How Does the Funding Rate Mechanism Replace the Expiration Date of a Traditional Futures Contract?

The expiration date in a traditional futures contract forces the contract price to converge with the spot price at maturity. The funding rate mechanism achieves a similar convergence continuously without an expiration date.

By incentivizing traders to take the opposing side of the dominant market sentiment (through positive or negative payments), the funding rate constantly pressures the perpetual contract price to stay close to the underlying asset's spot price, thereby mimicking the convergence function of an expiration date.