What Happens to the Funding Rate When the Perpetual Contract Trades at a Significant Premium to the Spot Price?

When the perpetual contract trades at a significant premium (higher price) to the spot price, the funding rate becomes positive and increases. This means that traders holding long positions must pay traders holding short positions.

This payment acts as a strong incentive for traders to open short positions or close long ones, which puts downward pressure on the contract price, pushing it back toward the spot price.