What Is the Funding Rate Mechanism in Perpetual Futures and Why Is It Crucial?

The funding rate is a small, periodic payment exchanged directly between traders holding long and short positions. It is calculated based on the difference between the perpetual contract price and the underlying spot price.

It is crucial because it incentivizes arbitrageurs to trade against the price divergence, effectively "tethering" the perpetual contract's price to the spot price without an expiration date.