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day 1 of 5

What's funding rate, why does it pay you

The mechanic that makes basis trades work — and why it isn't a free lunch.

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You see "funding rate" thrown around constantly in perp-DEX commentary, and most of it is wrong or imprecise. Let's get it correct in 5 minutes so the rest of this course doesn't slide on a shaky foundation.

A perpetual contract has no expiry

Futures expire; that's how their price gets pinned to spot. A perpetual contract — invented by BitMEX in 2016, now the dominant on-chain derivative — never expires. Without an expiry there's nothing pulling perp price toward spot.

Solution: a periodic cash transfer between longs and shorts, paid out every funding interval (1 hour on Hyperliquid, 8 hours on most CEXes). When perp trades above spot, longs pay shorts. When perp trades below spot, shorts pay longs. The size of the transfer is proportional to the gap.

That's funding rate. It's the price perps pay to behave like spot.

The trader's perspective

If you're long ETH-PERP and funding is +0.01% per 8h, you pay 0.03%/day to hold that position. Annualised: ~10.95%. That's a real cost — many people forget about it during a rally because their PnL is up. Crowded markets get expensive fast.

If you're short the same position, you receive that 10.95%. This is the income source the rest of the course extracts.

Why it's not free money

Funding is paid on the perp leg only. To capture it without taking directional risk, you need to also hold a hedging spot position. The hedge eats your edge through:

  • Borrow cost if you're shorting spot (the more common direction)
  • Trading fees on both legs every time you rebalance
  • Slippage when sizing in and out
  • Liquidation buffer capital that's parked but not earning the funding rate

A 10% APR funding rate becomes a 4-6% net yield by the time those drag through. Sometimes less. Occasionally negative. That's what days 3-5 are about.

What we want you to take away from day 1

  1. Funding is a peer-to-peer transfer, not a fee.
  2. The sign tells you who's crowded — positive funding = crowded longs, negative funding = crowded shorts.
  3. The carry you keep is gross funding minus all the frictions on the hedge leg.

Tomorrow we'll pick the venues. Spoiler: not every perp DEX is created equal.

quiz · 3 questions

Q1. Funding payments on a perpetual contract are exchanged between:

  1. Traders and the exchange treasury
  2. Long holders and short holders, every funding interval
  3. Market makers and the index oracle
  4. Liquidity providers and the protocol DAO

explain → Funding is a peer-to-peer rebalancing transfer between long and short positions — the exchange just runs the math, the cash flows trader-to-trader.

Q2. Funding rate goes positive (longs pay shorts) when:

  1. The perp price drifts above the spot/index price
  2. Open interest exceeds a fixed cap
  3. The exchange wants to attract liquidity
  4. Volatility hits a 30-day high

explain → When demand for longs pushes perps above spot, positive funding incentivises short-side flow, dragging perp price back toward index.

Q3. The carry on a delta-neutral funding-arb position is approximately:

  1. The funding rate itself
  2. The funding rate minus borrow + slippage + fees
  3. Twice the funding rate
  4. Zero — funding is symmetric

explain → Funding is the gross income; the strategy's edge is what survives borrow on the spot leg, perpetual fees, gas, and execution slippage.

homework

Pick one perpetual market on Hyperliquid (HL) and one on Nado. Note the funding rate right now and which side pays. Write 2 sentences on what that tells you about current trader positioning.

e.g. ETH-PERP on HL: +0.012% per 8h (longs pay). On Nado: +0.018%. Suggests crowded longs...

Homework is acknowledged, never graded — do it for yourself.