Funding rates

Periodic funding payments are the most common mechanism used by exchanges to do perpetual swaps. Funding payments act to converge the mark price (the price on Position Perpetual Trading Protocol) and the index price (the average price from major exchanges - Chainlink price).

Position Perpetual Trading Protocol calculates funding payments every hour.

Position Perpetual Trading Protocol follows FTX's method to calculate the funding payments, which is as follows:

$$fundingPayment = positionSize * fundingRate$$

The fundingRate in the formula above is calculated by, firstly, subtracting the hourly time-weighted average price (TWAP) of the index price from the hourly TWAP of the mark price, and secondly, dividing the result from the previous step by 24. (Note: FTX's formula results in funding denominated in position size, whereas our calculation expresses funding in quote asset, ie. USDC.)

$$fundingRate = {TWAP_{perpetual} - TWAP_{index} \over 24}$$

We use the price feed from Chainlink as the data source for the index price because it is currently the most battle-tested Oracle solution on the market. Other oracles will be added as needed.

If the fundingRate is positive, long position holders need to pay the funding payment while short position holders will receive the funding payment, and vice versa if the rate is negative.

The funding payment happens at the end of each hour on Position Exchange's Perpetual Trading Protocol.