How Does the Funding Rate Mechanism Work to Keep Perpetual Futures Prices Close to the Spot Price?

The funding rate is a small payment exchanged between long and short traders, typically every eight hours. If the perpetual price is higher than the spot price (positive funding rate), longs pay shorts.

If the perpetual price is lower (negative funding rate), shorts pay longs. This payment incentivizes arbitrageurs to enter trades that push the perpetual price back toward the spot price, ensuring convergence without an expiration date.