How Does the Funding Rate Mechanism Keep the Perpetual Contract Price Close to the Spot Price?

The funding rate is a small payment exchanged between long and short position holders, typically every eight hours. If the perpetual price is higher than the spot price, the funding rate is positive, and longs pay shorts, incentivizing shorting and pushing the price down.

If the perpetual price is lower, the rate is negative, and shorts pay longs, incentivizing buying and pushing the price up. This constant balancing act ensures convergence.