By @Web 3 Mario

Summary : This article analyzes opportunities within a recently trending protocol: Borors, Pendle's derivatives market for CEX perpetual swaps. I will comprehensively analyze the platform from the perspectives of fundamentals, opportunities, and risks, and share what I believe is a promising advanced interest rate arbitrage strategy. Overall, in the current market, shorting funding rates on Boros offers a high-return-to-risk ratio. By leveraging Binance, Hyperliquid, and Boros, a Delta Neutral fixed-rate arbitrage portfolio with a yield of up to 30% can be achieved.

How did the 100% Long/Short Rate ROI on Boros' homepage come about?

When you open the Boros homepage, the first thing you see is a Market List. At this time, many friends who are not familiar with Boros may be most confused about the high ROI in the rightmost column. Next, I will introduce Boros based on this point.

First of all, the value of Boros lies in the fact that it creates an off-chain yield derivatives trading market, allowing users to engage in leveraged trading, hedging or speculation on such yield derivatives without having to directly participate in the native yield scenario. Currently, it mainly focuses on funding rate derivatives in the perpetual contract market in CEX.

This directly addresses a key issue in the perpetual contract funding rate arbitrage market: the uncertainty in returns brought about by interest rate fluctuations. For example, we know that Ethena's core principle is to utilize a Delta Neutral arbitrage strategy to profit from the funding rates of perpetual contracts on CEXs. This involves going long on a spot cryptocurrency and shorting the corresponding perpetual contract to earn funding rates. The resulting profits are then distributed to sUSDe holders. This means that fluctuations in funding rates will significantly impact sUSDe's returns, and thus the protocol's attractiveness to users. We can clearly observe these fluctuations in the official website's dashboard.

However, arbitrageurs like Ethena cannot influence the fluctuations in perpetual contract funding rates, as these rates are primarily determined by the overall trading preferences of the cryptocurrency market. Only in bull markets are speculators willing to pay higher funding rates for long contracts. However, when the market enters a volatile or bearish period, funding rates drop significantly, even turning negative. This introduces risks into arbitrage strategies. Therefore, hedging the risks associated with rate fluctuations is a major pain point for these arbitrageurs. The emergence of Boros offers a solution to this problem. Simply put, you can hedge against funding rate fluctuations by trading Boros-related funding rate derivatives.

To understand how this is achieved, let's examine the fundamentals of Boros. Boros has designed a new asset called YU. It operates similarly to the YT asset in Pendle. The key difference is that YT is similar to a native spot crypto asset, with revenue settlement occurring on-chain, allowing for automated settlement via smart contracts. YU, on the other hand, is a contract derivative. Because revenue is anchored off-chain, it relies on the settlement of margin accounts between the two parties to the contract transaction to track off-chain revenue.

Let's take a closer look at how YU works. First, for YU buyers, this means they gain access to the funding rate for the perpetual contract over the future duration of the contract. Each unit of YU corresponds to one unit of the underlying asset. This profit is paid from the YU seller's margin using Boros's clearing and settlement mechanism. The specific profit corresponds to the Underlying APR in the interface. The matching interest rate during the purchase process, which corresponds to the Implied APR in the interface, defines the fixed interest rate the buyer must pay the YU seller over the duration of the contract, and this is also achieved through the clearing and settlement mechanism.

Let's use an example to illustrate. Suppose a trader buys a long position of 5 YU in the ETHUSDT-Binance YU market with an expiration date of December 25, 2026. This means that from that moment until expiration, you will continue to receive the funding rate earned on the 5 ETH short position. This profit will be settled from the YU seller's margin account along with Binance's fee settlement every 8 hours. At the same time, you will also pay interest to the seller based on the matching rate at the time of opening the position. As a result, as long as the accumulated interest paid is less than the interest earned at expiration, the trade will have a positive ROI; otherwise, it will be a loss. Furthermore, if you choose to close the position before expiration, your profit will also depend on the matching rate of your closing transaction.

With that said, let's take a look at the current state of Boros. You can see that the ROI for shorting YU is very high. In a market with long maturities, the final ROI can easily exceed 100%. This means that, assuming the Implied APR remains at its current level relative to the Underlying APR, your return on investment at maturity will be 100%. This is primarily due to the fact that following the Fed's September interest rate decision, Powell's hawkish, defensive rate cut speech, and the accompanying dot plot showing the conservative stance of voting members regarding a significant rate cut, market sentiment has shifted from the greed that prevailed before the decision to a neutral level. Consequently, funding rates have fallen rapidly, even turning negative. Therefore, shorting YU at this time means you pay interest at the Underlying APR and receive a fixed interest rate at the Implied APR. Given the current negative Underlying APR, you are effectively earning on both sides, which explains the current instantaneous return exceeding 100%. If this interest rate differential can persist for a period of time, the final actual return will be quite good.

The reason behind this is that Boros is still in its early stages, with limited liquidity. Consequently, potential slippage is significant, hindering speculators. This is reflected in the interest rate chart, where the Impiled APR fails to effectively track changes in the Underlying APR. However, this widening interest rate spread presents an opportunity for traders with smaller capital, especially since Boros allows traders to open leverage up to 3 times. Therefore, opening a position when slippage and Impiled are appropriate can yield substantial returns. However, when leveraging capital, one must consider the risk of liquidation brought on by fluctuations in the Impiled APR.

From a product perspective, Boros has also designed a Vault feature to enrich liquidity sources. This, similar to Uniswap V2's DeFi implementation, provides users with a liquidity provision experience similar to that of an LP Staking Pool, thereby reducing the learning curve. Since the official documentation doesn't provide a detailed explanation of this aspect, we won't discuss it here. However, I believe the idea is to distribute funds in the Staking Pool across the order book according to the AMM's bonding curve, thus supplementing the order book depth. However, providing liquidity in this market may expose users to impermanent loss, so readers are advised to wait for more detailed information before participating.

Share an advanced interest rate arbitrage strategy to achieve a 30% yield on Delta Neutral fixed income arbitrage

After introducing the basics of Boros, I'd like to share an advanced interest rate arbitrage strategy, leveraging Binance, Hyperliquid, and Boros to achieve Delta Neutral fixed-rate arbitrage. Boros' recent launch of Hyperliquid's BTC and ETH perpetual contract YU market provides a prerequisite for this strategy.

We can intuitively see from this chart that Hyperliquid's funding rate is significantly higher than Binance's. So what is the reason for this situation? In other words, we need to explore whether this situation is caused by instantaneous transactions or will last for a period of time. This requires tracing back to the calculation logic of funding rates in the CEX perpetual contract market.

Generally, we intuitively assume that when the Spot index price is higher than the perpetual contract's mark price, the contract market is at a discount, with shorts paying longs, and vice versa. However, this isn't always the case. In fact, another crucial factor in the calculation of funding rates is order book depth. Let's examine the introductory documentation for funding rate calculations from two exchanges.

Simply put, the calculation formula for the funding rate of both is as follows:

The differences lie in the settings for MAX_RATE and MIN_RATE, as well as the slightly different calculation of the premium index. This can be roughly understood as a piecewise function with maximum and minimum values. The premium index calculation incorporates considerations of order book depth, specifically in the calculation of the impact bid price (impact_bid_px) and the impact ask price (impact_ask_px). This calculation relies on information collected from the instantaneous order book structure. Essentially, a set of orders with a certain trading volume is set, and the final bid and ask prices at the current order book depth are calculated as the impact bid and ask prices. This data is then collected at regular intervals over a period of time, and a weighted average is calculated over that period. There are also slight differences in the price index between the two platforms. Binance uses its own Spot market price as its price index, while Hyperliquid uses a weighted price across multiple exchanges calculated using an oracle. This makes sense, given the significant disparity in liquidity depth between the two platforms in the spot market.

So let's consider why Hyperliquid's funding rate remains high even when Binance's funding rate is negative. The reason lies in the difference in depth between the two. Specifically, the sell order depth in Hyperliquid is weak, causing the impact price to be higher than the price index, resulting in a higher premium index. This is consistent with the market phases of both platforms. Therefore, we can conclude that this interest rate pattern is likely to persist for some time, rather than being a transient state.

So, is it possible to arbitrage this interest rate differential through a certain position opening strategy? The answer is yes. We can open a long position on Binance, where the interest rate is lower, and a short position on Hyperliquid, thus implementing a Delta Neutral interest rate arbitrage model. So, what is the role of Boros in this? It is to lock in the interest rate differential. We can use Boros to lock in the interest rate of each variable, thus implementing a fixed-rate Delta Neutral arbitrage strategy. Based on current data, assuming we open a 5x leverage position in the ETH-USD market on both exchanges and use Boros to lock in the interest rate, we can obtain:

Of course, more detailed considerations also require considering the Boros margin usage relative to the principal, as well as the position balance between Binance and Hyperliquid, to avoid unilateral liquidation. Interested parties can contact me for further discussion.