How Does the “Funding Rate” Mechanism Work in a Perpetual Futures Contract?

The funding rate is a periodic payment exchanged between long and short traders to keep the perpetual futures price anchored to the spot price. If the futures price is higher than spot (positive funding rate), longs pay shorts.

If the futures price is lower (negative funding rate), shorts pay longs. This mechanism prevents the futures price from diverging permanently from the underlying asset's spot price.