> ## Documentation Index
> Fetch the complete documentation index at: https://docs.ascend.market/llms.txt
> Use this file to discover all available pages before exploring further.
# Funding & Price Alignment
> How funding keeps traded prices aligned with external probability signals
Funding is a continuous mechanism that keeps the traded price aligned with the external reference price. Without funding, perpetual markets could drift away from reality since there is no expiry date forcing convergence.
On Ascend, funding transfers value between LONG and SHORT positions based on how far the Mark Price has diverged from the Index Price. This creates a natural incentive for prices to stay anchored to external probability signals.
***
## Why Funding Exists
In traditional futures, contracts expire. At expiry, the futures price must equal the spot price. This forces convergence.
Perpetual markets have no expiry. So what keeps prices aligned?
Funding.
When the traded price diverges from the external reference:
* If the Mark Price is above the Index Price, LONGs pay SHORTs
* If the Mark Price is below the Index Price, SHORTs pay LONGs
This creates pressure for the price to return to equilibrium. Traders on the "wrong" side of the divergence pay for the privilege. Traders on the "right" side get paid.
***
## The Two Prices
Funding is calculated from the relationship between two prices:
| Price | What It Represents |
| ----------- | -------------------------------------------------------- |
| Index Price | External reference from oracles. The "true" probability. |
| Mark Price | Internal trading price. Smoothed and stabilized. |
When these prices diverge, funding kicks in to push them back together.
***
## Funding Rate Calculation
The funding rate is proportional to the gap between Mark and Index:
```
Funding Rate = k × (Mark Price − Index Price)
```
Where:
* k is the funding sensitivity coefficient (set per market)
* The result is capped within predefined bounds
**Example:**
* Mark Price = 64%
* Index Price = 62%
* k = 0.1
* Funding cap = ±0.05%
```
Funding Rate = 0.1 × (64 − 62)
= 0.1 × 2
= 0.2%
```
But the cap is ±0.05%, so:
```
Final Funding Rate = 0.05% (capped)
```
The cap prevents extreme funding rates during volatile periods.
***
## Who Pays Whom
The funding direction depends on which price is higher:
The traded price is higher than external reality suggests.
* LONGs pay funding to SHORTs
* This discourages new LONG positions
* It encourages traders to SHORT, pushing price down
* Price converges back toward Index
**Example:** Mark is 64%, Index is 62%. LONGs are paying for the premium.
The traded price is lower than external reality suggests.
* SHORTs pay funding to LONGs
* This discourages new SHORT positions
* It encourages traders to go LONG, pushing price up
* Price converges back toward Index
**Example:** Mark is 58%, Index is 62%. SHORTs are paying for the discount.
Prices are aligned.
* Funding rate is near zero
* Neither side pays significant funding
* Market is in equilibrium
**Example:** Mark is 62.1%, Index is 62%. Funding is negligible.
***
## Funding Payment Calculation
Funding payments are proportional to your position size, not your margin:
```
Funding Payment = Position Notional × Funding Rate
```
**Example:**
* Your position: 1,000 USDC notional LONG
* Funding Rate: 0.05% (LONGs pay)
```
Funding Payment = 1,000 × 0.0005 = 0.50 USDC
```
You pay 0.50 USDC this funding interval.
If you were SHORT instead, you would receive 0.50 USDC.
***
## Funding Intervals
Funding accrues continuously but is applied at regular intervals:
* Intervals are defined per market (e.g. every hour, every 8 hours)
* The funding rate shown is typically the rate per interval
* Payments are automatically added to or deducted from your equity
**Example:**
A market has hourly funding. The current funding rate is 0.01% per hour.
* Over 24 hours, you would pay/receive approximately 0.24% of your position notional
* This assumes the rate stays constant (it fluctuates based on price divergence)
***
## Funding and Your Equity
Funding affects your position equity directly:
```
Equity = Initial Margin + Unrealized PnL − Accrued Funding
```
If you are paying funding:
* Your equity decreases over time
* This brings you closer to liquidation
* Large positions in crowded trades can bleed significant funding
If you are receiving funding:
* Your equity increases over time
* This provides a buffer against adverse price moves
* You are being compensated for taking the less popular side
***
## Funding During Different Conditions
Mark and Index stay close. Funding rates are small. Neither side pays much.
**Example:** Mark oscillates between 61.8% and 62.2% around a 62% Index. Funding flips between small positive and negative values.
Many traders pile into one side. Mark diverges from Index. The crowded side pays heavy funding.
**Example:** Breaking news makes everyone go LONG. Mark rises to 68% while Index is 64%. LONGs pay 0.05% per hour to SHORTs. This eventually attracts SHORTs and rebalances the market.
Few trades occur. Mark stays close to Index. Funding rates naturally approach zero.
No artificial pressure is introduced. The market remains fair even when quiet.
***
## Why Funding Matters
Funding serves critical functions:
* **Price accuracy**: Keeps Ascend prices aligned with external prediction markets
* **Balance**: Prevents one side from dominating indefinitely
* **Sustainability**: Allows perpetual markets to function without expiry
* **Incentives**: Rewards contrarian positions when markets get one-sided
Without funding, leveraged prediction perpetuals would not work. Prices could disconnect from reality with no mechanism to pull them back.
***
## Key Points
* Funding transfers value between LONGs and SHORTs based on price divergence
* LONGs pay when Mark > Index; SHORTs pay when Mark \< Index
* Payments are proportional to position notional
* Funding accrues continuously and applies at regular intervals
* Heavy funding on one side signals a crowded trade
***
Learn how the orderbook executes trades