Explain the “Funding Rate” Mechanism in Perpetual Futures

The funding rate is a small, periodic payment exchanged between the long and short positions in a perpetual futures contract. It is designed to keep the contract's price anchored to the underlying asset's spot price.

If the contract price is higher than the spot price, longs pay shorts. If it is lower, shorts pay longs.

This incentive mechanism prevents significant price divergence without an expiration date.