5. Funding

Funding is the mechanism that keeps perpetual futures market prices anchored to underlying index values. In Perp City, funding payments flow continuously between longs and shorts based on the divergence between market price and index price, ensuring sustained price convergence.

TWAP-Based Continuous Funding

In Perp City, funding payments are continuous rather than applied at fixed intervals. This design prevents traders from timing their positions around discrete payment periods, reducing price distortions and ensuring that market prices consistently reflect the intended funding incentives.

Taker Funding

When a taker opens a position, he either buys a certain amount of perps (long) or borrows and sells them (short). In both cases, the position size (quantity of perp contracts) determines the funding owed, as funding is calculated per position unit. Larger positions therefore incur (or receive) greater funding, reflecting their higher potential price impact.

Maker Funding

Makers also pay or receive funding, since they can be directionally exposed. Every taker trade has a maker as the counterparty. For example, if a taker opens a long position of 2 perps, they are effectively swapping some amount of USD in for 2 perps out. The maker sells those 2 perps, receiving USD in return, thus holding a short exposure of 2 perps. This exposure determines the maker's funding owed or received. As prices move, a maker's exposure dynamically shifts, which in turn affects their ongoing funding position.