Binance will update its funding rate algorithm on September 18th. This move aims to keep funding rates within a relatively moderate range, shifting the perception of "holding a position equals liquidation" to a true cost of holding. This algorithm change is likely intended to curb the exploitation of the funding rate mechanism by cryptocurrencies like $Alpaca, $TRB, and $MYX, which exploit the funding rate mechanism to create leverage and suppress their counterparties.

Original article: https://www.binance.com/en/support/announcement/detail/c00588a7e8504b3eb28d02a2da00530b

Section 1: The Role of Funding Rates in Perpetual Contracts: The Weaponization of Regulators

The most significant difference between perpetual contracts and traditional futures contracts is that they have no expiration date. This feature greatly enhances the contract's liquidity and speculative nature, but it also introduces an inherent risk: the contract price may continuously deviate from the spot price of the underlying asset, forming the so-called "futures-spot gap." (Two prices for one underlying asset)

To address this core issue, the funding rate mechanism was developed. Essentially, it acts as a price anchoring mechanism that periodically exchanges funds between long and short positions, incentivizing market participants to take trading actions that push the perpetual swap price back to the spot price, thereby maintaining long-term price consistency.

The mechanism's operating logic is clear: when the funding rate is positive (i.e., the perpetual contract price is higher than the spot price), long position holders pay funding fees to short position holders; conversely, when the funding rate is negative (i.e., the perpetual contract price is lower than the spot price), short position holders pay long position holders. This design creates a direct financial incentive, encouraging traders to take positions contrary to prevailing market sentiment, thereby balancing the market and correcting price discrepancies.

These periodic fund exchanges continuously create arbitrage incentives: when the perpetual contract price is too high, arbitrageurs can sell the perpetual contract and buy an equal amount of spot assets at the same time to earn a positive funding rate. Their behavior will put downward pressure on the perpetual contract price, prompting it to return.

1.2 Funding Rate Composition: Deconstructing the Core Elements

The calculation of funding rate mainly consists of two core parts: interest rate and premium index.

Interest rate: This is a relatively stable component set by the exchange, theoretically representing the difference in borrowing costs between the base and quote currencies in the contract. On Binance, the BTC/ETH interest rate is typically fixed at 0.01% every 8 hours (or 0.03% daily), while other currencies have an interest rate set at 0%.

Premium Index: This is the most dynamic and influential component of the funding rate. It directly quantifies the degree of deviation between the perpetual swap price and the underlying asset's spot index price. When the perpetual swap price is higher than the spot index price, the premium index is positive; otherwise, it is negative. To smooth short-term price fluctuations, the premium index is typically determined based on a moving weighted average of the price difference over the funding rate calculation period.

Section 2: Comparative Analysis of Algorithm Evolution

2.1 Traditional formula: 8 hours industry standard

Prior to this update, Binance’s funding rate calculation followed a standardized 8-hour settlement cycle. The formula can be effectively expressed as:

Funding rate = average premium index (P) + clamp (interest rate − premium index (P), 0.05%, − 0.05%)

Under this framework, BTC/ETH's "interest rate" defaults to 0.01% every 8 hours, while all other currencies are 0%. This calculation yields a rate that applies directly to settlements every 8 hours, or three times daily (24 hours / 8 hours = 3). This fixed 8-hour structure is standard on BitMEX.

2.2 Updated formula: Introducing the “frequency normalization factor”

The new formula effective September 18, 2025, is as follows:

Funding Rate (F) =

[Average Premium Index (P) + Clamp (Interest Rate − Premium Index (P), 0.05%, − 0.05%)]​ / (8/N)

The key innovation of this formula is the introduction of two core variables:

N: The interval between fund settlements in hours (i.e., the "settlement frequency"). This is the core of the algorithm's dynamic adjustment.

(8/N): The divisor in the formula is called the frequency normalization factor.

The numerator of the new formula is identical to the old one, and can be understood as calculating a "base 8-hour fee rate." The newly added frequency normalization factor scales this base rate. Its core purpose is to adjust the fee for each fund exchange based on the shorter settlement cycle, thereby keeping the funding rate within an 8-hour window.

This formula design reveals a core design principle: Binance hopes to limit the excessive "holding costs" imposed by funding rates on counterparties, or from a market manipulation perspective, reduce the "lethality" of funding rates on opposing transactions.

Take the funding rate of 2% every 4 hours as an example:

The 24-hour funding rate under the old algorithm is 12%;

The 24h funding rate under the new algorithm is 6%

Section 3: Quantitative Impact of the Settlement Frequency Variable (N)

This section will use a hypothetical scenario to provide a detailed numerical breakdown of funding rates at different settlement frequencies to intuitively demonstrate their operating mechanism.

Model assumptions:

Assuming the "base 8-hour rate" (the numerator of the new formula) is a constant value of 0.02%, this represents a market environment where the perpetual contract price has a moderate premium to the spot price.

The trader's position has a notional value of $100,000.

3.1 Scenario A (N=8): Baseline Scenario (Standard Settlement)

Collection frequency: 8/8=1 (1 collection every 8 hours)

Single settlement funding rate: 0.02%/1=0.02%

Number of settlements within 24 hours: 24/8=3

Single settlement payment amount: $100,000×0.0002=$20

24-hour effective cumulative cost: $20×3=$60

3.2 Scenario B (N=4): PUMPUSDT Example (Increased Frequency)

Collection frequency: 8/4=2 (2 collections every 8 hours)

Single settlement funding rate: 0.02%/2=0.01%

Number of settlements within 24 hours: 24/4=6

Single settlement payment amount: $100,000×0.0001=$10

24-hour effective cumulative cost: $10×6=$60

3.3 Scenario C (N=2): High-Frequency Settlement

Collection frequency: 8/2=4 (4 collections every 8 hours)

Single settlement funding rate: 0.02%/4=0.005%

Number of settlements within 24 hours: 24/2=12

Single settlement payment amount: $100,000×0.00005=$5

24-hour effective cumulative cost: $5×12=$60

3.4 Scenario D (N=1): Hourly Settlement

Collection frequency: 8/1=8 (8 collections every 8 hours)

Single settlement funding rate: 0.02%/8=0.0025%

Number of settlements within 24 hours: 24/1=24

Single settlement payment amount: $100,000×0.000025=$2.50

24-hour effective cumulative cost: $2.50×24=$60

From the above calculations, we can see that regardless of the frequency, the final (24h) funding rate is the same.

IV. Market Impact and Binance’s Response

From a strategic perspective, this update can be seen as a weaponization of funding rates, a systemic risk exposed by past market crises, and a strategic move to dominate the listing and trading of emerging, high-risk assets. The crypto market is already known for its extreme volatility, and particularly in a market environment characterized by high market capitalization and low liquidity, this seemingly normalized value mechanism and tool has become a weapon.

In classic "battles" like Alpaca, MYX, and TRB, it's gradually been used as a weapon to contain and even suppress competitors. In extreme cases, a maximum hourly funding rate of 2% translates to 48% over a 24-hour period (Alpaca even reached 4%). What a painful lesson! Using the opponent's funding rate to provide a financial boost to yourself while also reducing their margin requirements. Consequently, even less capital is needed to "blow up" the opponent's position, creating an accelerating upward/downward spiral.

8/N is Binance's response to the recent narrative of coin delistings, market manipulation, and the bloody consequences of holding positions. This model essentially caps the daily funding rate at 6% (assuming 2% every 8 hours), effectively blocking the funding rate's ability to provide a lifeline and steal revenue.

Some may wonder why not simply set settlement every eight hours. This is primarily because an eight-hour funding interval is too slow for a viral token, whose price can double or halve in a matter of hours. During this period, premiums can become extremely large, and the resulting funding rate could be punitive, exacerbating market instability. By implementing a variable N, Binance can configure a settlement frequency of 1, 2, 4, or 8 hours for a high-risk new asset based on its volatility on day one.

As mentioned above, the purpose of the funding rate is to adjust the price difference between futures and spot, but it is unfortunately exploited by those with ulterior motives and becomes a roadblock that crushes retail investors who have little understanding of the contract mechanism.

The market is ever-changing. When God closes a door, he will open a window - this applies to everyone. Let us look forward to the next big game drama.

May we always maintain a heart of awe for the market.

This article refers to: @owenjin12's tweet analysis

https://x.com/OwenJin12/status/1968294143169618117