What Is the Role of Financing Rates in Perpetual Futures Contracts?

In perpetual futures contracts, which do not have an expiration date, the financing rate is the mechanism that keeps the contract price tethered to the spot price. If the perpetual contract is trading at a premium to the spot price (contango), the financing rate will be positive, and traders who are long the contract will pay a fee to those who are short.

This incentivizes traders to sell the perpetual, pushing its price down towards the spot price. If the perpetual is trading at a discount (backwardation), the financing rate will be negative, and short traders will pay long traders, incentivizing buying that pushes the price up.