Many people don’t really understand how funding rates work in perpetual contracts. Simply put, it’s the “toll fee” you pay for holding a position.

The algorithm isn’t complicated—it looks at the difference between the perpetual contract price and the spot index price. When the contract price is higher than the spot, it means the market is bullish, so the funding rate is positive: long positions pay shorts. Conversely, if the contract price drops below the spot price, bearish sentiment dominates, the funding rate turns negative, and shorts pay longs.

In essence, it’s a balancing mechanism. When the funding rate gets too high, people will naturally close positions or switch directions, which keeps the contract price from deviating too far from the spot. If you’re trading contracts, keep an eye on this data—sometimes funding rates alone can eat up a lot of your profits.