Funding

Funding rates are a core mechanism in perpetual futures contracts, designed to ensure that the contract's price remains closely aligned with the underlying asset's spot price. This is achieved through periodic payments exchanged directly between traders holding long and short positions. Funding is a peer-to-peer process, and SoDEX does not collect any fees from these payments.

Funding Mechanism Overview

Funding Rate	Contract Price Status	Payment Direction	Incentive
Positive (>0)	Contract trades at a Premium (higher than Spot).	Longs Pay Shorts.	Incentivizes Shorts/Disincentivizes Longs.
Negative (<0)	Contract trades at a Discount (lower than Spot).	Shorts Pay Longs.	Incentivizes Longs/Disincentivizes Shorts.

• Frequency: Funding payments occur every hour.

• Cap: The maximum funding rate is capped at 4% per hour to protect traders from extreme volatility.

Funding Rate Calculation

The funding rate is calculated based on two main components: the Interest Rate and the Premium Index.

While payments are made hourly, the standard formula calculates a rate over an 8-hour period, which is then divided by 8 to determine the hourly rate. The 8-hour funding rate is calculated as follows:

$$\mathbf{\text{Funding Rate (8-hour)}} = \mathbf{\text{Average Premium Index (P)}} + \mathbf{\text{clamp}(\text{Interest Rate} - \text{Premium Index (P)}, -0.05\%, 0.05\%)}$$

1. Interest Rate Component: The interest rate component accounts for the difference in borrowing costs between the base currency (e.g., BTC) and the quote currency (USDC). On SoDEX, this is fixed at 0.03% per day, which is equivalent to 0.01% per 8-hour period.

2. Premium Index (P) Component: The Premium Index measures the contract's deviation from the Oracle Price (the reference Spot Price) based on the order book's liquidity.

   1. Impact Notional: The reference size for measuring liquidity is 200 USD * Max Leverage of the specific asset.

   2. Impact Price: This is the average execution price required to fill the Impact Notional on the bid and ask sides.

   3. Premium Formula:

$$\text{Premium} = \frac{\text{Impact Price Difference}}{\text{Oracle Price}}$$

$$\text{Impact Price Difference} = \max(0, \text{Impact Bid Price} - \text{Oracle Price}) - \max(0, \text{Oracle Price} - \text{Impact Ask Price})$$

• Averaging: The premium is sampled every 5 seconds, and a simple average of these samples determines the Average Premium Index (P) used in the main funding rate formula.

Funding Fee Payment

If you hold an open position at the exact time of the funding interval (at the top of every hour), you will either pay or receive the funding payment. The payment is calculated as:

$$\mathbf{\text{Funding Payment}} = \mathbf{\text{Position Size}} \times \mathbf{\text{Oracle Price}} \times \mathbf{\text{Hourly Funding Rate}}$$

• Note that the Oracle Price is used to convert the position size to its notional value for this calculation, not the mark price.

Funding Rate Cap

To protect traders from extreme volatility, the funding rate on SoDEX is capped at 4% per hour. This is a significantly less aggressive cap than on many centralized exchanges.