DeFi Beginner's Guide (Part 3): In-depth Analysis of Pendle's New Product Boros and the Principle of 100% ROI Along with Advanced Arbitrage Strategies

Author: ++@Web3Mario++

Abstract: In this article, we will analyze the opportunities in a recently popular protocol, specifically the Boros derivatives market for CEX perpetual contract fee rates launched by Pendle. The author will provide a comprehensive analysis of this platform from aspects such as basic principles and opportunity risk points, and share an advanced interest rate arbitrage strategy that the author considers promising. Overall, at the current market stage, shorting the funding rate on Boros is a choice where the returns outweigh the risks, and through the three platforms of Binance, Hyperliquid, and Boros, a Delta Neutral fixed-rate arbitrage combination can achieve a yield of up to 30%.

How the 100% Long / Short Rate ROI on Boros Homepage is Derived

Upon opening the Boros homepage, the first thing that catches the eye is a Market List. At this point, many newcomers to Boros may wonder how the high ROI in the far-right column is derived. The author will introduce Boros in conjunction with this point.

First, the value of Boros lies in its creation of an off-chain yield derivatives trading market, allowing users to leverage trade, hedge, or speculate on these yield derivatives without directly participating in the native yield scenarios, primarily focusing on the funding rate derivatives market for perpetual contracts in CEX.

This directly addresses a critical issue in the perpetual contract funding rate arbitrage market, which is the uncertainty of returns brought about by interest rate fluctuations. To illustrate, we know that the core principle of Ethena is to utilize a Delta Neutral arbitrage strategy to earn the funding rate of perpetual contracts in CEX, that is, going long on the crypto asset spot while shorting the corresponding crypto asset perpetual contract to earn the funding rate, with the resulting earnings distributed to holders of sUSDe. This means that fluctuations in the funding rate will significantly impact the yield of sUSDe, thereby affecting the protocol's attractiveness to users. We can clearly observe this fluctuation in the Dashboard on the official website.

For arbitrageurs like Ethena, the fluctuations in the perpetual contract funding rate are unavoidable, as they primarily depend on the overall trading preferences of users in the cryptocurrency market. Only in a bull market are speculators in the perpetual contract market willing to pay a higher funding rate for long contracts, while in a sideways or bear market, the funding rate will significantly decline, even turning negative. This introduces risks to the arbitrage strategy. Therefore, how to hedge against the risks brought by rate fluctuations is a significant pain point for these arbitrageurs. The emergence of Boros provides a solution to this pain point; simply put, you can hedge against funding rate fluctuations by trading the corresponding funding rate derivatives on Boros.

So how is this achieved? Let's look at the basic principles of Boros. Boros has designed a new asset called YU. Its principle is similar to the YT asset in Pendle, with the main difference being that YT resembles a native crypto asset spot, as the yield settlement occurs on-chain and can be automatically settled through smart contracts, while YU is a contract derivative that anchors off-chain scenarios and relies on the settlement of the margin accounts of the two parties in the contract to achieve tracking of off-chain yields.

Specifically, let's discuss how YU works. For the buyer of YU, it is equivalent to obtaining the ability to earn the funding rate of the corresponding perpetual contract during the future duration, with each unit of YU corresponding to each unit of the native underlying asset. This yield is paid from the margin of the YU seller through Boros's clearing and settlement mechanism, corresponding to the Underlying APR shown in the interface. The matching rate during the purchase process corresponds to the Implied APR shown in the interface, which defines the fixed rate the buyer needs to pay to the YU seller during the duration, and this also relies on the clearing and settlement mechanism.

Let's illustrate with an example. Suppose a trader buys 5 YUs in the ETHUSDT-Binance YU market with an expiration date of December 25, 2026. This means that from this moment until the expiration date, you will continuously earn the funding rate obtained from a short position of 5 ETH, and this yield will be settled from the margin account of the YU seller every 8 hours by Binance, while you will also pay interest to the seller at the matching rate at the time of opening the position. As a result, as long as the interest you accumulate by the expiration date is less than the interest you earn, this trade is positive ROI; otherwise, it results in a loss. Additionally, if you choose to close your position early before the expiration date, your profit condition will also depend on the matching rate of your closing trade.

Having introduced this, let's look at the current status of Boros. We can see that the ROI for shorting YU is very high, and in markets with a longer expiration date, the final ROI can easily exceed 100%. This means that assuming the Implied APR remains at the current level compared to the Underlying APR, your investment return rate upon expiration will be 100%. This is primarily because, following the FED's interest rate decision in September, Powell's "hawkish defensive rate cut" speech, and the conservative attitude of the voting committee towards significant rate cuts shown in the corresponding dot plot, market sentiment has shifted from greed before the decision back to a neutral level, leading to a rapid decline in funding rates, even turning negative. Therefore, at this time, by shorting YU, you pay interest at the Underlying APR and earn fixed-rate returns at the Impiled APR. Corresponding to the current actual values, since the Underlying APR is negative, you are effectively earning on both sides, which is also the reason why the current instantaneous return rate exceeds 100%. If this interest rate difference can persist for a while, then the final actual return rate will also be quite good.

The underlying reason is that Boros is still in its early stages, and liquidity is not high, resulting in significant potential trading slippage, which hinders speculators' trading. This is reflected in the interest rate chart's performance, where the Impiled APR cannot effectively follow the changes in the Underlying APR. Of course, for users with small capital, the amplification of the interest rate difference is also an opportunity, especially since Boros allows traders to open up to 3x leverage. Therefore, when opening positions at suitable times with slippage and Impiled, the returns can also be quite considerable. However, when leverage is applied, one must consider the liquidation risks brought by Impiled APR fluctuations.

Additionally, from the product front, Boros has also designed a Vault function to enrich liquidity sources. By implementing a model similar to Uniswap V2, it provides users with an LP Staking Pool experience to offer liquidity, thereby reducing the learning cost of the product. Since the official documentation regarding this part has not provided too detailed explanations, we will not discuss it further here. However, the author believes the idea should be to distribute the funds in the Staking Pool according to the AMM's Bonding Curve form in the order book, forming a supplement to the order depth. However, providing liquidity in this market may face impermanent loss, so it is recommended that readers wait for more detailed information to be disclosed before choosing to participate.

Sharing an Advanced Interest Rate Arbitrage Strategy to Achieve a 30% Yield Delta Neutral Fixed Rate Arbitrage

After introducing the basic situation of Boros, the author hopes to share an advanced interest rate arbitrage strategy that utilizes Binance, Hyperliquid, and Boros to achieve Delta Neutral fixed-rate arbitrage. Boros has recently launched the BTC and ETH perpetual contract YU markets on Hyperliquid, providing a premise for this strategy.

From this chart, we can intuitively see that the funding rate on Hyperliquid is significantly higher than that on Binance. What causes this situation? Or we need to explore whether this situation is caused by instantaneous trading or will persist for a while, which requires tracing back to the calculation logic of funding rates in the CEX perpetual contract market.

Generally, we have an intuitive judgment that when the Spot index price is higher than the marked price of the perpetual contract, the contract market is in a contango state, and shorts pay the rate to longs, and vice versa. However, this is not always the case. In fact, there is another crucial influencing factor in the calculation of funding rates, which is order depth. Let's look at the introduction documents for funding rate calculations from both exchanges.

In simple terms, the funding rate calculation formulas for both are as follows:

The difference lies in the settings of MAXRATE and MINRATE, as well as slight differences in the calculation of the premium index. Readers can roughly understand this as a piecewise function with maximum and minimum values. The calculation of the premium index also includes considerations of order book depth, specifically reflected in the calculations of impactbidpx and impactaskpx. This value's calculation process requires combining a momentary order book shape to calculate, roughly by presetting an order volume and then calculating the final transaction price of buys and sells based on the current order depth, serving as the impact bid and impact ask prices. This is then collected periodically over a period and ultimately calculated into a weighted result. Regarding the price index, there are also slight differences between the two; Binance uses its Spot market price as the price index, while Hyperliquid uses a multi-exchange weighted price calculated by an oracle as the price index, which is reasonable since there is still a significant difference in liquidity depth between the two in the spot market.

So let's consider a question: why is the funding rate on Hyperliquid still high when the funding rate on Binance is negative? The reason lies in the different depths of the two; that is, at this time, the sell order depth in Hyperliquid is not strong, causing the impact price to be higher than the price index, so the final premium index remains large. This also aligns with the market stages of the two. Therefore, we can conclude that this interest rate pattern should persist for a while rather than being instantaneous.

So can we arbitrage this interest rate difference through some opening strategies? The answer is yes. We can go long in the lower funding rate Binance and short in Hyperliquid to achieve a Delta Neutral interest rate arbitrage model. So what role does Boros play in this? It locks in the interest rate difference; we can use Boros to lock in the variable interest rates to achieve a fixed-rate Delta Neutral arbitrage strategy. Based on the current data, assuming we open 5x leverage in the ETH-USD markets of both exchanges and use Boros to lock in the interest rate, we can obtain:

Of course, further refinement is needed to consider the margin occupation of Boros against the principal, as well as the position balance between Binance and Hyperliquid to avoid unilateral liquidation. Interested parties can further discuss with the author.