How Does Arbitrage Help to Enforce the Funding Rate Mechanism?

Arbitrageurs profit by exploiting the temporary difference between the perpetual contract price and the spot price. If the contract price is too high, they will short the contract and buy the spot asset.

This action increases supply on the futures market and demand on the spot market, pushing the contract price down. The funding rate incentivizes this activity, ensuring the contract price converges back to the spot price.