Curriculum·R401 Derivatives Foundations·about 42 min
The funding rate
By the end of this lesson you can
- →State what funding is, who pays whom, and why the instrument requires it
- →Annualise any quoted funding rate, and do it before opening a position
- →Compute the cost of funding against your margin rather than against notional
- →Read an extreme funding rate as information about positioning
Senior · enrolled learners
This lesson opens with Ether funding before the Merge, September 2022.
- What happened
- Ahead of the Ethereum Merge in September 2022, a widely followed trade was to hold ether in spot and short the perpetual against it, so as to receive the expected ETHPoW fork tokens with no price exposure. Because the short side of the perpetual became extremely crowded, funding turned deeply negative, meaning shorts paid longs. The average funding rate across major venues fell to its most negative on record, and accumulated funding on one venue's ether perpetual reached about negative 0.94 percent a day. At a prevailing rate near negative 0.06 percent an hour, the expected cost of holding the hedge to the Merge was estimated at about 2.4 percent. The fork tokens the trade was designed to capture were valued at roughly 1 percent of ether's market capitalization.
- The decision point
- The hedge worked exactly as intended. The spot exposure was neutralised, the fork tokens arrived, and the position had no directional risk at any point. It simply cost about 2.4 percent to collect something worth about 1 percent, because funding is the price the market charges for standing on the crowded side and enough participants had worked out the same trade. Nobody was wrong about the mechanics. The price of being right was published continuously and most people did not annualise it.
What you will be able to answer
- →What is funding and who receives it?
- →How do you annualise it?
- →What does leverage do to funding?
- →What did the Merge hedge cost?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.coindesk.com/markets/2022/09/14/merge-focused-hedging-makes-ether-shorts-most-expensive-in-16-months
- https://k33.com/research/archive/articles/eth-perps-seeing-massively-negative-funding-rates
- https://www.coindesk.com/markets/2022/09/15/market-wrap-markets-trade-lower-despite-success-of-ethereum-merge
- https://en.macromicro.me/charts/144030/ethereum-perpetual-contract-funding-rates
Confidence medium·Volatility high·Reviewed 2026-08-07·Owner unassigned
Contested
Funding figures around the Merge differ by venue, by hour and by whether an eight-hourly or hourly convention is quoted. The negative 0.94 percent daily accumulation and the estimate of about 2.4 percent to hold to the event are as reported at the time on specific venues, and the ETHPoW valuation near 1 percent of ether's market capitalization was an estimate rather than a settled figure. The argument depends on the cost exceeding the payoff by roughly a factor of two, which holds across the reported range.
Funding intervals, caps, clamps and the interest component vary by venue and change. Eight-hourly settlement is the common convention used here and hourly settlement is increasingly used. Re-derive from the venue's published formula rather than assuming the convention in part one.
R402 owns margin and liquidation. This lesson owns funding as a carrying cost and as a positioning signal. Keep the split and do not compute a liquidation price here.