Boros: The on-chain trading tool for Perptual Futures funding rate

The Boros module launched by Pendle on Arbitrum is a brand new on-chain protocol that transforms the funding rate of Perptual Futures into a tradable yield instrument. This innovative tool aims to address the issue of the instability of the funding rate for Perptual Futures.

Perptual Futures are a type of futures contract that has no expiration date. To prevent the contract price from deviating too far from the spot price, the exchange has designed a funding rate mechanism. When the Perptual Futures price is higher than the spot price, longs pay the funding rate to shorts; conversely, the opposite is true. This mechanism allows the contract price to fluctuate around the spot price, preventing significant deviation.

However, the dramatic fluctuations in funding rates bring significant uncertainty to traders and protocols. Taking the yield-bearing stablecoin USDe as an example, its yield primarily comes from shorting perpetual futures to earn funding rate profits. However, if the funding rate turns negative, the protocol that is short will have to pay out, turning the original income channel into a holding cost.

Boros introduced the concept of "Yield Units" (abbreviated as YU), which packages the funding rate returns for a future period into a tradable asset. YUs have a fixed expiration date, and upon expiration, all returns are settled, causing the value of YU to drop to zero.

Trading YU involves two key concepts: Implied Annual Percentage Rate (Implied APR) and Underlying Annual Percentage Rate (Underlying APR). Traders use a fixed Implied APR to replace the fluctuating Underlying APR for a certain period based on their predictions of future funding rate trends.

Boros provides various application scenarios for DeFi users and protocols:

1. Long hedge funding rate cost: By going long on interest rates, the expected rising funding rate cost is locked in as a fixed cost.

2. Stable funding rate income: Protocols like Ethena can convert floating funding rate income into fixed rate returns by shorting the interest rate.

3. Delta Neutral Lock-in Yield: Arbitrageurs can build a "spot + Perptual Futures" combination on-chain and lock in profits at the beginning of the position, no longer worrying about large fluctuations in the funding rate eroding profits.

The launch of Boros marks Pendle's transition from a protocol focused on DeFi fixed income to the crypto derivatives interest rate market. This not only opens up new fee income channels for Pendle but also enhances the risk management tools of the on-chain derivatives market, with the potential to attract more stable funds into on-chain arbitrage and market-making activities.

Currently, Boros has set position limits and leverage restrictions, supporting only BTC and ETH Perptual Futures on certain trading platforms. In the future, the team plans to open more asset markets and support more derivatives platforms.

Boros has transformed the important yet volatile revenue stream of the perpetual futures funding rate into a standardized interest rate product 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 crucial step in bridging the gap between crypto finance and traditional finance. As the popularity of such innovations grows, DeFi is expected to accommodate larger trading volumes and more complex financial operations, realizing the vision that "any yield can be accessed, traded, and hedged."