How Do Funding Rates in Perpetual Swaps Influence the Market's Contango or Backwardation State? ▴ Learn

How Do Funding Rates in Perpetual Swaps Influence the Market’s Contango or Backwardation State?

Funding rates act as the mechanism to keep the perpetual swap price anchored to the spot price, effectively mitigating extreme contango or backwardation. A positive funding rate means longs pay shorts, disincentivizing long positions and pushing the swap price down towards spot (reducing contango).

A negative rate means shorts pay longs, disincentivizing short positions and pushing the swap price up towards spot (reducing backwardation).

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