Today, I want to talk to you about an interesting new tool—the Boros platform launched by Pendle on August 6, 2025. This is a brand new on-chain protocol specifically designed to convert the Funding Rates of perpetual contracts into tradable yield instruments.
???? Introduction to the Funding Rate mechanism
First, let’s understand the pain point problem that this tool aims to solve: the Funding Rate of perpetual contracts is too unstable.
Let’s first explain what perpetual contracts are for those who are not familiar. In simple terms, a perpetual contract is a futures contract without an expiration date, which you can hold indefinitely. This creates a problem: the expiration date mechanism of regular futures allows the futures and spot prices to converge, but perpetual contracts lack an expiration date, thus losing the means to anchor futures prices to spot prices. To prevent contract prices from deviating too far from spot prices, exchanges have designed a "Funding Rate" mechanism.
In simple terms, the Funding Rate mechanism is designed to increase the holding costs for the profitable party, thereby encouraging the profitable party to close their positions promptly. The mechanism works like this:
When the price of perpetual contracts is higher than the spot price (bulls are stronger than bears), the bulls must pay the Funding Rate to the bears. This increases the holding cost for the bulls, forcing them to close positions and encouraging the bears to open positions, which results in the perpetual contract price turning downwards, converging towards the spot price.
Conversely, when the price of perpetual contracts is lower than the spot price (bears are stronger than bulls), the bears must pay the Funding Rate to the bulls. This allows the price of perpetual contracts to turn upwards, converging towards the spot price.
This way, the Funding Rate mechanism can achieve the goal of "keeping contract prices fluctuating around spot prices, without deviating too much."
Currently, the daily trading volume of perpetual contracts reaches hundreds of billions of dollars! According to statistics, the annualized Funding Rate for BTC and ETH perpetual contracts averages between 7.8% and 9%. Doing the math shows that hundreds of millions of dollars flow through the Funding Rate daily.
Pain point: Volatility is too high
But there is a big problem—Funding Rate fluctuations are very large. For example, the Funding Rate for ETH perpetual contracts is positive most of the time (longs pay shorts), but during periods of severe market fluctuations, it has dropped into negative territory (shorts pay longs).
This volatility brings significant uncertainty to both traders and protocols. For example, Ethena's USDe is a well-known yield-bearing stablecoin, with its primary source of yield being from Ethena shorting perpetuals to earn Funding Rate income, which is then distributed to USDe holders. However, once the Funding Rate turns negative, Ethena, as the short, will have to make payments, and the original income channel turns into a holding cost.
To address this risk, Ethena has no choice but to:
Established an insurance fund of over $39 million as "reserve ammunition" for external payments when the Funding Rate turns negative.
Incentivize users not to stake USDe as sUSDe by issuing ENA tokens, thus giving up the right to yield and leaving part of the earnings in the insurance fund to enhance their own "safety cushion."
It can be seen that the extreme fluctuations of the Funding Rate add a lot of burden and complexity to DeFi protocols.
????️ BOROS: Turning FUNDING RATE into a tradable asset
To address this pain point, Pendle has launched the Boros module on Arbitrum. The core innovation of Boros is the introduction of the concept of "Yield Units" (abbreviated as YU).
In simple terms, YU is to package the future Funding Rate income into a tradable asset. For example: 5 YU-ETHUSDT-Binance represents the yield rights of a position size of 5 ETH in the ETHUSDT perpetual contract on Binance over a future period. Note that perpetual contracts have no expiration date, but YU does have an expiration date. At maturity, all earnings will be settled, and the value of YU will naturally drop to zero.
Two interest rates
Trading YU involves two key concepts:
Implied Annual Percentage Rate (Implied APR): This is the price set for YU by the market, reflecting the market's average expectation of future Funding Rates. When you trade YU, the Implied APR at the time of the transaction is equivalent to locking in a fixed interest rate. Depending on the direction of the trade, this locked fixed rate Implied APR could be your cost or your income.
Underlying Actual Annual Percentage Rate (Underlying APR): This is the actual yield from the Funding Rate generated by the underlying asset (perpetual contracts on Binance or Hyperliquid), which will fluctuate with the market.
The core logic of trading YU on Boros is that each trader, based on their predictions of the future trend of Funding Rates in the market, swaps the Implied APR that is fixed at the time of opening a position for the floating Underlying APR over a future period.
Going long on rates vs going short on rates
The key to trading YU is to compare the market's expectation of future Funding Rates (i.e., Implied APR, which is known) with the actual future funding rates (i.e., Underlying APR, which is currently unknown and needs to be predicted by individuals):
If you believe that the future Underlying APR will be higher than the current Implied APR, you should go long on the rate (Long Rate). By taking a long position, you pay a fixed, lower Implied APR in exchange for the opportunity to earn a higher actual funding yield (Underlying APR). If the future Underlying APR indeed strengthens as you predicted, your income (Underlying APR) will exceed your cost (the initial Implied APR), resulting in a profit. Conversely, if the market moves against your prediction, you will naturally incur a loss.
Conversely, if you believe that the future Underlying APR will be lower than the current Implied APR, you should go short on the rate (Short Rate). By taking a short position, you lock in a higher fixed rate (Implied APR) as income, expecting that the actual future expenses (Underlying APR) will be lower, thus netting the interest spread.
In other words, the essence of Implied APR is the price of buying and selling the opportunity to earn from the Funding Rate:
When you Long Rate, you are essentially paying a fixed-rate cost (Implied APR) to earn future fluctuating Funding Rate income (Underlying APR);
When you Short Rate, you are receiving a fixed-rate income (Implied APR) and taking on the obligation to pay future fluctuating funding costs (Underlying APR).
???? Three major application scenarios
The interest rate swap feature introduced by Boros provides DeFi users and protocols with various practical scenarios to help them manage Funding Rate risks and innovate yield strategies.
Long hedge Funding Rate costs
When the market is hot, the Funding Rate is positive for an extended period and may rise further, long positions in perpetual contracts, while benefiting from price increases, will see their net profits reduced by the increasing Funding Rate payments.
By going long on rates (Long Rate) on Boros, long investors pay a fixed rate and receive a floating rate, transferring it to the bears, essentially locking in the floating, and expected to be increasingly high, Funding Rate costs as a fixed cost. This is akin to buying insurance against rising interest rates: even if the funding rate surges, the additional expenses beyond the fixed portion will be offset by the floating income obtained from Boros, thus stabilizing the holding costs for long investors. In a bull market, this can significantly enhance the certainty of long strategies.
ETHENA stabilizes FUNDING RATE income
Strategies like the aforementioned Ethena protocol, which short perpetuals to earn Funding Rate income, can also benefit from Boros. Normally, these strategies rely on a positive Funding Rate to generate income, but in extreme situations, the Funding Rate may turn negative, leading to additional expenses for Ethena and causing protocol losses.
By shorting rates (Short Rate) on Boros, Ethena can convert its fluctuating, potentially declining or even negative Funding Rate income into a fixed-rate yield in advance. If the actual future Funding Rate turns negative, the Short Rate contract on Boros allows Ethena to be compensated (Short Rate requires Ethena to pay a negative floating rate, akin to receiving a positive floating rate income) and transfer payments to the bulls, offsetting both, allowing Ethena to steadily enjoy the fixed-rate income from the Short Rate without experiencing a cliff in earnings due to Funding Rate fluctuations.
This provides protocols like Ethena with another layer of risk hedging, reducing dependence on large insurance funds or ENA incentive mechanisms, and improving capital efficiency. As Pendle officials pointed out, Boros will become a key hedging tool for such Delta neutral protocols, helping to smooth out the income fluctuations caused by negative Funding Rates and improve income stability in bear market environments.
DELTA NEUTRAL locking in yield
In centralized exchanges (like Deribit), arbitrageurs can construct risk-free profits through "spot + futures." For example, if an arbitrageur notices that the futures prices are significantly higher than the spot prices, they can execute a "Cash-and-Carry" strategy, going long on the spot, short on the futures, and holding until expiration, since at expiration the futures and spot prices will converge, thus locking in the basis at the time of entry and earning a stable profit.
However, on-chain, most derivatives are not conventional futures but perpetual contracts. Although the combination of "going long on spot and short on Perps" (like the combination behind Ethena USDe) can still achieve Delta Neutral, and the Funding Rate mechanism can still add value to the whole combination, the downside is that the income brought by the Funding Rate is always fluctuating, preventing arbitrageurs from locking in profits at the outset like holding futures.
The emergence of Boros has changed this situation. For example, when the price of Perps is higher than the spot price, arbitrageurs go long on the spot and short on the perpetual contracts to gain a positive funding rate, then short the rate on Boros, converting the future fluctuating Funding Rate income into a fixed-rate cash flow. As a result, the combination of "spot + perpetual contracts" can lock in profits at the beginning of the position just like a "spot + futures" combination, without worrying about significant fluctuations in the Funding Rate eroding profits. This compensates for a shortcoming of DeFi perpetual contracts compared to centralized futures, and is expected to attract more stable funds into on-chain arbitrage and market-making.
???? Impact
Significance for the Pendle platform
The launch of Boros marks Pendle's transition from initially focusing on DeFi fixed income protocols to the vast field of crypto derivatives interest rates. As a "crypto-native" interest rate product, the funding rate has daily trading volumes reaching tens of billions of dollars but has long lacked on-chain tools. Boros has filled this gap, making Pendle a complete on-chain interest rate product platform—capable of trading fixed income products like on-chain lending rates and staking yields, as well as trading floating funding rates of derivatives like perpetual contracts. TN Lee, co-founder of the Pendle team, stated that this means that the funding rate risks that could not be hedged or speculated on-chain for a long time finally have a solution.
Boros has opened new channels for fee income, making the income streams for Pendle token holders more diverse, thereby providing more stable support for the price of PENDLE tokens, while also solidifying the Pendle protocol's core position in the DeFi interest rate market.
Impact on the entire DeFi ecosystem
The emergence of Boros has improved the risk management tools for on-chain derivatives markets: traders and protocols can finally hedge funding rate uncertainties through fixed-floating interest rate swaps, just like in traditional financial markets. This will reduce systemic risks in the DeFi perpetual contract market and encourage more institutions and stable funds to participate in on-chain derivatives trading.
???? Looking to the future
Currently, Boros has set a maximum position limit of $10 million and a leverage of 1.2 times to control risk, only supporting perpetual contract types BTC and ETH on Binance. As the system matures, the team plans to open more asset markets (such as SOL, BNB) and support more derivatives platforms (like Hyperliquid, Bybit).
In summary, Pendle's Boros function transforms the important but volatile revenue stream of perpetual contract Funding Rates into standardized interest rate products that can be traded and hedged in the DeFi world. This not only provides seasoned DeFi users with new strategic tools but also takes a key step towards integrating crypto finance with traditional finance.
I believe that with the popularization of innovations like Boros, DeFi will be able to support a significantly larger trading volume and more complex financial operations in the future, truly realizing the vision of "Any yield is accessible, tradable, and hedged."
This article is based on publicly available information and does not constitute investment advice. Cryptocurrency investments carry significant risks; please make decisions carefully and do your own research (DYOR).
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