Perpetual futures don’t expire like traditional futures contracts. To keep their price aligned with the spot market, perps use a mechanism called funding rates: periodic payments between long and short traders. When the market is bullish and more traders are long, longs pay shorts. When the market is bearish and more traders are short, shorts pay longs. The funding rate typically resets every eight hours on centralized exchanges and continuously on DeFi perp venues.
Funding rates can be a significant cost or a significant income depending on which side of the trade you’re on. During extreme bull markets, annualized funding rates have exceeded 100% — meaning a leveraged long position could cost more than 100% of its value per year just in funding payments. Some sophisticated traders make their entire living by being the other side: going short on perps while holding the equivalent spot position, earning funding with no directional risk. This is called the “cash-and-carry” trade.
Ethena’s USDe stablecoin is essentially a productized version of this trade. By holding staked ETH long and shorting ETH perps, Ethena captures the funding rate differential and passes it to USDe holders as yield. When funding rates are high (bullish markets), yields are enormous. When funding rates go negative (bearish markets), the strategy loses money. Understanding funding rates is essential to understanding why USDe’s yield fluctuates so dramatically.
For retail traders, funding rates are often an overlooked cost. A trader who opens a leveraged long during a euphoric market might be paying 0.1% every eight hours in funding — which compounds to 100%+ annualized. Many retail traders don’t realize they’re paying this hidden cost until they check why their position is down despite the price barely moving. Funding rates are the invisible tax on leverage, and understanding them is one of the most important (and least taught) aspects of crypto trading.
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