Funding Rate vs Interest Rate vs Borrow Rate: What's the Difference?.

A funding rate is a recurring peer-to-peer payment between longs and shorts on a perpetual, existing solely to hold the perp’s price to its index. An interest rate, in the perp context, is a small fixed constant inside the funding formula, 0.00125 percent per hour on venues like Hyperliquid and Variational, standing in for the cost of borrowing dollars versus holding crypto. A borrow rate is the actual market price of borrowing a specific asset, on margin platforms or money markets like Aave, paid by the borrower to the lender. Traders use the three interchangeably, and they are three different objects with different payers, different receivers, and different reasons to move.

The funding rate is the only one of the three that is a transfer between traders. The exchange takes no cut; it flows from the crowded side of the perp to the uncrowded side, its sign flips with positioning, and it is information about the market as much as it is a cost. Everything about who pays and when lives in who pays funding and how often it is paid.

The interest rate inside the funding formula confuses people because it shares a name with the thing banks do, while behaving like neither a market rate nor a fee. It is a fixed parameter. The standard formula on the venues I cover is the average premium index plus a clamped adjustment toward this fixed interest rate, and the constant exists to give funding a structurally correct resting level: holding a hedged long-spot, short-perp position should earn roughly the dollar borrowing cost, so the formula bakes in about 11 percent annualized flowing to shorts at equilibrium. It does not float with the Fed, it does not respond to demand, and on these venues it has one job, setting the baseline that makes a normal funding rate slightly positive rather than zero.

The borrow rate is the real market price of leverage on an actual asset. Borrow USDC on a money market to lever a position and you pay its floating rate, set by pool utilization. Short a token on margin and you pay its borrow rate, which on a hard-to-borrow asset can dwarf any funding rate, occasionally reaching levels that make shorting uneconomical regardless of your thesis. Borrow rates are always paid by the borrower to the lender, never reverse sign, and respond to supply and demand for the asset itself rather than to perp positioning. One adjacent cousin worth knowing: some perp designs charge an additional borrow-style fee on open positions, paid to the liquidity pool backing the venue and always flowing trader-to-pool, which is a venue revenue mechanic rather than an alignment payment, and reading one as the other will distort any cross-venue comparison.

Why the distinction pays: the classic cash-and-carry trade, long spot and short the perp, is exactly the arbitrage connecting these rates. Its yield is the funding you collect minus whatever borrow costs you incur to put the position on, and the fixed interest component is the formula’s way of acknowledging that relationship at equilibrium. When funding detaches far from borrowing costs, arbitrage capital flows in to close the gap, which is the deep reason funding mean-reverts and the quiet engine behind most of what the screener measures. Confuse the three rates and the carry math silently breaks; keep them straight and the whole structure of the market gets legible.