How funding rates work
A perpetual never expires — so what keeps its price tied to spot? A small payment traded between longs and shorts, every few hours.
Perpetual contracts have no expiry date, so they lack the natural mechanism that, in traditional futures, forces the contract price to converge to spot at expiration. The funding rate replaces it.
The mechanism
The funding rate is a periodic payment exchanged directly between longs and shorts — the exchange doesn't keep it. It's calculated from the difference between the perpetual's price and the spot price:
- When the perpetual trades above spot (a market skewed long), the rate is positive and longs pay shorts. This makes holding a long more expensive and encourages selling, pushing the price back toward spot.
- When the perpetual trades below spot (skewed short), the rate is negative and shorts pay longs, encouraging buying.
The result is a continuous economic force that anchors the perpetual's price to the spot market.
How it's calculated
The rate typically combines two components: a premium index (the gap between contract and spot price) and an interest rate (reflecting the cost of the two currencies in the pair) — often with a cap and floor to bound extreme values. Payment usually occurs every eight hours, though this varies by platform.
Why it matters to your position
Funding affects your result over time, not just at entry and exit. In a strongly long market, a long pays recurring funding that erodes profit, while a short in that same situation receives funding. That's why traders watch the rate both as a carrying cost and as a signal of positioning — very high rates can indicate excessive leverage on one side.
Why it matters. The funding rate is a small marvel of mechanism design: a never-expiring contract kept honest not by a court or a clearinghouse, but by a self-correcting payment that traders enforce simply by pursuing their own interest. Ignore it and a "winning" position can bleed out through funding while you hold it.