What Is the Purpose of the Funding Rate in a Perpetual Futures Contract?

The funding rate is a small, periodic payment exchanged between long and short traders in a perpetual futures contract. Its purpose is to keep the contract's price (mark price) anchored to the underlying asset's spot price (index price).

If the perpetual price is higher than spot, longs pay shorts (positive funding rate), incentivizing shorts to enter and drive the price down, and vice versa.