What Is the Function of the ‘Funding Rate’ in a Perpetual Swap Market?

The funding rate is a periodic payment made between traders holding long and short positions in a perpetual swap contract. Its function is to keep the perpetual contract's price close to the underlying asset's spot price.

If the perpetual price is higher than the spot price, the funding rate is positive, and long position holders pay shorts, incentivizing short selling. If the perpetual price is lower, the rate is negative, and shorts pay longs, incentivizing buying.

This mechanism ensures price convergence without an expiration date.