What is Funding fees and its mechanism ?

 

Funding fees are periodic payments exchanged between traders in perpetual futures contracts to ensure the contract price stays close to the underlying market price (spot price). Unlike regular trading fees, which are charged by the platform, funding fees are paid between traders — meaning, depending on the market conditions and the position you hold (long or short), you might either pay the funding fee or receive it.

If the market is bullish (price expected to go up), traders holding long positions usually pay funding fees to traders holding short positions.

If the market is bearish (price expected to go down), traders holding short positions typically pay funding fees to those holding long positions.

This mechanism is designed to balance demand and supply between long and short positions.

How it affects your wallet:

When you are on the paying side of funding fees, the fee is deducted from your position margin.

When you are on the receiving side, the fee is added to your wallet or position margin, effectively giving you additional funds.

Fluctuation of funding fees: Funding fees are not fixed — they fluctuate based on:

Market sentiment: If most traders are long, funding rates rise for longs (and they pay shorts).

Volatility: During high volatility, funding fees can spike to encourage balance between positions.

Demand and supply of perpetual contracts: A high demand for either long or short positions can cause funding rates to change frequently, sometimes several times a day.