How Does the Funding Rate Mechanism Work in a Perpetual Swap Contract?

The funding rate is a small payment exchanged between long and short position holders at regular intervals. It ensures the perpetual contract price remains anchored to the underlying asset's spot price.

If the contract price is higher than the spot price (premium), long holders pay short holders. If the contract price is lower (discount), short holders pay long holders.

This mechanism prevents the contract from drifting too far from the index price.