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

Binance will update the funding rate algorithm on September 18, aiming to keep the funding rate within a relatively moderate range and to change the perception of “Holdings = Get Liquidated” to true holdings cost. The purpose of this algorithm change should be to suppress the ability of altcoins like $Alpaca, $TRB, and $MYX to exploit the funding rate mechanism for liquidity and to undermine their competitors.

The original text is as follows:

Section 1: The Role of Funding Rate in Perpetual Contracts: The Weaponization of the Regulator

Perpetual contracts differ from traditional futures 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, creating what is known as the “futures and spot difference” (two prices for one underlying).

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 capable of pushing 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 operating 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 need to 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), short positions will pay long positions. This design creates a direct financial incentive, encouraging traders to hold positions that are contrary to the mainstream market sentiment, thereby balancing the market and correcting the price difference.

These periodic funding exchanges continuously create arbitrage incentives: when perpetual contract prices are too high, arbitrageurs can sell perpetual contracts while buying an equivalent amount of spot assets to earn a positive funding rate. Their behavior puts downward pressure on the perpetual contract prices, prompting a return.

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 Part: This is a relatively stable component preset by the exchange, theoretically representing the borrowing cost difference between the base currency and the quoted currency in the contract. On Binance, the BTC/ETH interest rate is usually fixed at 0.01% every 8 hours (i.e., 0.03% daily), while the interest rates for other coins 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 short-term price fluctuations, the premium index is typically determined based on the moving weighted average of the price differences during the funding rate calculation period.

Section 2: Comparative Analysis of Algorithm Evolution

2.1 Traditional Formula: 8-hour Industry Standard

Before this update, Binance's funding rate calculation followed a model based on a standardized 8-hour settlement cycle. 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 BTC/ETH “interest” which is set to a default of 0.01% every 8 hours, all other coins are at 0%. The calculation produces a rate that directly applies to settlements every 8 hours, meaning there are three settlements per day (24 hours / 8 hours = 3 times). This fixed 8-hour structure follows the standards of Bitmex.

2.2 Formula after update: 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 dynamic adjustment of the algorithm.

(H/N): The divisor in the formula is referred to as the frequency normalization factor.

The numerator of the new formula is exactly the same as 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 funding exchange based on a shorter settlement period, keeping the funding rate controlled within a window based on 8 hours.

This formula design reveals a core design principle: Binance aims to limit the “holdings cost” imposed on counterparties by the funding rate, or from a market manipulation perspective, to reduce the “destructive power” of the funding rate for opposite-direction trades.

Taking 2% funding rate every 4 hours as an example:

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

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

Section 3: Settlement Frequency Variables (N) Quantitative Impact

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

Model Assumption:

Assuming the “benchmark 8-hour 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 relative to 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 (1 time every 8 hours)

Single Settlement Funding Rate: 0.02%/1=0.02%

Settlement times in 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)

Charging frequency: 8/4=2 (charged 2 times every 8 hours)

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

Settlement times 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

Charging frequency: 8/2=4 (charged 4 times every 8 hours)

Single settlement funding 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

Charging frequency: 8/1=8 (Charge 8 times every 8 hours)

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

Settlement times 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 initiative aimed at dominating the listing and trading of new emerging high-risk assets. The crypto market is already known for its extreme volatility, and especially in a market environment characterized by “high market capitalization and low circulation,” this mechanism and tool that seems to revert 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 positions. 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 using the opponent's funding rate to replenish one's own while also reducing the opponent's margin, thereby requiring fewer capital chips to “Get Liquidated” the opponent's positions, achieving a spiral acceleration upwards/downwards.

8/N is Binance's response to the narrative of delisting coins, high market manipulation, and bleeding holdings over the past few months. This model basically keeps the daily funding rate limited to 6% (assuming 2% every 8 hours), effectively blocking the route for funding rate bleeding and stealing.

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

As mentioned earlier, the funding rate is used to adjust the price difference between futures and spot, but unfortunately, it has been exploited by certain individuals, becoming a grinding machine that crushes retail investors who have only a superficial 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 strategy.

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

This article references: @owenjin12's tweet analysis