What Is the Function of the “Funding Rate” in a Perpetual Crypto Futures Contract?

The funding rate is a periodic payment made between traders who hold long and short positions in a perpetual futures contract. Unlike traditional futures, perpetual contracts have no expiration, so the funding rate is used to keep the contract's price anchored to the spot price of the underlying asset.

If the perpetual contract trades above the spot price (contango), long holders pay short holders. If it trades below (backwardation), short holders pay long holders.