A perpetual future never settles, so something must keep its price from drifting away from spot. That something is the funding rate: a small payment exchanged between longs and shorts at regular intervals.
The mechanism
- When the perp trades above spot (longs dominate), funding is positive and longs pay shorts.
- When the perp trades below spot (shorts dominate), funding is negative and shorts pay longs.
- This makes the crowded side pay the other, nudging price back toward spot — a constant arbitrage tether.
Reading funding
Funding is a positioning gauge. Strongly positive funding means longs are crowded and paying up to hold — frothy, and vulnerable to a long squeeze if price stalls. Strongly negative funding means shorts are crowded and paying — the setup for a short squeeze. Extremes are more useful as a contrarian warning than as a trend signal.
Funding and carry
Funding is also why 'carry' strategies exist: a delta-neutral trader can hold spot and short the perp to collect funding when it is positive. On low-funding venues the collected funding may not clear trading fees — which is exactly what this project's own research found on its universe. Funding is a real cashflow, but not free money.