What Is the ‘Funding Rate’ in a Perpetual Swap Contract and Why Is It Necessary?

The funding rate is a small periodic payment exchanged between the long and short sides of a perpetual swap contract. It is necessary because perpetual swaps, unlike futures, have no expiration date, which can cause their price to drift away from the underlying spot price.

The funding rate acts as a mechanism to incentivize traders to push the contract price back toward the spot price, keeping the derivative anchored to the underlying asset.