Boros: on-chain derivation market of Perptual Futures funding rate

Author: danny; Source: X, @agintender

Boros has created a capital-efficient on-chain derivatives market for perpetual contract funding rates. By “tokenizing” the funding rates of off-chain exchanges into tradable “Yield Units” (YU), it effectively builds a market functionally similar to Interest Rate Swaps (IRS) in traditional finance—enabling durian farmers of Musang King to engage in a trading category that bets on a durian tree “three times.”

The protocol not only provides traders with new tools to hedge and speculate on funding rate fluctuations, but also offers critical risk management infrastructure for delta-neutral strategy protocols like Ethena that rely on funding rates.

In the short term, the better Ethena develops, the greater the trading volume of Boros will be.

1. The Rise of On-Chain Interest Rate Derivatives

1.1 Perpetual Contract Funding Rate: A Crypto Native Interest Rate Benchmark

Perpetual contracts differ from traditional futures contracts in that they have no expiration date. To keep their price anchored to the spot price of the underlying asset, a core mechanism known as the funding rate is introduced. The funding rate is a periodic fee exchanged between long and short positions.

Its economic significance lies in the fact that the funding rate not only reflects market sentiment and leverage demand but also embodies the capital cost differences between the base currency and the quote currency. A positive funding rate (longs pay shorts) usually indicates strong bullish sentiment or high leverage demand; a negative funding rate (shorts pay longs) indicates the opposite. The perpetual contract market handles hundreds of billions of dollars in trading volume daily, making the funding rate a vast source of yield and risk that was previously not directly tradable, creating a broad market space for derivative protocols built around it.

Similarities and Differences Between 1.2 and Traditional Interest Rate Swaps (IRS)

Interest Rate Swaps (IRS) are derivative contracts in which two parties agree to exchange a series of interest payments based on a nominal principal over a specified future period, typically with one party paying a fixed rate and the other paying a floating rate. The global interest rate swap market is massive, with daily clearing amounts exceeding $1.2 trillion.

The Boros protocol implements a fixed-to-floating protocol that is functionally similar. Users can choose to pay a fixed interest rate (i.e., implied annualized yield) in exchange for a floating interest rate (i.e., base annualized yield from centralized exchanges), and vice versa.

However, there are key differences between the two:

• Underlying Interest Rate: Traditional IRS typically uses benchmark rates such as SOFR or ESTR. In contrast, Boros uses the funding rate of perpetual contracts.
• Infrastructure: Traditional IRS is an over-the-counter (OTC) market, usually mediated by banks and increasingly cleared by central counterparties (CCPs). Boros, on the other hand, is built on-chain with an order book.
• Counterparty Risk: In traditional finance, counterparty risk is a major issue, mitigated through legal agreements and collateral. In Boros, counterparty risk is managed algorithmically through a set of on-chain collateral, margin, and clearing systems.

1.3 Introduction to Boros: Pendle enters leveraged yield trading

Boros has expanded “收益交易” to include “Funding Rate” and introduced margin and leverage mechanisms.

For many years, traders could only passively endure funding rates, treating them as trading costs or sources of income, without being able to trade them as an independent risk factor. Hedging operations are indirect and capital inefficient. Boros has achieved direct trading of funding rate risk for the first time by providing a direct, capital-efficient tool (YU) and trading venue (on-chain order book). This is similar to the birth of credit default swaps (CDS) in financial history, which allowed banks to separate credit risk from underlying loans for trading. Boros is doing the same for funding rate risk in the crypto world.

The most core and powerful application scenario at this stage is to provide institutional-grade hedging tools for Delta neutral strategies like Ethena that manage assets worth billions of dollars. Whether Ethena can provide stable fixed income for its stablecoin USDe may partly depend on its ability to hedge funding rate risks on Boros.

1.4 An analogy: Cat Mountain King durian futures market

To better understand the core concept of Boros, we can draw an analogy with a hypothetical “Musang King durian futures market.”

Imagine a cat mountain king durian tree. This tree represents a fundamental asset that can generate returns, just like the perpetual contract market on Binance.

• Future Durian Harvest: It is uncertain how many durians this tree will bear in the future and what their quality will be. This uncertain future harvest is akin to the funding rate generated by the perpetual contract market. Sometimes the harvest is good (funding rate is positive and high), and sometimes the harvest is poor (funding rate is negative).
• Durian Futures Contract: Fruit farmers and vendors want to lock in the price of durians in advance to hedge against the uncertainty of harvests. Therefore, they created a market specifically for trading contracts for “durian to be delivered on a specific future date.” This contract is equivalent to the Yield Unit (YU) in the Boros protocol.
• Price of the Futures Market: In this market, the price of durian futures contracts is formed by bids from both buyers and sellers. This price reflects the market's collective expectations for future durian harvests. This price is the Implied APR in Boros.
• Actual Yield Value: When the durian is ripe for harvest, its actual value in the spot market is determined. This final, real value is the Underlying APR in Boros.

In this analogy, the Boros protocol plays the role of the durian futures market. It does not trade the durian tree itself (i.e., it does not trade BTC or ETH spot), but provides a platform for people to trade the expectations of the “fruits” (funding rates) that will be produced by this “tree” (perpetual contract market) in the future. Traders can buy and sell expectations of future funding rates on Boros, just like fruit merchants buy and sell expectations of future durian harvests, thus realizing speculation or hedging.

2. Architecture Deep Dive: The Operating Mechanism of the Boros Protocol

This chapter will detail the technical components of Boros and explain how it transforms an abstract off-chain fee into a financial instrument that can be traded on-chain.

2.1 Tokenization of Off-Chain Earnings: Connecting CEX Rates with On-Chain Assets

Boros relies on oracles to import real-time funding rate data from data sources like Binance/Hyperliquidi. This is a key centralized node and also a potential manipulation vector, which the protocol addresses through specific risk parameters.

The clever design of Boros lies in its ability to allow users to trade the variations or spreads between market expectations and actual rates, rather than the rates themselves. This transforms it into a powerful prediction market.

2.2 Yield Unit (YU): Basic Tradable Tool

The Yield Unit (YU) is a basic trading tool in Boros, representing the total funding fee income that one unit of nominal principal (such as 1 BTC or 1 ETH) can generate from the current date until the contract's expiration date.

Conceptually, Boros' YU is similar to Pendle V2's yield token (YT), as they both represent tokenized future yield streams. However, unlike V2, Boros does not have a corresponding principal token (PT), making it a purely yield directional trading tool. Trading YU allows users to speculate or hedge against the volatility of funding rates without taking on direct price risk of the underlying assets (such as BTC or ETH).

2.3 The Binariness of Rates: Deconstructing Implied APR and Base APR

The core dynamics of Boros trading stem from the interaction between two types of fees:

• Implied APR (Implied APR): This is the YU price determined by market trading on the Boros order book, representing the market's collective expectation of the average funding rate before expiration. Traders are essentially going long or short on this implied interest rate.
• Base Annualized Yield (Underlying APR): This is the real-time funding rate that is annualized and obtained from the source exchange by the oracle. It serves as the basis for periodic settlement of positions.

The profitability of a position depends on the difference between the Underlying APR at settlement and the Implied APR at the time the trader entered (in simple terms: you are betting on the Implied apr):

Long YU: Profit if the Underlying APR > Implied APR.

Short YU: If Underlying APR < Implied APR, then profit.

2.4 Trading Infrastructure: On-chain Order Book and Settlement Engine

Boros uses a fully on-chain public order book for peer-to-peer trading of YU. This design provides transparency but also comes with challenges related to Gas costs and potential front-running trades. At the same time, the protocol also features an automated market maker (AMM) to provide underlying liquidity.

The settlement process (also known as Rebase) will be conducted regularly according to the funding rate cycle of the source exchange (for example, Binance every 8 hours). During each settlement, the system will calculate the profit and loss (i.e., the difference between the Underlying APR and the Implied APR) and directly adjust the user's collateral balance.

This periodic settlement mechanism, along with the existence of arbitrage opportunities, ensures that as the expiration date approaches, the Implied APR will naturally converge towards the accumulated average of the Underlying APR. This is because the shorter the remaining time, the smaller the uncertainty of future rates.

2.5 Capital Management: Cross Margin and Clearing System

Boros supports leveraged trading (with an initial cap of 1.2x, but designed to support higher leverage), and offers two account models: isolated and cross margin. The design of its margin system aims to achieve capital efficiency by aligning collateral requirements with the expected payment risk (i.e., spread volatility), rather than being linked to the full nominal exposure.

To conduct margin checks, the position value is determined by the “Mark Rate”, which is a time-weighted average price (TWAP) derived from on-chain order book trades. This is a key defense mechanism against short-term price manipulation. If the margin level of an account falls below the maintenance margin requirement, that account will face liquidation to prevent the accumulation of bad debt.

The architecture of Boros creates a self-referential yet externally anchored ecosystem. The trading price (Implied APR) is endogenously determined by the participants on the Boros order book. However, the value and profit and loss of the system are ultimately settled based on an exogenous, objective (oracle) data source. This internal pricing and external anchoring binary structure is the core engine of the protocol. The 8-hour settlement mechanism plays the role of 'reality check', forcing speculative prices to reconcile with off-chain actual rates.

3. Applications and Market Dynamics

3.1 Boros Trading Strategy Framework 3.1 Boros Trading Strategy Framework

In addition to the strategies listed in the table above, traders can also take advantage of the periodic patterns of funding rates (such as lower rates on weekends) for periodic trading, or engage in mean reversion trading when rates deviate from historical averages. Additionally, conducting event-driven trading is also a common strategy before significant market events (such as regulatory decisions) occur.

3.2 Institutional Utility: Ethena Case Study and Delta Neutral Hedging

Protocols like Ethena generate returns for their stablecoin (USDe) by holding spot ETH/BTC and shorting equivalent perpetual contract positions. Their primary source of income comes from the funding rates earned as short position holders. However, this income is extremely unstable; once the funding rate turns negative, Ethena will face significant losses.

Boros provides a solution for this. By shorting YU on Boros, Ethena can pay a (volatile) floating Underlying APR while receiving a (predictable) fixed Implied APR. This effectively converts its volatile income stream into a fixed, predictable income, allowing it to reduce treasury risk and even provide fixed income products for its users. This hedging capability is crucial for any entity operating “spot-futures arbitrage” or basis trading, including miners, stakers, and arbitrage funds, enabling them to lock in costs or revenues and improve operational stability.

3.3 Assessment of Capital Efficiency Claims

Boros claims to provide extremely high capital efficiency, allowing users to hedge large nominal positions with a small amount of collateral (officially advertised up to 1000 times). This efficiency comes from its margin model. In Boros, the margin is calculated based on the potential volatility of interest payments, rather than the full nominal value of the underlying position.

However, the theoretical 1000 times efficiency is an extreme marketing figure. The actual leverage and capital efficiency are strictly limited by protocol risk parameters, margin requirements, and initial leverage caps (for example, 1.2 times during the early launch). True capital efficiency is dynamic and depends on market volatility.

4. Thinking

The emergence of Boros has created a “meta game” and a new layer on top of the existing perpetual contract market. It allows traders to not only speculate on asset prices but also to hedge against the behavior and sentiment of other traders in the underlying perpetual contract market—funding rates.

The funding rate is a direct result of the imbalance of long and short positions after the game on CEX. Therefore, trading YU on Boros is essentially a leveraged bet on the positions and sentiments of traders in markets like Binance or Hyperliquid. A trader going long on YU is essentially betting that the leveraged long demand on Binance will increase/decrease. This adds a new layer of complexity and opportunity, turning market structure and trader psychology itself into a directly tradable asset.

Interestingly, the existence of a sound funding rate hedging market may, in turn, suppress the volatility it relies on. Extreme funding rates are usually caused by crowded one-sided trades. Large participants often hesitate to increase their positions due to high holding costs (funding rates). With Boros, a large trader can now go long with leverage on a CEX (which will raise the positive rate) while going long on YU on Boros to hedge this cost. This reduces the negative incentive to participate in crowded trading. As Boros liquidity deepens, it may play a stabilizing role, similar to how mature IRS markets stabilize lending rates in traditional finance, compressing the extreme peaks and troughs of funding rates, or could it push crowded trades to another extreme?