What are the differences in the detailed explanation of the Hedging protocol Boros launched by Pendle for Perptual Futures?

Written by: Godot

In one sentence, Boros converts the "changes" in the perpetual contract fees of CEX and DEX into tradable assets.

Note that it is the "changes" in trading conditions that matter, rather than simply tokenizing the fee rates themselves. Boros is essentially a perpetual contract fee rate prediction market.

So how is this "change" reflected? Boros uses a comparison of two values to illustrate it:

1. Implied APR: The current rate of this variety at the price of Boros (which actually reflects the rate predicted by Boros traders);

The price of the Implied APR is the result of user transactions within Boros, as shown in the order book in the figure below.

2. Underlying APR: The current actual rate of this product on Binance perpetual contracts.

It actually displays the current fee rate of Binance perpetual contracts in APR, which stands for annualized form. For example, the current fee rate for Binance BTCUSDT perpetual contracts is 0.01%, settled every 8 hours. Therefore, the annualized rate, which is the basic APR, is,

0.01% * 3 * 365 = 10.95% 。

In summary, in Boros trading, it is actually whether the underlying APR is higher or lower than the implied APR, which means whether the actual rate of Binance perpetual contracts in the future is higher than the current pricing within Boros.

If higher, bulls profit; if lower, bears profit.

As the expiration date approaches, the implied APR will converge to the base APR.

Therefore, users are trading the price of Implied APR on Boros, allowing for both long and short trades, currently supporting up to 1.4x leverage.

1/ Go Long

Equivalent to the long rate, believing that the actual rate of Binance (Underlying APR) will be higher than the current rate of Boros (Implied APR).

At the end of the countdown for the Next Settlement, the difference between the Underlying APR and the Implied APR is received, which is currently 9.77%-7.84% = 1.93%.

Since Binance perpetual contract fees are settled every 8 hours, Boros is the same, so at the end of the countdown, you will receive.

1.93% / 365 / 3 = 0.001762%

Will be directly Rebased into the account balance.

2/ Short Selling

Equivalent to the short selling rate, believing that the actual rate of Binance (Underlying APR) will be lower than the current rate of Boros (Implied APR).

At the end of the countdown to the Next Settlement time, the Implied APR - Underlying APR difference is received, currently at 7.84% - 9.77% = 1.93%.

The same above, the yield is,

-1.93% / 365 / 3 = -0.001762%

Directly Rebase into the account balance.

The next question is: How does the Implied APR converge to the Underlying APR at maturity?

First of all, the existence of the Rebase mechanism with a settlement rate every 8 hours will cause the implied APR to converge towards the "actual cumulative average rate".

As the expiration date approaches, the uncertainty of rate fluctuations decreases, making arbitrage possible.

Assuming a situation,

• The implied APR of BTC's Boros is currently 6.50%
• The current actual rate on Binance, which is the base APR = 8%
• The actual average rate over the past 47 days and 22 hours = 7.85%
• 2 hours remaining until the final expiration date

Practical Operation:

The fee rate for going long BTCUSDT on Boros supports an implied APR of 6.5%, with an 8% return upon maturity, and a net profit of 1.5% in 2 hours.

Calculation Process:

48 days is a total of 48 * 24 = 1152 hours

Even in the extreme case that the rate drops to 0, then,

（7.85% * 1150 + 0% * 2）/ 1152 = 7.836%

In the worst-case scenario, you will still receive 7.836% at maturity, with a 2-hour yield of 7.836% - 6.5% = 1.33%.

Summary:

Therefore, the changes in the Boros internal trading fee rates and the actual rates of Binance perpetual contracts are essentially two parallel pricing systems.

The transactions within Boros reflect the market's expectations for the upcoming changes in market rates.

On the other hand, the rate settlement system every 8 hours (the 8-hour period is based on the Binance perpetual contract rate settlement rules, and if Hyperliquid rate products are launched later, the settlement time for this series of products will be set to 1 hour according to Hyperliquid rules), along with arbitrage, causes the rate for Boros trading, i.e., the implied APR price, to gradually approach the underlying APR, which is the actual rate from Binance.

Since the price system is relatively independent, where do the counterparties for both long and short positions come from? What are the demands for going long and going short?

The changes in the long or short rates using Boros actually reflect the use cases of Boros.

1/ Long Position

1. Pure directional speculation

For example, if the current perpetual contract rates are low, the expectation of a market rise will drive the contract rates up.

2. Periodic Trading

During weekends or when institutional performance calculation time occurs, the market trading is inactive, and the contract rates are relatively low, which presents an opportunity to go long.

3. Mean Reversion Arbitrage

The current expected rate is too low and should at least return to the historical average.

4. Cross-commodity arbitrage

The correlation of the two underlying assets' rates is approaching 1, such as BTC and ETH. However, there is a significant difference in the rates of the two at present, so one can choose to short the one with a higher implied APR and go long on the one with a lower implied APR.

5. Event Trading

Long the fee rate ahead of anticipated positive events, such as tariff resolutions.

6. Rate Hedging

For staking to earn fixed income in currency terms within DeFi, there is short hedging in perpetual contracts. There are concerns about rates turning negative or being volatile. By going long on rates in Boros, costs become more fixed.

7. Advanced Strategies

Combine advanced strategies with options trading.

2/ Short Selling

1. Largest Client: Ethena Labs

The core of Ethena's earnings is shorting ETH to earn funding rates, rewarding USDE stakers.

Ethena allows shorting ETH rates, providing fixed APY returns for USDE stakers. In this way, Ethena can actually launch yield tiered products, offering stakers both fixed APY and non-fixed APY options.

2. Miners / Stakers Hedge

Short ETH perpetual, lock ETH staking rewards, short funding rate, lock rate.

3. DeFi staking, short position fee hedging

In addition, it also includes purely speculative trading, cyclical trading, and various arbitrage scenarios, etc.

Long and short demand, opposing each other.

The chart below shows the 24-hour trading volume and positions of Boros one day after its launch.

In summary, the design of the Boros product is actually very, very, very clever.

An independent pricing system allows users to trade fee rate fluctuations within Boros, enabling market participants to engage in games and respond to future market changes.

If the current rate is forcibly anchored, the meaning of the expected transaction is lost.

In the future, there could be greater room for innovation, such as creating varieties with different terms, like 1 month, 3 months, 6 months, etc., and creating composite varieties, such as the average fee rates of multiple exchanges. As long as there are enough long and short counterparties.

In fact, Pendle's PT and YT are also independently priced, not just mechanically pegged to the expected value of the underlying assets. Especially YT allows market speculation to reflect future value, which has also led to the emergence of airdrop scenarios.

As long as users hold YT, even if it goes to zero, they will receive airdrops from the ETH Staking and Restaking projects.

Boros continues this philosophy, allowing the market to determine a reasonable price for fees, maintaining relative fairness through fee settlement and arbitrage mechanisms, but without a mandatory peg.

Currently, Boros is an excellent tool for arbitrage and risk hedging, and it may become an indicator of market expectation changes in the future, potentially leading to the derivation of more DeFi products.

Supplement:

Enter the product, connect the wallet, and top-up in the upper right corner, supported.

On the Arbitrum chain, accounts are divided into two modes: Cross Margin and Isolated Account.

Currently, Binance perpetual contracts with U-based BTC and ETH varieties are supported. According to the official Docs, Boros will also support Hyperliquid.

Terminology Explanation:

1. YU (Yield Unit) - A unit of yield. For example, 1 YU-BTCUSDT-Binance represents the total funding rate yield generated from holding a position of 1 BTC on Binance from now until the expiration date. (In order to avoid increasing the difficulty of understanding, YU is not mentioned in the original text.)

2. Maturity: The expiration time of the YU contract, after which all profits are settled.

3. Implied APR: The market's expectation of the average funding rate before the expiration for Boros, which is also the trading price of YU.

4. Underlying APR: The real-time funding rate for this contract type on Binance perpetual futures, obtained through an oracle, is used for settlement every 8 hours;

5. 24h Volume: Total trading volume of YU in this market over the past 24 hours;

6. Notional OI: The total scale of all open contracts currently outstanding, measured in underlying assets (BTC/ETH);

7. Long/Short Rate ROI: The potential return rate calculated based on the difference between the current implied APR and the underlying APR, indicating the relative advantage of going long or short.