Today, I want to talk to you about a very interesting new tool—the Boros platform launched by Pendle on August 6, 2025. This is a brand new on-chain protocol specifically designed to transform the funding rates of perpetual contracts (Perpetuals, Perps) into tradable yield instruments.
???? Introduction to the FUNDING RATE Mechanism
First, let’s understand the pain point that this tool aims to address: The funding rate of perpetual contracts is too unstable.
For those who are not familiar, let me explain what a perpetual contract is. Simply put, a perpetual contract is a type of futures contract that has no expiration date, allowing you to hold it indefinitely. This creates a problem: the expiration date mechanism of conventional futures allows the futures and spot prices to converge, but perpetual contracts lack an expiration date, losing the means to anchor the futures price to the spot price. To prevent the contract price from deviating too far from the spot price, 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 them to close their positions in a timely manner. This mechanism works as follows:
When the perpetual contract price 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 costs for the bulls, forcing them to close their positions and encouraging the bears to open positions, resulting in the perpetual contract price turning downwards and converging towards the spot price.
Conversely, when the perpetual contract price is lower than the spot price (bears are stronger than bulls), the bears must pay the funding rate to the bulls. This causes the perpetual contract price to turn upwards, converging towards the spot price.
In this way, the funding rate mechanism achieves the goal of "keeping the contract price fluctuating around the spot price 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, it’s clear that the funds flowing through the funding rate amount to millions of dollars daily.
Pain Point: Too Much Volatility
However, there is a major issue—funding rates are highly volatile. For example, the funding rate for ETH perpetual contracts is positive most of the time (bulls pay bears), but during periods of market turbulence, it has dropped into negative territory (bears pay bulls).
This volatility brings significant uncertainty to both traders and protocols. For instance, Ethena's USDe is a well-known yield-bearing stablecoin, and its primary source of yield comes from Ethena shorting perpetual contracts to earn funding rate income, which is then distributed to USDe holders. However, once the funding rate turns negative, Ethena, as the short seller, has to make payments, turning the original income stream into a holding cost.
To mitigate this risk, Ethena had to:
Establish an insurance fund of over $39 million as "reserve ammunition" for payments when the funding rate turns negative.
Distribute ENA tokens to incentivize users not to stake USDe as sUSDe, thereby relinquishing their rights to yield and allowing some of the yield to remain in the insurance fund, enhancing their "safety cushion."
It is evident that the extreme volatility of funding rates adds a lot of burden and complexity to DeFi protocols.
????️ BOROS: Turning FUNDING RATE into Tradable Assets
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 packages the future funding rate income for a certain period into a tradable asset. For example: 5 YU-ETHUSDT-Binance represents the funding rate income rights for a position size of 5 ETH in the ETHUSDT perpetual contract on Binance over a certain period. Note that while perpetual contracts have no expiration date, YU does have an expiration date. Upon expiration, all income is settled, and the value of YU naturally goes to zero.
Two Key Rates
Trading YU involves two key concepts:
Implied Annual Percentage Rate (Implied APR): This is the price set by the market for YU, 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 rate. Depending on the direction of the trade, this locked fixed rate Implied APR may be your cost or your income.
Underlying Actual Annual Percentage Rate (Underlying APR): This is the actual funding rate income generated by the underlying asset (the perpetual contract 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 future funding rate trends, uses the fixed Implied APR locked in at the opening of their position to exchange for the fluctuating Underlying APR over a certain period.
Long Rate vs. Short Rate
The key to trading YU lies in comparing the market's expectations of future funding rates (i.e., Implied APR, which is known) with the actual funding rates that will occur in the future (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 income (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 expenses (Underlying APR) will be relatively low, thus netting the interest spread.
In other words, the essence of Implied APR is the price of buying and selling the opportunity for funding rate income:
When you Long Rate, you are effectively paying a fixed rate cost (Implied APR) to obtain future fluctuating funding rate income (Underlying APR);
When you Short Rate, you are effectively receiving a fixed rate income (Implied APR) while assuming the obligation to pay future fluctuating funding costs (Underlying APR).
???? Three Major Application Scenarios
The interest rate swap functionality introduced by Boros provides DeFi users and protocols with various practical scenarios, helping them manage funding rate risks and innovate yield strategies.
Long Hedging of FUNDING RATE Costs
When the market is hot, and the funding rate is consistently positive and likely to rise further, perpetual contract longs enjoy the benefits of price increases, but the increasingly high funding rate payments will reduce net profits.
By going long on the rate (Long Rate) on Boros, long investors pay a fixed rate and receive a floating rate, effectively locking in the floating, and expected to rise funding rate costs as a fixed cost. This is akin to buying an interest rate rise insurance: even if the funding rate skyrockets, the additional expenses beyond the fixed portion will be offset by the floating income obtained from Boros, thereby stabilizing the holding costs for longs. In a bull market, this move can significantly enhance the certainty of long strategies.
ETHENA Stabilizing FUNDING RATE Income
Protocols like Ethena, which short perpetual contracts to earn funding rate income through delta-neutral strategies, can also benefit from Boros. Typically, such 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 going short on the rate (Short Rate) on Boros, Ethena can convert the floating, potentially decreasing or even negative funding rate income into a fixed rate income in advance. If the future actual funding rate is negative, the Short Rate contract on Boros allows Ethena to receive compensation (the Short Rate requires Ethena to pay a negative floating rate, equivalent to receiving a positive floating rate income) and transfer payments to the longs, offsetting each other, allowing Ethena to steadily enjoy the fixed rate income from the Short Rate conversion without facing income cliffs due to funding rate fluctuations.
This provides protocols like Ethena with another risk hedging tool, reducing reliance on large insurance funds or ENA incentive mechanisms, and improving capital utilization efficiency. As Pendle officials have pointed out, Boros will become a key hedging tool for such delta-neutral protocols, helping to smooth out income fluctuations caused by negative funding rates and enhancing income stability in bear market environments.
DELTA NEUTRAL Locking in Income
In centralized exchanges (like Deribit), arbitrageurs can construct risk-free income through “Spot + Futures.” For example, if an arbitrageur notices that the futures price is significantly higher than the spot price in the current market, they can execute a "Cash-and-Carry" strategy, which involves going long on the spot, shorting the futures, and holding until expiration, because at expiration, the futures and spot prices will converge, thus locking in the basis at the time of entry to secure a stable income.
However, on-chain, most derivatives are not conventional futures, but perpetual contracts. Although the combination of "going long on spot and shorting Perps" (like the combination behind Ethena USDe) can still achieve Delta Neutral, and the funding rate mechanism can still increase the overall value of the combination, the downside is that the income from the funding rate is always fluctuating, preventing arbitrageurs from locking in profits at the outset like they would with futures.
The emergence of Boros changes this situation. For example, when the Perps price is higher than the spot price, arbitrageurs can go long on the spot and short the perpetual contract on-chain to obtain a positive funding rate, and then Short Rate on Boros, converting the future fluctuating funding rate income into a fixed rate cash flow. In this way, the "spot + perpetual contract" combination can also lock in profits at the outset, just like the "spot + futures" combination, no longer 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 capital 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 entering the vast field of crypto derivatives interest rates. As a "crypto-native" interest rate product, the funding rate has a daily trading volume of up to tens of billions of dollars but has long lacked on-chain tools. Boros fills this gap in one fell swoop, making Pendle a complete on-chain interest rate product platform—capable of trading on-chain lending rates, staking yields, and other fixed income products, as well as trading the floating funding rates of derivatives like perpetual contracts. TN Lee, co-founder of the Pendle team, stated that this means a solution has finally been found for the funding rate risks that have long been unable to be hedged or speculated on-chain.
Boros opens up new channels for fee income, diversifying the income streams for Pendle token holders, thereby providing more stable support for the price of PENDLE tokens and solidifying Pendle's core position in the DeFi interest rate market.
Impact on the Entire DeFi Ecosystem
The emergence of Boros enhances the risk management tools in the on-chain derivatives market: traders and protocols can finally hedge the uncertainty of funding rates through fixed-floating interest rate swaps, just like in traditional financial markets. This will reduce systemic risks in the DeFi perpetual contract market and promote more institutions and stable capital to participate in on-chain derivatives trading.
???? Looking Ahead
Currently, Boros has set a maximum position limit of $10 million and a leverage of 1.2 times to control risk, and it only supports the BTC and ETH perpetual contracts on Binance. As the system matures, the team plans to open more asset markets (such as SOL, BNB) and support more derivatives platforms (such as Hyperliquid, Bybit).
Overall, Pendle's Boros feature transforms the important but volatile income stream of perpetual contract funding rates into standardized interest rate products that are tradable 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.
With the popularization of innovations like Boros, it is believed that the future of DeFi will be able to support larger trading volumes and more complex financial operations, 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 cautious decisions and DYOR.
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