How Does the “Funding Rate” Mechanism Keep Perpetual Swaps Anchored to the Spot Price?

The funding rate is a periodic payment exchanged between the long and short sides of the perpetual swap contract. If the perpetual swap price is higher than the spot price (premium), longs pay shorts, incentivizing traders to short the contract and driving its price down toward spot.

Conversely, if the price is lower (discount), shorts pay longs, encouraging buying and driving the price up. This mechanism prevents divergence and is crucial for the contract's function.