Funding rates
Conventions on perp exchanges indicate with funding rate the variable interest rate on the underlying debt. Funding rates are charged periodically, e.g. every 1 or 8 hours.
The variable funding rate on Contango is determined by the difference between the cashflow on the lending and borrowing legs of a position, which you normally see referenced as borrow APY and supply APY on money markets. That’s why it’s also called APY on Contango. It can be positive or negative:
if it’s positive, it means the trader is receiving money to keep his position opened.
if it’s negative, it means the trader is paying money to keep his position opened.
In other words, Contango’s APY is equivalent to a funding rate, but its sign is inverted compared to funding rates on other perp venues. Funding rates on Contango are cheaper and less volatile than perp trading venues. Academic research on this topic shows that positions built on Aave are around 3x cheaper and less volatile than Binance and dYdX (full study).
The APY on Contango is accrued as PnL and settled when closing the position.
Note that the APY varies with leverage and with the size of your position: when inputting a bigger size Contango always takes into account its impact on the rates and adjust the displayed APY accordingly, so you know it beforehand. If everyone uses Contango, this feature would prevent traders to flip the rates inadvertently and even dilute the APY excessively. So, even if you wanna place a trade outside of Contango, at least use it to simulate it beforehand.
Please note that APY is different from ROE, the return on equity, which is the same concept but computed on your initial margin. Looking at APY is useful if you need to know your funding when trading directionally on non-correlated pairs, while looking at ROE is useful if you're farming a rate differential on correlated pairs and you want to estimate your expected returns. Check out all the differences in this FAQ.
Before trading → always make sure you understand how much you're paying or receiving by looking at the APY/ROE of the money market you selected; also check on the 'review trade' ticket the final market impact of your trade on the rates.
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