How Perpetual Swap Funding Tracks the Index Price
Summary
Perpetual swaps lack the expiry date that helps conventional futures converge with spot, so funding payments between long and short holders are used to encourage the contract price back toward its index. When the swap trades below the index, shorts pay longs; above the index, longs pay shorts. The article explains the intended demand effect of each payment direction and how the funding rate responds to the premium or discount.
It outlines a calculation based on the difference between mark price and index, a zero-rate band around parity, limits on the rate, and a time adjustment used to determine the position payment. Rates are quoted on an eight-hour basis but accrue and transfer in small increments in real time. The account is specific to Deribit’s BTC and ETH perpetuals; rate caps differ by asset, and exchange parameters or implementations elsewhere may vary. It presents no empirical test of whether funding alone reliably restores price alignment.
Key ideas
- Funding transfers value between long and short perpetual holders to help align the contract with its index.
- A swap below the index pays longs, while a swap above the index pays shorts.
- The rate is derived from the mark-to-index premium with a deadband and asset-specific cap.
- An eight-hour quoted rate is time-adjusted to calculate payments that accrue in real time.
- The described calculation applies to Deribit BTC and ETH perpetual contracts.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.