Dear Dcoin users:
This article mainly elaborates the definition of capital cost, capital rate, the composition and calculation of capital rate and other related issues.
As we know, before the expiration of a futures contract, its price may deviate from the spot price; the spread between this is called the "basis". When the futures contract approaches its expiration date, the basis will gradually approach zero.
Since the perpetual contract has no settlement and expiration date, how to narrow the basis and make the latest market price always anchor the spot price? This is because of the use of a funding fee mechanism.
Definition of funding costs
Funding costs are Dcoin's main mechanism to ensure that the latest market price is always anchored to the global spot price, which is somewhat similar to the overnight interest of holding positions in spot margin trading.
Method of payment or collection of funds
On the Dcoin trading platform, funds are paid or collected regularly at 8 am every day between long and short positions. The time stamp of the funds cost is 08:00 Hong Kong time, and each time is about 10,000 to 5,000 (the specific calculation formula is detailed below. ). If the funding rate is positive, long positions will pay funding fees to short positions. Conversely, if the funding rate is negative, the short position will pay the funding cost to the long position. Traders only need to pay or receive funding fees if they hold positions at these time cut-off points. If the trader closes the position before the specified funding fee timestamp, there is no need to pay/acquire any funding fee.
What is the funding rate
Funding cost = position value * funding rate.
Before understanding how funding costs make the latest market price always anchor the spot price, we need to understand the key factors of funding costs and the composition of funding rates. Funding rate is mainly divided into two parts, namely interest rate and premium index.
1. Interest rate: the base currency and the denominated currency.
For example: the base currency of the BTC/USDT perpetual contract is BTC, and the denominated currency is USDT. In other words, the interest rate is a function of the interest rate between the two currencies: interest rate (I) = (quoted interest rate index-base interest rate index) / funding rate time interval.
Base rate index = base currency borrowing rate
Pricing rate index = the borrowing rate of the denominated currency
Funding rate time interval = 24
2.Premium index = (Max (0, depth weighted buying price-mark price)-Max (0, mark price-depth weighted selling price)) / spot price + reasonable basis rate of marked price
Calculation of funding rate
The fund rate is calculated based on the interest rate and the premium/discount part of the interval of each contract fund rate. Dcoin sets +/- 0.025% as the buffer zone.
Funding rate = premium index + clamp (interest rate-premium index, 0.025%, -0.025%)
Therefore, when (interest rate-premium index) is between +/- 0.025%, funding rate = premium index + (interest rate-premium index) = interest rate.
In other words, the funding rate will be equal to the interest rate. The calculated fund rate will be used to calculate the trader's position value, and then calculate the fund fee that needs to be paid or collected at the corresponding timestamp.
In order to ensure that traders can use the highest leverage, Dcoin imposes restrictions on the funding rate of each perpetual contract: the upper and lower limits of the funding rate; the upper and lower limits of each funding rate fluctuation.
Funding rate limit: the change of the funding rate within the funding interval shall not exceed the upper and lower limits set by each contract. Dcoin sets upper and lower limits on the fund rate to achieve the following purposes:
a) Ensure that investors can use the highest leverage;
b) Avoid a large number of liquidation while collecting funds.
*Funding fees are collected by the long and short parties, and the Dcoin platform does not charge funding fees.