How Do Funding Rates for Perpetual Contracts Work?

Funding rates are periodic payments exchanged between buyers and sellers of perpetual contracts. The purpose of the funding rate is to keep the price of the perpetual contract in line with the price of the underlying cryptocurrency.

If the perpetual contract is trading at a premium to the underlying, the funding rate will be positive, and longs will pay shorts. If the perpetual contract is trading at a discount, the funding rate will be negative, and shorts will pay longs.