Funding Rates: The Engine Behind USDh Yield

USDh bridges liquidity from CeFi into Bitcoin DeFi by generating yield from one of the most liquid and mature markets in crypto: Perpetual futures.

Perpetual futures are a type of derivative that allows traders to take long or short positions without an expiry date. Perpetual contracts don't settle like traditional futures, so exchanges use a mechanism called the funding rate to ensure the perpetual contract price stays close to the spot price of the underlying asset.

The funding rate is a recurring payment exchanged between long and short positions on a contract. If the perpetual contract trades above the spot price, longs pay shorts. If it trades below, shorts pay longs.

The rate is calculated and applied at fixed intervals, typically every 8 hours across all major exchanges. This payment is not a fee to the exchange, but a direct transfer between market participants. The goal is to maintain market balance by incentivizing traders to express their directional bias, while offering the opposing side (often market makers or neutral participants) the opportunity to earn a yield by absorbing that exposure.

How Exchanges Structure and Calculate Funding Rates

The concept of funding rates is consistent across exchanges, but the implementation varies significantly. Each exchange uses different inputs, smoothing methods, caps, and reference prices. These factors influence the stability or volatility of funding rates and, ultimately, the yield a strategy like ours can capture.

Let’s break down how each major exchange handles these components.

Binance
Binance uses a time-weighted average of the premium between the perp price and the spot price. Every 5 seconds, Binance records the difference between the bid/ask midpoint of the perpetual contract and the spot index. The data is aggregated over 8 hours, with greater weight given to recent values. If the average premium crosses the ±0.05% dampening threshold, funding is activated.

Binance applies a base interest rate of 0.01%, serving as a minimum charge. However, the final funding rate is capped within a ±0.3% range per 8-hour window to prevent extreme outcomes during periods of volatility. The result is a relatively stable funding environment that discourages small, manipulative price gaps from triggering excessive payments.

Binance calculates its funding rate (F_Rate) as follows:

Where the Average Premium Index (P_Average) is added to a clamp function of the interest rate (I) minus the Average Premium Index (P_Average), and the top and bottom funding dampers, respectively.

Bitget & Bybit
Bitget and Bybit closely follow Binance’s structure, though they remove most of the guardrails. However, Bitget and Bybit differ significantly in their approach to risk exposure.

Bybit raises the funding cap to ±0.75%, allowing for more pronounced payouts in trending markets. Bitget goes much further, permitting funding to spike as high as ±2.5% per 8-hour window. While this creates opportunities for higher yield on the short side, it also increases volatility and introduces higher drawdown risk for traders caught on the wrong side of the market.

OKX
Instead of relying on time-weighted premiums, OKX averages the premium index evenly across 1-minute intervals of the funding window, but now the calculation incorporates an average premium index with an inner clamp. This clamp limits the adjustment from the interest rate to ±0.05%, preventing extreme funding swings.

The premium index itself is derived from impact bid and ask prices, making it more resistant to manipulation compared to using the simple bid/ask midpoint. Funding rate is capped at ±0.375%, but the use of impact pricing, a controlled interest adjustment, and the inner clamp results in a profile that is reflective of market liquidity.

Debirit
Deribit differs fundamentally from the rest. Since Deribit does not have a spot market, it uses a composite index price from other exchanges known as the “Deribit Index.” The funding rate is calculated as a simple moving average of the premium over 8 hours, with no interest rate. Its cap sits at ±0.5%, higher than Binance and OKX’s rate caps but lower than Bybit's.

The funding rate on Deribit is calculated by the formula:

Deribit references spot prices externally, so its funding rate can behave differently from exchanges that tie perps directly to their spot markets.

Comparison Table: Funding Rate Parameters Across Exchanges

How Hermetica Captures Funding Rates

Hermetica captures funding rates through a delta-neutral strategy that eliminates directional exposure to BTC’s price. This structure involves two core components:

1. Bitcoin collateral held in institutional-grade custody

2. A 1x short perpetual futures position on major exchanges

The protocol holds BTC in institutional-grade custody through regulated providers like Copper and Ceffu. These custodians enable the BTC that backs USDh to be mirrored on exchanges, allowing Hermetica to open and maintain hedge positions without underlying collateral ever touching centralized exchange balance sheets. The protocol generates a market-based yield without incurring speculative risk.

If the market is at an equilibrium or long-biased (which it typically is), the short position receives funding payments. If the market is at an equilibrium, where the perp price equals the spot price, the premium index is effectively zero. However, funding is not zero. Most exchanges apply a base interest rate (commonly 0.01% per 8 hours).

This interest rate represents the cost of capital in perpetual futures markets. Even when there’s no directional bias (no premium), the rate ensures shorts are compensated for providing capital, while longs pay for holding leveraged exposure. It’s a built-in pricing of capital that aligns perps with traditional finance logic: borrowing has a cost, lending has a return.

With this structure, short positions receive funding payments even at equilibrium. When the market tilts long, as it typically does, these payments increase.

These inflows are directed to the protocol and serve two critical roles:

• Distribute daily yield to USDh stakers.

• Build the Reserve Fund, a dedicated buffer designed to cover funding payments during periods of negative funding, when shorts are required to pay longs.

The system is operated conservatively. Leverage is capped at 1x, exposures are diversified across exchanges, and strict solvency thresholds are enforced. In prolonged periods of negative funding rates, Hermetica can reduce perpetual exposure or shift collateral into yield-bearing assets, such as Treasury-backed securities, to preserve capital and protect the Reserve Fund.

The result is a Bitcoin-backed, yield-generating stablecoin that does not rely on debt issuance, inflationary incentives, or synthetic collateral.