> For the complete documentation index, see [llms.txt](https://docs.carbon.inc/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.carbon.inc/trading/understanding-funding-rates.md).

# Understanding Funding Rates

### <mark style="color:$info;">Introduction</mark>

Funding rates are crucial components in the trading of perpetual contracts on Carbon. These are periodic payments exchanged between traders and solvers who hold positions in perpetual contracts. The funding rate mechanism ensures that the price of the perpetual contract remains close to the underlying asset's spot price.

***

### <mark style="color:$info;">How Funding Works on Carbon</mark>

Funding rates are small payments exchanged between traders and solvers based on whether long or short positions are dominant.

* **Positive Funding**: When the perp price is above spot, **longs pay shorts**. This discourages excessive long positioning and brings prices back in line.
* **Negative Funding**: When the perp price is below spot, **shorts pay longs**. This disincentivizes overly bearish pressure and helps restore equilibrium.

Carbon doesn’t use a fixed oracle or index price. Instead, the protocol uses pricing streamed by solvers, who in turn pull data from CEXs, DEXs, and other sources,  to determine the fair value of each asset and calculate the funding rate accordingly.\
\
**Funding Rates on carbon are displayed based on your direction. Clicking Long shows you the long funding rate (positive means you get paid, negative means you have to pay) and vice versa.**

***

### <mark style="color:$info;">Solver-Based Funding</mark>

Carbon’s pricing engine is solver-driven. Solvers are market participants that stream executable quotes based on off-chain hedging venues. These quotes aren’t just for trading, they also anchor the funding rate.

This has two benefits:

1. **No Oracle Dependence** – Pricing stays responsive to real market conditions.
2. **Market-Driven Adjustments** – Funding dynamically shifts based on where solvers and traders are leaning.

> **Note:** If the calculated funding amount is smaller than the gas cost to settle it, the fee will be skipped. This avoids unnecessary on-chain transactions and preserves capital.

***

### <mark style="color:$info;">What This Means for Traders</mark>

Funding rates affect the cost of holding a position. If you’re paying funding, it eats into your PnL. If you’re earning it, it can boost your gains; even in a sideways market.

That means:

* **Timing matters** – Avoid paying excessive funding by understanding positioning skew.
* **Strategy matters** – Some traders use funding rates to build directional or neutral strategies.
* **Execution matters** – Because Carbon has no funding fee markup or platform take, all funding flows directly between traders and solvers.

***

### <mark style="color:$info;">Summary</mark>

Funding on Carbon is simple, clean, and solver-powered. It’s designed to:

* Keep perps aligned with real market prices
* Incentivize balanced positioning
* Avoid reliance on centralized oracles
* Let traders build smarter, more adaptive strategies

#### &#x20; <a href="#how-funding-rates-work" id="how-funding-rates-work"></a>


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