Funding Rate Alignment

Funding Rate Alignment is a mechanism used in perpetual futures to keep the contract price in line with the underlying spot price. It works by periodically exchanging payments between long and short position holders based on the difference between the two prices.

If the perpetual price is higher than the spot price, longs pay shorts; if lower, shorts pay longs. This creates an incentive for traders to arbitrage the difference, which naturally pushes the perpetual price back toward the spot price.

This alignment is crucial for the stability of the liquidation engine, as it ensures that the mark price used for liquidations is representative of the actual market value. Without this mechanism, the perpetual price could diverge significantly, leading to unnecessary and unfair liquidations.

It is a core component of perpetual contract design.