How does the Binance Algorithm update cut off the "rate leverage" of meme coins?

Original Author: Agintender

Reprint: White55, Mars Finance

Binance will update the funding rate algorithm on September 18th. This move aims to keep the funding rate within a relatively moderate range, striving to change the image of “position = liquidation” to true holding costs. The purpose of this algorithm change should be to suppress the ways that tokens like $Alpaca, $TRB, and $MYX exploit the funding rate mechanism to create a blood transfusion and undermine competing positions.

Section 1: The Role of Funding Rates in Perpetual Contracts: The Weaponization of Regulators

Perpetual contracts differ from traditional futures primarily in that they have no expiration date. This characteristic greatly enhances the liquidity and speculative nature of the contracts, but it also introduces an inherent risk: the contract price may persistently deviate from the spot price of the underlying asset, resulting in what is known as the “futures and spot gap”. (Two prices for one underlying asset)

To address this core issue, the funding rate mechanism has emerged. It is essentially a price anchoring mechanism that incentivizes market participants to engage in trading behaviors that can push the perpetual contract price back to the spot price level by periodically exchanging funds between long and short holders, thereby maintaining price consistency in the long term.

The operational logic of this mechanism is very clear: when the funding rate is positive (i.e., the perpetual contract price is higher than the spot price), long position holders must pay funding fees to short position holders; conversely, when the funding rate is negative (i.e., the perpetual contract price is lower than the spot price), shorts pay longs. This design creates a direct financial incentive, encouraging traders to hold positions contrary to the mainstream market sentiment, thus balancing the market and correcting price discrepancies.

These periodic fund exchanges continuously create arbitrage incentives: when the perpetual contract price is too high, arbitrageurs can sell the perpetual contract while buying an equivalent amount of spot assets to earn a positive funding rate. Their actions put downward pressure on the perpetual contract price, prompting it to revert.

1.2 Composition of the Funding Rate: Deconstructing Core Elements

The calculation of the funding rate mainly consists of two core components: the Interest Rate and the Premium Index.

Interest Rate Component: This is a relatively stable component preset by the exchange, theoretically representing the difference in borrowing costs between the base currency and the quoted currency in the contract. On Binance, the BTC/ETH interest rate is typically fixed at 0.01% every 8 hours (i.e., 0.03% per day), while the interest rates for other currencies are set at 0%.

Premium Index Section: This is the most dynamic and influential component of the funding rate. It directly quantifies the degree of deviation between the perpetual contract price and the spot index price of the underlying asset. When the perpetual contract price is higher than the spot index price, the premium index is positive; conversely, it is negative. To smooth out short-term price fluctuations, the premium index is usually determined based on the moving weighted average of the price difference during the funding rate calculation period.

Section 2: Comparative Analysis of Algorithm Evolution

2.1 Traditional Formula: 8-hour Industry Standard

Prior to this update, Binance's funding rate calculation followed a model based on a standardized 8-hour settlement period. Its formula can be effectively expressed as:

Funding Rate = Average Premium Index ( P ) + clamp ( interest rate - Premium Index ( P ), 0.05%, -0.05% )

Under this framework, except for the “interest rate” of BTC/ETH, which is set to 0.01% every 8 hours by default, all other currencies are at 0%. The entire calculation produces a rate directly applicable for settlement every 8 hours, which means there are three settlements per day (24 hours / 8 hours = 3 times). This fixed 8-hour structure follows the standard set by Bitmex.

2.2 Updated Formula: Introduce “Frequency Normalization Factor”

The new formula effective from September 18, 2025, is as follows:

Funding Rate ( F )=

[Average Premium Index ( P) + clamp ( interest rate - Premium Index ( P), 0.05%, -0.05% )] / (8/N )

The key innovation of this formula lies in the introduction of two core variables:

N: The funding settlement interval measured in hours (i.e., “settlement frequency”). This is the core of the algorithm's dynamic adjustment.

(/N): The divisor term in the formula is called the frequency normalization factor.

The numerator of the new formula is exactly the same as that of the old formula, which can be understood as calculating a “benchmark 8-hour rate.” The newly added frequency normalization factor is responsible for scaling this benchmark rate. Its core purpose is to adjust the rate of each capital exchange based on a shorter settlement period, keeping the funding rate controlled within a window based on an 8-hour basis.

This formula design reveals a core design principle: Binance aims to limit the “holding costs” imposed on counterparties by funding rates, or from the perspective of market manipulation, to reduce the “lethality” of funding rates for counter-directional trades.

For example, with a maximum funding rate of 2% every 4 hours:

The funding rate for 24h under the old algorithm is 12%;

The funding rate for 24 hours under the new algorithm is 6%.

Section 3: Settlement Frequency Variable (N) Quantitative Impact

This section will provide a detailed numerical breakdown of funding rates under different settlement frequencies through a hypothetical scenario, in order to intuitively demonstrate its operational mechanism.

Model assumption:

Assuming the “benchmark 8-hour fee rate” (i.e., the numerator of the new formula) is a constant value of 0.02%. This represents a market environment where there is a moderate premium of the perpetual contract price over the spot price.

The notional value of the trader's position is $100,000.

3.1 Scenario A (N=8): Benchmark Scenario (Standard Settlement)

Collection Frequency: 8/8=1 (Collect once every 8 hours)

Single settlement fund rate: 0.02%/1=0.02%

Settlement times within 24 hours: 24/8=3

Single settlement payment amount: $100,000×0.0002=$20

24-hour effective cumulative cost: $20×3=$60

3.2 Scenario B (N=4): PUMPUSDT Example (Frequency Increase)

Collection frequency: 8/4=2 (collecting 2 times every 8 hours)

Single settlement funding rate: 0.02%/2=0.01%

Settlement count within 24 hours: 24/4=6

Single settlement payment amount: $100,000×0.0001=$10

24-hour effective cumulative cost: $10×6=$60

3.3 Scenario C (N=2): High-Frequency Settlement

Collection frequency: 8/2=4 (Collect 4 times every 8 hours)

Single settlement fund rate: 0.02%/4=0.005%

Settlement count within 24 hours: 24/2=12

Single settlement payment amount: $100,000×0.00005=$5

24-hour effective cumulative cost: $5×12=$60

3.4 Scenario D ( N=1): Hourly Settlement

Collection frequency: 8/1=8 (8 times every 8 hours)

Single settlement fund rate: 0.02%/8=0.0025%

Settlement count within 24 hours: 24/1=24

Single settlement payment amount: $100,000×0.000025=$2.50

24-hour effective cumulative cost: $2.50×24=$60

From the above calculations, it can be seen that regardless of the frequency geometry, the final (24h) funding rate is the same.

4. Market Impact and Binance's Response

From a strategic perspective, this update can be seen as a response to the systemic risks exposed by past market crises—specifically the “weaponization” of funding rates. It is also a strategic move aimed at dominating the listing and trading of emerging high-risk assets. The crypto market has always been known for its extreme volatility, especially in a market environment characterized by “high market capitalization and low liquidity.” This mechanism and tool, which seems to return to normal value, has gradually become a weapon.

In classic “battles” like Alpaca, MYX, and TRB, it has gradually been used as a weapon to restrain and even suppress the opponent's position. In extreme cases, a top funding rate of 2% per hour translates to 48% over 24 hours (Alpaca even reached 4%). What a painful realization this is! This means that while using the opponent's funding rate to transfuse blood to oneself, it can also reduce the opponent's margin, allowing for a smaller capital chip to “liquidate” the opponent's position, achieving a spiral acceleration upwards/downwards.

8/N is Binance's response to the narrative of delisting coins in recent months, high control manipulation, and bleeding positions. This model basically limits the daily funding rate to 6% (assuming 2% every 8 hours), which effectively closes off the route for bleeding funding rates and stealing funds.

Some may wonder why not simply set the settlement to once every 8 hours. This is primarily because an 8-hour funding settlement interval is too slow for a viral token that could double or halve its price within a few hours. During this period, the premium could become extremely large, and the final calculated funding rate could be punitive, further exacerbating market instability. By implementing variable N, Binance can configure the settlement frequency to 1/2/4/8 hours for its volatility on the first day a high-risk new asset is launched.

As mentioned earlier, the purpose of the funding rate is to adjust the price difference between futures and spot, but unfortunately, it has been exploited by malicious individuals, becoming a roller that crushes retail investors who have only a partial understanding of the contract mechanism.

The market is ever-changing; when God closes a door, He opens a window – this applies to everyone. Let us look forward to the next grand game of chance.

May we always hold a heart of reverence for the market.