How Do Perpetual Swaps, Which Have No Expiration Date, Maintain Their Price Peg to the Underlying Asset?

Perpetual swaps use a mechanism called a 'funding rate' to stay pegged to the spot price of the underlying asset. If the swap price is higher than the spot price, the funding rate is positive, and traders who are long (buyers) pay a fee to traders who are short (sellers).

This incentivizes selling, pushing the swap price down. Conversely, if the swap price is below the spot price, the funding rate is negative, and shorts pay longs, incentivizing buying that pushes the price up.

This continuous payment exchange keeps the swap price closely tethered to the spot index.