💸Understanding Funding Rates

Introduction

Funding rates play a pivotal role in perpetual contract trading on GemaX. These are regular payments swapped between traders and solvers with positions in perpetual contracts. The funding rate mechanism is in place to maintain the perpetual contract's price proximity to the spot price of the underlying asset.

How Funding Rates Work

• Positive and Negative Rates: Funding rates may vary between positive and negative, depending on the price differential between the perpetual contract and the spot price of the underlying asset.

  • When the perpetual contract price exceeds the spot price, leading to a positive funding rate, traders with long positions compensate solvers holding corresponding short positions. This payment acts as a deterrent for traders to open or maintain long positions when the perpetual price significantly surpasses the spot price, as it becomes expensive to sustain such positions.

  • On the flip side, a negative funding rate occurs when the perpetual contract price is below the spot price, resulting in solvers with short positions compensating traders with corresponding long positions. This setup discourages the retention of short positions when the perpetual price is significantly lower than the spot price, as it becomes costly to uphold such positions.

• Price Alignment: The funding rate mechanism ensures that the perpetual contract price closely tracks the spot price of the underlying asset, fostering market stability and fairness.

Key Features of Funding Rates on GemaX

• Solvers-Driven Pricing: GemaX derives its pricing data primarily from the rates established by Solvers, ensuring precise and dependable information for funding rate calculations. Solvers, although frequently involved with CEXs, are not confined to these platforms and can also engage with DEXs or other markets, providing a more extensive and adaptable pricing foundation.

• Solver Interaction: Funding rates on GemaX are established through interactions between traders and solvers, ensuring competitive and market-driven rates.

Note: At present, the solver refrains from charging or crediting funding fees if the amount falls below the blockchain gas cost. This is due to the on-chain interaction requirement for every funding rate update with the trade position.

Importance for Traders

Comprehending funding rates is crucial for GemaX traders, as these rates affect the expenses associated with keeping positions open in the market. Traders need to factor in funding rates when devising their trading strategies, as these rates can influence the overall profitability of trades.

Conclusion

Funding rates are essential in the perpetual contract trading process on GemaX. Operating with a mechanism that guarantees price alignment with the underlying asset and fosters a fair trading environment, funding rates are crucial for the profitable and strategic trading of perpetual contracts on the platform.