What Happens to the Funding Rate When the Contract Price Is below the Spot Price?

When the perpetual contract price is below the spot price, the contract is trading at a "discount," also known as "backwardation." In this scenario, the funding rate becomes negative. A negative funding rate means that holders of short positions must pay a fee to holders of long positions.

This incentive encourages buying (longs) and discourages selling (shorts), pushing the contract price back up toward the spot price.