Funding Rate

Funding Mechanism

In line with the principles of perpetual contracts, Penals utilizes a funding mechanism to maintain the contract's price close to the floor price of the underlying asset. This mechanism involves periodic funding fees, which are payments exchanged between long and short traders based on the funding rate.

The funding rate is determined by calculating the difference between the contract's mark price and the NFEX index price (NFEXI). If the funding rate is positive, long traders pay funding fees to short traders. Conversely, if the funding rate is negative, short traders pay funding fees to long traders.

To facilitate this process, funding payments are settled every hour, and they are included in the realized PnL for the position. It's important to note that funding only occurs when traders hold a position under the contract during the funding time. If traders close out all their positions before the funding time, they are not subject to paying or receiving funding fees.

Traders can find information about the funding rate and the countdown timer to the next funding on the Penals trading page, allowing them to stay informed about the funding dynamics.

Funding Rate Calculation

The funding rate calculation is conducted at the start of each hour. If the funding rate is positive, long traders pay ETH, while short traders pay ETH if the funding rate is negative. The amount paid is determined by the following formula:

Amount Paid = Position Value x Funding Rate

The funding rate is calculated in real-time every 3 seconds leading up to the funding time. The current funding rate is determined by the formula:

FR_{current} = \frac{(MarkPrice-NFEXFP)/NFEXFP}{24}

Additionally, a cumulative funding rate (CFR) is calculated at the current timestamp (T) using the formula:

CFR_{T} = CFR_{T-1} + FR_{current} x Time Interval

The actual funding rate for the one-hour funding interval is calculated using this methodology:

Actual Funding Rate = CFR_{T}

It's important to note that at the beginning of the funding period, when there is no previous funding rate, the cumulative funding rate is set to 0. Therefore, at this timestamp, Penals uses the initial funding rate as the actual funding rate.

Funding Rate Cap and Floor

To prevent significant deviations from the norm, Penals' funding mechanism sets a cap and floor rate at ±2%. This ensures that the funding rates remain within acceptable bounds and helps maintain stability in the platform.

By implementing the funding mechanism, Penals ensures that the contract's price remains closely aligned with the underlying asset's floor price, providing traders with a fair and transparent trading environment for NFT perpetual contracts.