In-depth analysis of Pendle and Boros: How can investors enter the funding rate market?

This report, authored by Tiger Research, analyzes how Pendle transforms fluctuating funding rates into stable and predictable returns for institutional investors through Boros, thereby changing the DeFi derivation sector.

Key Points Summary

• Core Problem Solved: Institutions need stable returns but the funding rate fluctuates dramatically - Boros converts fluctuation into fixed returns.
• Market Opportunity: Has a first-mover advantage in the DeFi derivation space, becoming an indispensable infrastructure for Delta-neutral strategies such as Ethena.
• Expanded Vision: To extend from the funding rate of crypto assets to traditional finance (bonds, stocks), leading the on-chain derivation market.

1. The Untapped Areas Behind DeFi Success

Despite the emergence of many narratives in the crypto market, Decentralized Finance (DeFi) and derivation trading have demonstrated the strongest product-market fit.

The initial growth of DeFi came from lending protocols like Aave and Compound, decentralized exchanges like Uniswap, and yield farming mechanisms. These reproduced core financial primitives in a permissionless environment, opening access to services that were previously available only to institutions.

As these markets mature, DeFi is beginning to expand into the derivation space, following a trajectory similar to that of traditional finance. In traditional markets, the scale and liquidity of derivations far exceed that of spot trading. A similar shift is occurring in the crypto space, with permissionless derivations becoming the next growth driver.

2. Pendle: Financial Engineering in DeFi

Source: Pendle

Pendle recognized this opportunity early on and launched in 2021, positioning itself as a leading project in bringing structured derivation to DeFi.

The entry point is the separation of the principal and the yield of the income-generating tokens. The timing choice is very effective: yield staking is becoming mainstream, and by 2023, the narrative of staking and future airdrops is increasingly prominent, attracting more attention to Pendle. Nowadays, many new projects integrate Pendle as the foundational layer for yield-related strategies.

Its core mechanism seems simple, but effectively creates two different asset classes: a discounted claim to future value (PT) and pure exposure to interest rate fluctuations (YT).

Its impact is significant. With Pendle, yield-bearing assets like stETH or rETH are no longer limited to being used as staking substitutes; they can now serve as building blocks for more complex strategies.

Investors seeking to capitalize on rising yields can purchase YT, gaining leverage risk exposure that may exceed six times depending on market conditions. Conversely, investors pursuing fixed returns can buy PT, often locking in double-digit discounts relative to future value.

Moreover, the design of Pendle enhances the capital efficiency of the entire DeFi ecosystem. Strategies that once required complex hedging or derivation expertise are now simplified through its yield splitting mechanism. Investors can now access, trade, and customize yield risk exposure on-chain.

By doing so, Pendle not only introduced a new concept of yield but also laid the foundation for financial engineering in DeFi, providing users with institutional-grade tools in a permissionless manner.

3. Boros: Empowering Delta Neutral Yield

As the cryptocurrency market expands, institutions are deploying larger capital bases and adopting more complex trading strategies to generate profits. Their primary goal is to stabilize returns, which is often achieved through Delta neutral positions to minimize price risk.

Ethena demonstrates this by holding spot ETH while shorting an equal amount on the futures market. The gains on one side offset the losses on the other, keeping the portfolio value stable regardless of the price direction (see figure).

In a bull market, the longs pay the funding rate to the shorts, allowing Ethena to earn income. In a bear market, the situation is reversed, and Ethena must pay the funding costs.

The challenge lies in the fact that the flow of funds is essentially unstable—sometimes generating income, other times requiring payments. This fluctuation undermines protocols like Ethena that rely on Delta neutral strategies to support their stablecoin USDe.

Source: Pendle

Boros addresses this gap by converting unstable funding rates into fixed, predictable returns. In doing so, it provides institutions with the stability needed to expand capital deployment in the cryptocurrency market.

4. Boros Mechanism: Stable Funding Rate

Boros introduced the Yield Unit (YU), which is a derivation tool that separates the funding rate fluctuation from the underlying asset price. YU allows for two things: directional betting on the funding rate and converting unstable capital flows into predictable income streams. The following section explains its mechanism.

4.1. Yield Unit (YU): Structure and Purpose

Assuming an investor seeks to achieve an 8% fixed annualized return within three months, regardless of whether the Bitcoin funding rate fluctuates positively or negatively. In contrast, another investor may prefer to be directly exposed to the funding rate fluctuations and is willing to pay a fixed return in exchange.

YU connects both parties by separating and trading only the fluctuation of the funding rate (independent of the underlying asset price movement).

Source: Boros, Tiger Research

For example, the product "1 YU-ETHUSDT-Binance" represents the funding rate return of a nominal position of one ETH in the Binance perpetual futures contract before the expiration date. Purchasing this product allows investors to profit or incur losses based on the fluctuations in the funding rate associated with that position, without having to hold the ETH itself. In this way, YU transforms the funding rate of a specific exchange-asset pair into an independent, tradable instrument.

4.2. Implied Annualized Yield (Implied APR): Market expectations as a price signal

Source: Boros, Tiger Research

A core concept of YU trading is the Implied APR (Implied Annual Percentage Rate). This represents the market's expectation of the average funding rate yield until maturity, reflected in the current price of YU.

Just as the price of Bitcoin at $80,000 reflects the market's valuation of the asset, the 8% implied annualized yield of YU-BTCUSDT indicates that participants expect the funding rate of Bitcoin to average 8% per year during the relevant period.

In short, the implied annualized yield functions similarly to the market price in the futures market: it reflects the consensus view of the market at present.

4.3. Long/Short Positions: Implied Yield and Actual Yield

The YU position is similar to futures trading, where long and short positions have different motivations.

• Bitcoin Futures Long: Mark Price 50,000 USD → Target Price 60,000 USD = 10,000 USD Profit
• YU Long: Implied annualized yield 8% → Underlying annualized yield 10% = 2% profit (Long pays implied annualized yield and receives underlying annualized yield)

The YU long position reflects the belief that "the actual funding rate will be higher than the current market expectation of 8%, say 10%." In this case, the long pays the funding fee at the implied annualized return (8%) and receives the funding fee at the underlying annualized return (10%). This is equivalent to saying, "Bitcoin futures are currently at $50,000, but I expect it to rise to $60,000," and going long.

• Bitcoin futures short: Mark price 50,000 USD → Target price 40,000 USD = 10,000 USD profit
• YU Short: Implied annualized yield 20% → Underlying annualized yield 15% = 5% profit (Short receives implied annualized yield and pays underlying annualized yield)

The YU short position reflects the belief that "the actual funding rate will be lower than the market's current expectation of 20%, say 15%." Here, the short position receives funding fees based on the implied annualized yield (20%) and pays funding fees based on the underlying annualized yield (15%). This is similar to saying "Bitcoin futures are currently at $50,000, but I expect it to drop to $40,000," and then going short.

In short, Bitcoin futures represent a bet on "current price vs. future price," while YU represents a bet on "current market expectations (implied annual yield) vs. actual funding results (underlying annual yield)." Since the funding rate resets every eight hours, returns depend on whether each actual realized rate is above or below the market expectations at that time.

5. Apply Boros in Delta Neutral Strategy

What practical use does YU have for institutions? To illustrate this, consider how Boros addresses the funding rate fluctuation challenges faced by Ethena.

Assuming Ethena operates a Delta neutral strategy that includes 100 ETH. It holds 100 ETH in the spot market while shorting 100 ETH in the futures market. The core issue of this setup is the funding rate fluctuation: in a bull market, the short position receives funding, but in a bear market, it has to continuously pay the funding rate.

To stabilize this risk exposure, Ethena additionally established a short position of "100 YU-ETHUSDT-Binance" with an implied annualized yield of 10%. This means it receives a fixed 10% return on a nominal value equivalent to 100 ETH while paying the actual funding rate incurred.

As shown in the table, the variable funding income from futures is offset by the variable funding payments in Boros. In fact, even if a positive funding fee is received, an equivalent funding fee payment will be made through the Boros contract, resulting in a net effect fixed at zero. What remains is a fixed 10% return provided by Boros. Along with the staking yield (4%), Ethena achieves a predictable total return of 14%.

However, this approach requires trade-offs. Institutions must allocate additional margin to maintain these positions, and severe price fluctuations can pose liquidation risks. Therefore, investors like Ethena need to apply YU within a sound risk management framework.

6. Pendle's next target: traditional finance

Although Ethena's case demonstrates how YU can be applied to a single Delta neutral strategy, Boros's potential goes far beyond this.

The scope of Boros goes far beyond the funding rate. Currently, it operates on Arbitrum and supports perpetual markets for BTC and ETH from Binance as well as the ETH market from Hyperliquid. However, institutions do not confine Delta-neutral strategies to a single exchange. To manage risk and capture arbitrage opportunities, they diversify across assets and venues. Therefore, expansion is crucial.

Boros plans to increase support for assets such as Solana and BNB, and integrate exchanges including Bybit. This will broaden the channels for investors to enter the funding rate market. However, Pendle's ambitions go even further.

These strategies are unlikely to be limited to institutions. With the maturity and diversification of Boros, we expect that mature individual investors will also be able to participate. Even for those who do not directly adopt such strategies, the funding rate will inevitably become a widely watched market sentiment and position indicator, shaping the trading environment for both institutional and retail participants.

The bigger vision is to bridge traditional finance. Pendle has outlined plans to incorporate benchmarks and instruments such as LIBOR, mortgage rates, bonds, and stocks. Unlike the familiar path of "traditional finance absorbing crypto assets," Pendle takes the opposite approach by applying cryptographic technology to reconstruct traditional tools on-chain.

Overall, the expansion of Pendle can be viewed with optimism. The growing participation of institutions and their demand for more advanced strategies may further enhance its role in the market. More importantly, Pendle is not just following the transformation of traditional finance; it shows the potential to become a leader in shaping the future of global markets—this vision deserves recognition.