What Happens to the Funding Rate during Extreme Market Volatility?

During extreme market volatility, the funding rate can spike dramatically. A rapid price move can cause a sudden, large divergence between the perpetual contract price and the spot index price, leading to a massive positive or negative premium.

This forces a high funding rate, which is intended to quickly incentivize traders to take the opposite position, thereby forcing the perpetual price back in line with the spot price. These spikes can lead to significant, sudden costs for traders.