How Does the 'Funding Rate' Mechanism Ensure the Perpetual Swap Price Tracks the Spot Price? ▴ Learn

How Does the ‘Funding Rate’ Mechanism Ensure the Perpetual Swap Price Tracks the Spot Price?

The funding rate is a periodic payment exchanged between traders holding long and short positions. When the swap price is higher than the spot price (premium), long holders pay short holders, incentivizing short selling and pushing the swap price down.

Conversely, when the swap price is lower (discount), short holders pay long holders, encouraging buying. This constant pressure keeps the swap price anchored to the spot price.

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