> For the complete documentation index, see [llms.txt](https://docs.megatao.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.megatao.com/core/funding-and-interest.md).

# Funding and Interest

MegaTAO uses two fee mechanisms to keep the protocol balanced and compensate liquidity providers. Both accrue continuously while a position is open.

## Funding rates

Perpetual futures have no expiry date, so there is no natural convergence between the futures price and the spot price. Funding rates solve this by creating periodic payments between longs and shorts based on which side is more crowded.

**When there are more longs than shorts**, longs pay shorts. This makes it more expensive to be long and cheaper to be short, encouraging traders to take the other side and rebalance the market.

**When there are more shorts than longs**, shorts pay longs. The same rebalancing effect works in reverse.

**When the market is balanced**, the funding rate is zero and no payments are made.

Funding is a peer-to-peer payment. The protocol does not collect funding fees. They flow directly between position holders. The rate is recalculated based on the ratio of long to short open interest and is capped at 0.75% per 8-hour interval.

## Interest fees

Separate from funding, an interest fee is charged to all position holders (both longs and shorts). This fee compensates vault depositors for the capital the vault puts at risk when acting as counterparty.

The interest rate scales with vault utilization:

* **Low utilization:** When the vault has plenty of available reserves relative to its exposure, the interest rate is minimal.
* **High utilization:** When the vault's capital is heavily committed, the rate increases to compensate depositors for the higher risk and to discourage further position opening.

This creates a self-regulating system: as the vault becomes more utilized, it becomes more expensive to hold positions, which naturally limits protocol exposure.

## Impact on traders

Both funding and interest reduce your margin over time. For short-duration trades, these costs are typically small. For longer-held positions, they can become meaningful.

Before opening a position, check the current funding rate and vault utilization on the market page. Your net P\&L includes:

* Price movement (unrealized P\&L)
* Funding paid or received (directional, based on market skew)
* Interest paid (always a cost, based on utilization)
* Trading fees (0.25% on open and close)

For detailed formulas and parameters, see [Funding](/trading/funding.md) in the Trading section.


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