perpetual contracts</strong></a> to bring the transaction price closer to the underlying asset's index price. The <strong>price of a perpetual contract</strong> is not always the same as the price of an underlying asset because a perpetual contract is a <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-derivative/">derivative.&nbsp;

/n

For instance, the price of a <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin (BTC)</strong></a> <strong>perpetual contract</strong> during a <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-bull-market/">bull market</strong></a> is generally higher than the price of BTC in the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-spot-market/">spot market</strong></a>. This happens because people are more <strong>bullish</strong> and believe that the price will continue to grow.</p>\n<p><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-funding-payments/">Funding payments</strong></a> were adopted by derivatives exchanges to reduce the difference between <strong>the spot market</strong> and the perpetual market. <em>How does it work? </em>Funding payments between traders are made automatically at fixed intervals (e.g. every 6 hours).&nbsp;</p>\n<p>Traders on the <strong>long</strong> side during a bull market (the more popular side) pay to the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-short/">short side during a bull market (the less popular side). This way people are encouraged to open a position on the less popular side which drives the price towards the spot price.</p>\n<p>Funding payments are calculated by multiplying the notional value of a trader&rsquo;s position by a rate that shows the price difference <strong>in a given interval</strong> (e.g. 6 hours). This rate is called the funding rate. How high the funding rate is, depends on how big the price difference is in a given interval.&nbsp;</p>\n<p>When the funding rate is positive (above the spot price), <strong>short position </strong>traders receive funding from long position traders. However, when the funding rate is negative (below the spot price), it&rsquo;s the other way around. The <strong>funding rate reflects</strong> the cost of capital and the steepness of the futures curve, as well as the&nbsp;sentiment of a trader on a particular <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-exchange/">exchange. 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This creates a new software path by splitting it into different versions, i.e., creating forks. Forking is common among open-source software development communities.</p>\n<p>The source code of one program can be used to develop several forks as different developers follow their own directions to improve the source project or aim to replace it altogether.</p>\n<p>Developers can use an <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-open-source/">open-source </strong>code or the legal copy of a code from a software package to start the process of working on a new program. The use of open-source code ensures the legality of the process.</p>\n<p>Developers using an <strong>open-source</strong> code <strong>do not breach any copyright laws</strong> and are <strong>not required to get permission</strong> to fork the software from the distributors or initial developers. The software developed as the fork is released to the community. It typically acts as an improved version of the source software and may provide more benefits to the users.</p>\n<p>Some fork projects <strong>may lead to conflict within the developer community</strong> due to differing views. The clash can then transfer into the overall community, with users choosing to use or boycott certain forks. In some cases, the community splits are amicable. However, it isn&rsquo;t uncommon for developers to garner resentment.</p>\n<p>If the fork projects become increasingly competitive, developers may choose to close the code and prevent it from being shared. This can lead to issues related to ownership, copyright, legality, and legitimacy. Competing developers may envision different project directions.</p>\n<p>Some developers are granted permission to use <strong>proprietary software</strong> for forking. Such software must be <strong>licensed by the copyright owners</strong> who maintain the exclusive legal rights to the project. 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On the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">Ethereum blockchain</strong></a>, for example, when <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-bots/">bots have the ability to <strong>quote a higher</strong> <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-gas-price/">gas price</strong></a> than a pending rate, front running might occur.</p>\n<p>There are also other parties that are capable of front running like, for example, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-full-node/">full node</strong></a> operators that gain knowledge of uninformed transactions by <strong>monitoring network activities</strong>. <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-centralized-exchange-cex/">Centralized exchanges (CEXs)</strong></a> can also perform front running but it's not in their best interest to cheat on their clients. Overall, there is a variety of methods that can be used to arrange front running. &nbsp;</p>\n<p>Since front running is an illegal practice, it is also referred to as an attack when there is <strong>malicious intent</strong> included. There are three main types of malicious attacks using front running:</p>\n<ul>\n<li>A displacement attack which happens when a genuine transaction is replaced with the transaction of the malicious actor.</li>\n<li>An insertion attack which happens when a genuine transaction is \"sandwiched\" between two transactions aiming for profit without holding an asset.</li>\n<li>A suppression <strong>attack</strong> which delays the execution of a genuine transaction.</li>\n</ul>\n<p>Front running can be prevented by improving transaction confidentiality and sequencing transactions. 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Handbook Cover Page
Crypto Terms: Letter F

What are Funding Payments?

Funding Payments MEANING:
Funding Payments - periodic payments between traders that are intended to reduce the difference between the spot market price and the perpetual market price.
Medium
2 minutes

Let's find out Funding Payments meaning, definition in crypto, what are Funding Payments, and all other detailed facts.

In cryptocurrency derivatives exchanges, funding payments are used for perpetual contracts to bring the transaction price closer to the underlying asset's index price. The price of a perpetual contract is not always the same as the price of an underlying asset because a perpetual contract is a derivative. 

For instance, the price of a Bitcoin (BTC) perpetual contract during a bull market is generally higher than the price of BTC in the spot market. This happens because people are more bullish and believe that the price will continue to grow.

Funding payments were adopted by derivatives exchanges to reduce the difference between the spot market and the perpetual market. How does it work? Funding payments between traders are made automatically at fixed intervals (e.g. every 6 hours). 

Traders on the long side during a bull market (the more popular side) pay to the short side during a bull market (the less popular side). This way people are encouraged to open a position on the less popular side which drives the price towards the spot price.

Funding payments are calculated by multiplying the notional value of a trader’s position by a rate that shows the price difference in a given interval (e.g. 6 hours). This rate is called the funding rate. How high the funding rate is, depends on how big the price difference is in a given interval. 

When the funding rate is positive (above the spot price), short position traders receive funding from long position traders. However, when the funding rate is negative (below the spot price), it’s the other way around. The funding rate reflects the cost of capital and the steepness of the futures curve, as well as the sentiment of a trader on a particular exchange. The rates might vary depending on various market conditions.
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