What are the Mechanisms and Terms in the World of Perpetual Trading?

Below are the essential components to ensure perpetual trading works.

As mentioned earlier, the funding rate is a mechanism to ensure that the index price used as a reference for perpetual contracts can be aligned with the spot price. Meanwhile, the funding rate is a fee exchanged between the long and short parties of a contract depending on market movements. Generally, the funding rate is paid every eight hours.

The purpose of the funding rate is to prevent price divergence between the perpetual futures contract price and the index price. When the perpetual contract price is much higher or lower than the spot price, the role of the funding rate will be seen. It will encourage traders to take positions opposite to market conditions to reduce price divergence.

Funding rates can be positive or negative, which will have an impact on both of these sentiments, including:

➕ The funding rate is positive when the perpetual is trading above the spot price. Long traders are willing to pay the fee to short traders.

➖ The funding rate is negative when the perpetual is trading below the spot price. In this case, the short trader pays a fee to the long trader.