Explain the Concept of “Funding Rate” in Perpetual Futures and Its Relationship to Leverage

The funding rate is a periodic payment between long and short traders to keep the perpetual contract price close to the spot price. High positive funding means longs pay shorts (contract price > spot), incentivizing shorts and deterring longs, thus reducing overall leverage.

High leverage amplifies the impact of the funding rate, making holding a position more expensive during market extremes.