What Is the Purpose of the “Funding Rate” Mechanism in Perpetual Futures Contracts?

The funding rate is a periodic payment exchanged between the long and short sides of a perpetual futures contract. Its primary purpose is to keep the perpetual contract's price anchored to the underlying spot price.

If the futures price is higher than the spot price (premium), longs pay shorts. If the futures price is lower (discount), shorts pay longs.

This mechanism prevents a permanent divergence between the derivative and the underlying asset.