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Author: Ryan Yoon, Source: Tiger Research, Compiled by: Shaw Bitchain Vision
This article analyzes how Pendle converts volatile financing expenses into stable, predictable returns for institutional investors through Boros, thereby revolutionizing decentralized finance (DeFi) derivatives.
TL;DR
Core issues have been resolved: Institutions want stable returns, but financing costs are unstable – Boros converts volatility into fixed income
Market Opportunities: The first-mover advantage in the field of DeFi derivatives has become an important infrastructure for neutral hedging strategies such as Ethena
Expand your vision: Expand from crypto asset capital rates to traditional finance (bonds, stocks), leading the on-chain derivatives market
1. Untapped Areas Behind DeFi Success
Despite the fact that the crypto market has produced many narratives, decentralized finance (DeFi) and derivatives trading have shown the strongest product-to-market fit.
DeFi’s initial growth stems from lending agreements such as Aave and Compound, decentralized exchanges such as Uniswap, and earnings farming mechanisms.These mechanisms rebuild core financial primitives in an unlicensed environment and open up services previously limited to institutional users.
As these markets mature, DeFi began to expand into the derivatives field, and its development trajectory is similar to traditional finance..In traditional markets, the scale and liquidity of derivatives far exceed that of spot trading.A similar shift is taking place in the cryptocurrency space, with license-free derivatives becoming the next growth driver.
2. The role of Pendle in financial engineering in DeFi
Pendle discovered this opportunity very early and launched in 2021, positioning itself as a leading project in bringing structured derivatives to DeFi.
Its entry point is to separate principal and income from income tokens.The timing is right: income pledge is gradually becoming the mainstream. By 2023, the narratives of pledge and future airdrops will gradually emerge, and Pendle has attracted more attention.Today, many new projects integrate Pendle as the foundational layer of revenue-related strategies.
Its core mechanism may seem simple, but it actually creates two different asset classes: discounted debt rights (PT) for future value and pure interest rate volatility exposure (YT).
The impact is significant.With Pendle, earning assets such as stETH or rETH are no longer limited to the ability to pledge alternatives; they can now serve as the cornerstone of building more complex strategies.
Investors seeking a rising yield can buy YT to get up to six times leverage exposure (depending on the market conditions).Instead, investors pursuing fixed income can buy PT, which can usually lock in earnings at a double-digit discount below future value.
More importantly, Pendle’s design improves the capital efficiency of DeFi.Strategies that used to require complex hedging or derivatives expertise are now simplified through the earnings split mechanism.Investors can now access, trade and customize earnings exposure on-chain.
By doing so, Pendle not only introduces new concepts of benefits, but also lays the foundation for financial engineering in DeFi, providing users with permissionless institutional-level tools.
3. Boros: Enhance delta neutral returns
As the cryptocurrency market expands, institutional investors are investing more money and adopting more complex trading strategies to earn profits.Their first priority is to get stable returns, which usually minimizes price risk by holding a neutral position in delta.
Ethena demonstrates this by holding spot ETH and shorting equal amounts of futures at the same time.One party’s gains offset the other party’s losses, and regardless of the price direction, the portfolio’s value can be kept stable (see figure).
In a bull market, the bulls pay financing fees to the shorts, and Ethena gains profits.In a bear market, the opposite is true, and Ethena has to pay for it.
The challenge is that capital flows are inherently unstable—sometimes generate income and sometimes require expenditure.This volatility undermines protocols like Ethena, which rely on delta neutral strategies to support its stablecoin USDe.
Boros fills this gap by converting unstable flow of capital expenses into fixed and predictable gains.In this way, it provides institutions with the stability required to expand capital allocation in the cryptocurrency market.
4. Boros mechanism: stabilize funding rate
Boros has launched the Income Unit (YU), a derivative that isolates fluctuations in capital expenses from the price of the underlying asset.YU can implement two functions simultaneously: targeting bets on fund rates and converting unstable fund flows into predictable revenue streams.The following sections explain its mechanism.
4.1. Income Unit (YU): Structure and Usage
Suppose an investor seeks to obtain a fixed annualized return of 8% in three months, regardless of whether the Bitcoin funding fee is positive or negative.Instead, another investor may be more inclined to directly bear fluctuations in fund expenses and be willing to pay fixed income.
YU connects these two parties through isolation and volatility in transaction fund fees, without being affected by changes in the underlying asset price.
For example, the product “1 YU-ETHUSDT-Binance” represents the income from the capital expenses held by 1 nominal ETH position in the Binance Perpetual Contract until the expiration date.After purchasing the product, investors can obtain gains or losses based on changes in funding expenses associated with the position without holding the ETH itself.In this way, YU converts the funding fees of a specific exchange asset pair into an independent tradable instrument.
4.2. Implicit annual interest rate: market expectations as price signal
The core concept of YU trading is the Implied APR.It represents the market’s expectations of the average rate of return on funds fees before maturity and is reflected in the current price of YU.
Just as the $80,000 Bitcoin price reflects the market’s valuation of the asset, YU-BTCUSDT’s implied annual interest rate indicates that participants expect Bitcoin funding expenses to be an average of 8% per year over the relevant period.
Simply put, the role of implicit annual interest rates is very similar to that of market prices in the futures market: it reflects the current market consensus.
4.3. Long and short positions: trading implicit rate of return and actual rate of return
YU positions are similar to futures trading, with long and short positions having different motivations.
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Bitcoin futures longs: mark price $50,000 → target price $60,000 = $10,000 profit;
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YU long: implied annual interest rate 8% → actual annual interest rate 10% = 2% Profit (long parties pay the implied annual interest rate and obtain the actual annual interest rate)
YU long positions reflect the belief that “the actual funding rate will be higher than the market’s current expectations, such as 10%.” In this case, the longs pay at the implied annual rate (8%) and collect funds at the actual annual rate (10%).This is equivalent to saying “Bitcoin futures are now priced at $50,000, but I expect it to go up to $60,000” and then go long.
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Bitcoin Futures Shorts: Marked Price $50,000 → Target Price $40,000 = $10,000 Profit
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YU Short: implied annual interest rate 20% → actual annual interest rate 15% = 5% profit (the shorts obtain implied annual interest rate and pay the actual annual interest rate)
YU short positions reflect the belief that “the actual financing rate will be lower than the market’s current expectations, such as 15%.” Shorts receive financing at implied annual interest rates (20%) and pay for financing at the actual annual interest rate (10%).It’s similar to saying “Bitcoin futures are now priced at $50,000, but I expect it to drop to $40,000” and then short.
In short, Bitcoin futures represent bets on “current price vs. future price”, while YU represents bets on “current market expectations (implicit APR) vs. realized financing results (actual APR)”.Since financing rates are reset every 8 hours, the returns depend on whether each realized interest rate is higher or lower than market expectations at the time.
5. Apply Boros in delta neutral strategy
What is YU’s practical use for institutions?To illustrate this, consider how Boros addresses the funding rate volatility challenge facing Ethena.
Suppose Ethena operates a Delta neutral strategy with 100 ETH.It holds 100 ETH in the spot market while shorting 100 ETH in the futures market.The core problem with this setup is the fluctuation of capital rates: in a bull market, short positions charge capital fees, but in a bear market, it must continue to pay capital fees.
To stabilize this risk exposure, Ethena has established an additional short position of “100 YU-ETHUSDT-Binance” with an implicit annualized yield of 10%.This means it receives a fixed 10% profit equivalent to 100 ETH nominal value while paying for the actual incurred capital costs.
As shown in the table, variable capital income from futures is offset by variable capital payments in Boros.In fact, even if a positive fund fee is received, equal fund fee payment will be made through the Boros contract, so the net effect is fixed to zero.What remains is a fixed 10% return offered by Boros.Adding to pledge income (4%), Ethena achieved 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 may pose liquidation risks.Therefore, investors like Ethena need to apply YU within a sound risk management framework.
6. Pendle’s next goal: traditional finance
While Ethena’s case demonstrates how YU can be applied to a single Delta neutral strategy, Boros’ potential goes far beyond that.
Boros’ range is well beyond the funding rate.Currently, it runs on Arbitrum and supports the BTC and ETH perpetual markets from Binance and the ETH market from Hyperliquid.However, institutions do not limit Delta neutral strategies to a single exchange.To manage risks and capture arbitrage opportunities, they are diversified across assets and places.Therefore, expansion is crucial.
Boros plans to increase support for assets such as Solana and BNB and integrate exchanges including Bybit.This will broaden investors’ access to the capital rate market.Pendle’s ambitions go a step further, however.
These strategies are unlikely to be limited to institutions.As Boros matures and diversifies, we expect mature individual investors to be able to participate as well.Even for those who do not directly adopt such strategies, funding rates will surely become a widely watched market sentiment and position indicator, shaping the trading environment for institutional and retail participants.
The bigger vision is to bridge traditional finance.Pendle has outlined plans to include benchmarks and tools such as LIBOR, mortgage rates, bonds and stocks.Unlike the familiar path of traditional “traditional finance absorbs crypto assets”, Pendle does the opposite and reconstructs traditional tools on the chain using the encryption technology architecture.
Overall,Pendle’s expansion can be optimistic.The growing involvement of institutions and their demand for more advanced strategies may further enhance their role in the market.More importantly, Pendle is not just following the transformation of traditional finance; it shows the potential to be a leader in shaping the future of global markets—a vision worthy of recognition.
