What Is the Funding Rate Mechanism in Perpetual Futures and How Does It Affect Traders?

The funding rate is a small, periodic payment exchanged between the long and short sides of a perpetual futures contract. It is designed to keep the contract's price closely tethered to the spot price of the underlying asset.

If the contract trades at a premium to the spot price (positive funding rate), longs pay shorts. Conversely, if it trades at a discount (negative funding rate), shorts pay longs.

This mechanism creates an incentive for arbitrage, aligning the derivative price with the spot price.