How Does the Funding Rate Mechanism Work in Perpetual Futures?

The funding rate is a small payment exchanged between long and short position holders, typically every eight hours. It ensures the perpetual contract price stays close to the spot price of the underlying asset.

If the contract trades above the spot price, the funding rate is positive, and longs pay shorts. If it trades below, the rate is negative, and shorts pay longs.

This mechanism prevents significant divergence from the underlying market price.