# Funding Rate

#### **Utilization Ratio**

UR is a different concept in perps trading. In collateralized borrowing there is a same name with different calculation formula.

Example with ETH/USD market:

UR = abs(Long OI - Short OI)/$insurancePoolSize

#### Funding fee is paid to [insurance pool](https://onchaintrade.gitbook.io/ot/perpetuals-trading/insurance-pool) and positions with a smaller OI of same margin contract

Funding mechanism is to balance the longs and shorts for each trading pair, reducing the risk of draining insurance pool. When there are more longs than shorts, longs pay shorts, incentivizing more traders to short. When short OI > long OI, shorts pay longs, incentivizing more traders to long. Insurance pool always receives funding unless long OI = short OI.

1 hour of funding fee is deducted from or added to position margin as soon as the position is opened, extra funding fee is deducted from or added to position margin every hour after position opened, funding rate is updated whenever a position is opened or closed, longs pay shorts when long OI > short OI, shorts pay longs when long OI < short OI.

#### long OI > short OI:

<mark style="color:red;">Longs pay funding rate = k \* Utilization Ratio \* (Long OI/ Short OI)</mark>

<mark style="color:green;">Shorts earn funding rate = -LongFundingRate</mark>

#### long OI < short OI:

<mark style="color:red;">Shorts pay funding rate = k \* Utilization Ratio \* (Short OI/Long OI)</mark>

<mark style="color:green;">Longs earn funding rate = -ShortFundingRate</mark>

The invariant *constant is 0.0025% for highly liquid assets such as BTC and ETH, a much higher invariant constant will be applied for less liquid assets. K considered the hourly interest rate of 100% utilization and 2:1(or 1:2)long short OI ratio. Following chart is based on an insurance pool  <= $10,000,000*

| Assets           | Constant(k) |
| ---------------- | ----------- |
| *BTC*            | *0.005%*    |
| ETH              | *0.005%*    |
| USDT             | 0.005%      |
| Cheems           | 0.05%       |
| ARB              | 0.025%      |
| ZKS              | 0.025%      |
| BNB              | 0.005%      |
| Aptos            | 0.025%      |
| Sui              | 0.025%      |
| Doge             | 0.01%       |
| GMX(gmx.io)      | 0.05%       |
| GNS(gains.trade) | 0.05%       |
| Blur             | 0.05%       |
| STX(Stacks)      | 0.025%      |

<mark style="color:red;">Funding fee = funding rate \* position size \* mark price</mark>

The difference between funding fee paid and earned is sent to [insurance pool](https://onchaintrade.gitbook.io/ot/perpetuals-trading/insurance-pool).

Positive funding rate means position holders are paying funding fees, negative funding rate means position holders are earning funding fees.


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