The Price Anchoring Mechanism
Perpetual futures contracts would drift infinitely from spot prices without the funding rate mechanism. Every 8 hours, funding payments incentivize traders to buy or sell, keeping perpetual prices aligned with the underlying asset.
Why Perpetuals Drift from Spot
Drift occurs when there’s an imbalance of buyers and sellers:
- Positive drift: More longs than shorts → funding positive → longs pay shorts → pressure to close longs
- Negative drift: More shorts than longs → funding negative → shorts pay longs → pressure to close shorts
Mark Price vs Index Price
Mark Price: The perpetual futures price, used for funding calculations and liquidation triggers.
Index Price: The weighted average of spot prices across major exchanges. The perpetual should trade close to this.