> For the complete documentation index, see [llms.txt](https://zion-exchange.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://zion-exchange.gitbook.io/docs/trade/interactive-blocks.md).

# Funding

### Overview

Funding rates are used in perpetual futures markets to keep the perpetual contract price aligned with the underlying spot market price.

Since perpetual contracts do not expire, a periodic funding payment mechanism is used to balance long and short positions and maintain price convergence with the underlying asset.

Funding payments occur directly between traders. The protocol does not collect funding payments.

When the perpetual contract trades above the underlying spot price, the funding rate becomes positive and long positions pay short positions. When the perpetual contract trades below the spot price, the funding rate becomes negative and short positions pay long positions.

Funding on Zion is settled every hour.

This mechanism incentivizes traders to take positions that bring the perpetual market price closer to the underlying spot price.

***

### Funding Rate Components

The Zion funding rate consists of two components:

#### Interest Rate Component

The interest rate component represents the cost difference between holding USD and holding the underlying crypto asset.

For consistency with centralized perpetual exchanges, the interest rate is fixed at:

```
0.01% every 8 hours
```

Which is equivalent to:

```
0.00125% per hour
≈ 11.6% APR
```

This component is typically paid from long positions to short positions.

***

#### Premium Component

The premium component measures the difference between the perpetual market price and the underlying oracle price.

```
premium = impact_price_difference / oracle_price
```

Where:

```
impact_price_difference =
max(impact_bid_price - oracle_price, 0)
-
max(oracle_price - impact_ask_price, 0)
```

The impact prices represent the average execution price required to trade a predefined notional size in the orderbook.

If the perpetual price is higher than the oracle price, the premium becomes positive and longs pay shorts.

If the perpetual price is lower than the oracle price, the premium becomes negative and shorts pay longs.

***

#### Funding Rate Formula

The funding rate is calculated using the following formula:

```
Funding Rate (F) =
Average Premium Index (P)
+
clamp(Interest Rate - Premium Index (P), -0.0005, 0.0005)
```

Where:

* **P** is the average premium index
* **Interest Rate** is the fixed rate component
* **clamp(x, min, max)** limits the value between the minimum and maximum bounds

The premium index is sampled every **5 seconds** and averaged across the funding interval.

***

#### Funding Interval

Although the funding formula is derived from an 8-hour framework used by centralized exchanges, Zion distributes funding payments **every hour**.

Each hourly payment equals **one eighth of the 8-hour funding rate**.

This approach ensures:

* smoother funding payments
* reduced liquidation pressure
* more stable funding dynamics

***

#### Funding Cap

To prevent extreme market conditions from causing excessive funding payments, Zion enforces a funding rate cap.

```
Maximum funding rate: 4% per hour
```

This cap applies across all markets.

***

#### Funding Payment Calculation

Funding payments are calculated as:

```
Funding Payment =
Position Size × Oracle Price × Funding Rate
```

Where:

* **Position Size** is the trader’s contract size
* **Oracle Price** is the external spot price used by the protocol
* **Funding Rate** is the hourly funding rate

The **oracle price** is used instead of the mark price to avoid manipulation through orderbook movements.

***

#### Oracle Price

Zion uses a decentralized oracle system to compute the underlying asset price.

Oracle prices are derived from a weighted aggregation of major centralized exchange spot prices. Exchanges with higher liquidity are given larger weights in the calculation.

This design provides:

* manipulation resistance
* reliable price discovery
* consistent mark pricing during volatility

***

#### Purpose of Funding

Funding is essential for maintaining the integrity of perpetual futures markets.

It ensures that:

* perpetual prices remain close to spot prices
* market imbalances self-correct through economic incentives
* traders are incentivized to take positions that stabilize the market