Derivative Funding

Definition ∞ Derivative funding refers to the cost of maintaining open positions in derivative contracts, particularly futures and perpetual swaps. It is a mechanism designed to keep the price of a derivative contract close to the price of the underlying asset. This funding rate is paid between traders holding long and short positions, ensuring market alignment.
Context ∞ Derivative funding rates are a critical metric for traders and analysts observing cryptocurrency markets, as they can signal market sentiment and leverage levels. Significant shifts in funding rates often precede substantial price movements, making them a focal point in news related to trading strategies and market liquidity. Understanding these dynamics is essential for comprehending the operational mechanics of many digital asset exchanges and trading platforms.