Funding is the periodic payment between holders of a perpetual futures contract. When the contract trades above its index, longs pay shorts. When it trades below, shorts pay longs. The rate is set from the premium of the contract over the index, averaged over a window, and on most exchanges settles every eight hours.
01What it is for
A perpetual has no expiry, so there is no settlement to pull its price back to spot. Funding does that job with money. Trading above index makes longs pay, which discourages longs until the premium shrinks. Trading below index makes shorts pay, until that discount shrinks. The mechanism keeps the two prices close over time without forcing anyone to close.
02Funding and liquidations
Extreme funding is one of the inputs traders watch ahead of liquidation events. A deeply positive funding rate means longs are crowded and paying heavily for the privilege, which is the positioning that downside cascades feed on. Deeply negative funding marks crowded shorts, fuel for squeezes.
Funding payments also slowly drain the margin of whoever pays them. At annualized rates above 100%, which happens in crowded trends, a leveraged position can bleed a meaningful fraction of its margin per day before the price even moves against it, bringing the liquidation price closer on its own.