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

The funding rate is a small, periodic payment exchanged between traders holding long and short positions in a perpetual futures contract. Its primary purpose is to anchor the perpetual contract's price to the underlying asset's spot price.

If the contract price is higher than the spot price, longs pay shorts (positive funding rate), incentivizing shorting and driving the contract price down. If lower, shorts pay longs (negative funding rate).