Funding Rate

Explaining the mechanics behind GRVT's Funding Rate in Perpetual Contracts

The GRVT Docs are a living document that will be dynamically and continuously edited and updated as the GRVT product suite evolves.

The funding rate is a tool used to ensure that the price of a perpetual contract closely tracks the actual market price of the underlying asset. This alignment is crucial because, unlike traditional futures contracts, perpetual contracts do not have an expiration date.

How It Works

While most typical exchanges apply funding rates on an eight-hourly basis, at GRVT, funding rates are applied on an hourly basis. Hourly funding provides the following benefits:

• The funding rate acts like an interest rate exchanged between traders holding opposite positions in perpetual contracts.

• If the funding rate is positive, it indicates that the perpetual contract is trading at a premium compared to the spot price. In this scenario, traders holding long positions (who bet on the price going up) pay traders with short positions.

• Conversely, a negative funding rate suggests that the perpetual contract is trading at a discount. Here, traders holding short positions (betting on the price going down) pay traders with long positions.

• These funding payments occur regularly and are a key feature of perpetual contracts. They are directly exchanged between traders, with the exchange itself not receiving or paying any part of these payments.

• The regular exchange of funding payments helps maintain the balance between the perpetual contract price and the spot market price, adjusting traders' positions based on current market dynamics.

How and When Are GRVT Funding Rates Charged

At GRVT, we've designed a funding rate mechanism for our perpetual contracts that ensures real-time calculation and settlement.

Real-time Calculation

Our funding rate is calculated continuously in real time, capturing the latest market dynamics. This real-time calculation allows for immediate responsiveness to market conditions, ensuring that the funding rate is always current and accurate.

Continuous Settlement

Along with real-time calculation, the funding rate is settled continuously. This means any changes in positions, whether from trades or adjustments, are directly added or subtracted from the position's realized PnL.

Funding Payment Formula

Funding payment charged to a trader’s account is calculated using following formula:

$$Funding Payment =\int_{T_0}^{T_1}(MarketImpactPrice(t) - Index Price(t))\\\times\: position(t)\:\times {dt\over 8hours}$$

Breakdown of Components

Calculus (Integration) ∫ from T0 to T1

$$\int_{T_0}^{T_1}$$

This represents the integration (continuous sum) of the funding rate over a period from T0 (start time) to T1 (end time). It calculates the cumulative funding payment over the time you hold a position.

Premium

$$MarketImpactPrice(t) - Index Price(t)$$

Premium is the difference between the MarketImpactPrice and the IndexPrice (spot) at time t.

$$MarketImpactPrice(t)$$

The MarketImpactPrice reflects the fair trading price, where

$$MarketImpactPrice(t)=Index Price+EMA_{30}[Premium]$$

$$Premium= FairPrice-IndexPrice$$

$$FairPrice={FairImpactBid + FairImpactAsk\over2}$$

By incorporating the 30-second EMA of the Premium, which is the FairPrice deviation from the Index Price, the MarketImpactPrice becomes a more stable and reliable metric. This method helps to cushion the impact of abrupt market movements and potential manipulative trading behaviors.

$$FairImpactBid = The\: average\: fill \:price \:to \:execute \:the \:\\ImpactNotional \:on \:the \:Bid Price$$

$$FairImpactAsk = The\: average\: fill \:price \:to \:execute \:the \:\\ImpactNotional \:on \:the \:Ask Price$$

FairImpactBid and FairImpactAsk are determined as average prices within a defined impact notional. This notional cap is considered in the order book to calculate an average price for the contract that reflects a significant market depth.

Category	Markets	Impact Notional ($)
Category 1	BTC, ETH	50,000
Category 2	TBD	10,000
Category 3	TBD	5,000

Maximum Bandwidth

To safeguard against market manipulation and mitigate the effects of panic trading, we've established a maximum bandwidth for the MarketImpactPrice relative to the Index Price. The MarketImpactPrice will not deviate beyond a set threshold of +/- 8% from the Index Price. Any deviation exceeding this 8% cap will be disregarded. This limit also serves as a ceiling for the funding rate, ensuring stability and fairness in our trading environment.

Position(t) (Number of Contracts at Time t)

$$Position(t)$$

This represents the number of contracts held at each point in time t.

dt / 8 hours (Time Fraction)

$$dt\over8hours$$

This term normalizes the calculation to an 8-hour basis. The dt represents an infinitesimally small time interval, and dividing by 8 hours converts the rate to a standard 8-hour funding rate.