How Does the ‘Basis’ of a Perpetual Swap Relate to the Funding Rate?

The basis of a perpetual swap is the difference between the swap price and the spot price (Swap Price – Spot Price). The funding rate mechanism is specifically designed to keep the basis close to zero.

A positive basis leads to a positive funding rate, which pushes the basis down, and a negative basis leads to a negative funding rate, which pushes the basis up.