What Is the ‘Funding Rate’ Mechanism in Perpetual Swaps and How Does It Work?

The funding rate is a periodic payment exchanged between long and short traders to keep the perpetual contract price anchored to the spot price. If the contract trades at a premium to spot, long holders pay short holders, encouraging shorting.

If it trades at a discount, short holders pay long holders, encouraging buying. This payment occurs directly between traders, not involving the exchange, and prevents divergence from the underlying asset price.