Written by: @charlotte_zqh
This research report is supported by international crypto media and primary investors @RomeoKuok.
1 Pendle 101: How to Achieve Separation of Principal and Yield
1.1 Separation of Income-Generating Assets
Pendle is a decentralized finance protocol that allows users to tokenize and sell future yields. In the specific business process, the protocol first wraps income-generating tokens as SY tokens (Standardized Yield Tokens), which are ERC-5115 standard tokens capable of wrapping most income-generating assets. Then, the SY tokens are divided into two parts: PT (Principal Token) and YT (Yield Token), representing the principal and yield portions of the income-generating asset, respectively.
Among them, PT is similar to zero-coupon bonds, allowing users to purchase at a certain discount and redeem at face value upon maturity. The yield is implicitly contained in the difference between the purchase price and the redemption price. Therefore, if a user holds PT until maturity, the fixed return they receive will be for instance, if they purchased PT-cDAI at a price of $0.9, they will receive 1DAI at maturity, yielding (1-0.9)/0.9=11.1%. The act of purchasing PT is a short yield action, indicating the belief that the future yield of this asset will decline below the current yield of purchasing PT, while this yield is fixed and suitable for low-risk preference users. However, this action differs from actual shorting and is more of a hedging behavior.
YT holders can receive all yields from the income-generating asset during the holding period, corresponding to the principal's yield rights. If the yield is settled in real-time, then holding YT allows one to collect settled yields at any time; if the yield is settled at maturity, users can only claim yields with YT after maturity, and once the corresponding yields are claimed, the YT asset will become invalid. Purchasing YT is a long yield action, indicating the belief that the future yield of the income-generating asset will rise, and the total yield obtained will be higher than the current purchase price of YT. YT provides users with a yield leverage, allowing direct purchase of yield rights without needing to purchase the entire income-generating asset. However, if the yield significantly declines, YT assets face loss issues. Hence, compared to PT assets, YT is a high-risk, high-reward asset.
Pendle provides tools for long and short yield rates, allowing users to choose corresponding investment strategies based on their yield predictions and judgments. Therefore, yield rates are an important metric for participating in the protocol, and Pendle also offers various APYs to reflect the current market situation:
Underlying APY: This is the actual yield rate of the asset, taken as the 7-day moving average yield rate to help users estimate the future yield trend of the asset.
Implied APY: This is the market consensus on the future APY of the asset, reflected in the prices of YT and PT assets, with its calculation formula being:
Fixed APY: Specifically for PT assets, the fixed yield obtainable by holding PT, this value is equal to the Implied APY.
Long Yield APY: Specifically for YT assets, the annual yield rate for purchasing YT at the current price, but this yield is constantly changing, as the yield of the income-generating asset itself changes (this value could be negative, meaning the current YT price is too high, exceeding the project's future yield). It is worth noting that currently, many YT assets in Pendle have potential yields based on airdrops and points, whose values are unquantifiable, resulting in many YT assets having a Long Yield APY of -100%.
These four yields will be displayed simultaneously on the Pendle Market interface. When Underlying APY > Implied APY, it indicates that holding the asset will yield more than holding PT; at this time, a long yield strategy can be employed, buying YT and selling PT. When Underlying APY = Implied APY, consider adopting the opposite strategy. However, it should be reiterated that these yield metrics do not account for future airdrop expectations, thus the aforementioned strategies are only applicable to pure interest rate swap assets.
1.2 Pendle AMM: Achieving Transactions of Different Asset Types
Pendle AMM is used to implement transactions between SY, PT, and YT tokens. According to the Pendle white paper, in version V2, Pendle improved the AMM mechanism, referencing the AMM model of Notional Finance, enhancing capital efficiency and reducing slippage. A diagram of the three AMM models for fixed income protocols currently available is shown below, where the X-axis indicates the proportion of PT assets in the pool, and the Y-axis indicates the Implied Interest Rate. Currently, Pendle uses the AMM model corresponding to the red curve, while the black curve represents the V1 model, and the blue curve represents AMM models of other fixed income protocols.
In specific pools, Pendle V2 uses PT-SY trading pairs, such as PT-stETH and SY-stETH, which can significantly reduce LP's impermanent loss (a detailed analysis will follow). Since SY = PT + YT, YT can be exchanged through Flash Swap. The specific process is as follows: If a user needs to purchase YT-stETH worth 1ETH, this requires an exchange from ETH to YT-stETH. Assuming 1ETH = N YT-stETH, the contract will borrow N-1 SY-stETH from the pool and convert the user's ETH into SY-stETH (the exact process involves first converting ETH into stETH via Kyberswap, then wrapping it into SY-stETH within the protocol), then all SY-stETH (N in total) will be split into PT and YT, providing the appropriate number of YT (in this example, N) to the user, while returning the PT (N pieces) to the pool, effectively completing the SY-PT exchange (N-1 SY converted into N PT).
The process of selling YT is the opposite. If a user wants to sell N YT (assuming the value of N YT at this time is equal to 1 SY), the contract will borrow N PT from the pool, merge them into N SY, and provide one SY to the user while returning N-1 SY to the pool. Thus, the actual completion in the pool is a PT-SY exchange (N PT converted into N-1 SY).
Like other AMMs, Pendle AMM also requires LPs to provide liquidity for the pools. However, due to the maturity date, one PT will definitely equal one SY, so there is no impermanent loss at the maturity date. When users provide liquidity, the assets they provide are SY and PT assets, thus automatically capturing the native yields of this part of the assets, as well as trading fees and PENDLE's liquidity mining rewards, which include four sources of income:
PT fixed yield: the yield from purchasing PT itself.
Underlying yield: the yield of SY assets.
Swap fees: 20% of trading fees.
PENDLE token incentives.
2 Token Economics: How Does Business Income Drive Token Price Upward?
2.1 Token Economic Mechanism: How to Achieve Economic Flywheel?
The token economic mechanism of PENDLE primarily lies in obtaining vePENDLE through locking, allowing participation in protocol revenue sharing and governance decisions. Similar to Curve's veCRV model, users can lock PENDLE to receive vePENDLE, and the longer the lock-up period, the more vePENDLE they receive, with lock-up durations ranging from 1 week to 2 years.
The benefits of holding vePENDLE include:
Boost Yield: You can boost your yield as an LP up to 2.5 times.
Voting Rights: Vote on the distribution of PENDLE incentives across different pools.
Revenue Sharing: Holders of vePENDLE can receive the following revenues:
80% of the trading fee share from the voted pool: vePENDLE holders vote on the direction of PENDLE incentives, and only those who complete the voting can receive rewards from the selected trading pool.
3% of all YT yields.
A portion of PT's yield: this portion comes from unredeemed PT, for example, if a user purchased PT assets and did not redeem them at maturity, after some time, this portion of assets is acquired by the protocol.
In yield calculation, the Total APY for holding vePENDLE = Base APY + Voter’s APY, where Base APY comes from the yields of YT and PT, and Voter’s APY comes from the distribution of trading fees from designated pools, which is also a major component of APY—currently, Base APY is only around 2%, while Voter’s APY can reach as high as 30% and above.
Pendle's ve model has also facilitated the emergence of bribing platforms such as Penpie and Equilibria, both of which are engaged in related businesses, similar to the business processes between Convex and Curve. However, compared to Curve, the core project parties of the assets traded on Pendle do not have a demand for bribing. Curve, as the primary trading platform for stablecoins and other pegged assets, ensures that pool depth is crucial for maintaining the price peg, which drives project parties to have a strong incentive to participate in bribing for liquidity guidance. In contrast, maintaining trading depth in Pendle AMM does not seem to hold much significance for LSD and LRT project parties, thus the main motivation for participating in bribing will come from LPs on Pendle. The establishment of bribing platforms primarily optimizes two issues: 1) Pendle LPs can achieve higher yields without purchasing and locking PENDLE; 2) PENDLE holders can obtain liquid ePEDNLE/mPENDLE to receive vePENDLE incentives. Since this article focuses solely on Pendle, it will not delve deeply into the bribing ecosystem here.
2.2 Token Distribution and Supply: No Major Unlock Events in the Future
The PENDLE token was launched in April 2021, adopting a hybrid inflation model with no upper limit on token supply, providing a stable incentive of 1.2 million PENDLE per week for the first 26 weeks, after which (weeks 27-260), liquidity incentives will decline by 1% weekly until week 260. After that (from week 261 onward), the inflation rate will be 2% annually for incentives.
According to Token Unlock data, the initial token distribution was granted to teams, ecosystems, investors, and advisors. Currently, all tokens have been unlocked. If we disregard OTC transactions and only consider initial allocations, PENDLE will not face significant concentration unlocks in the future. Currently, daily inflation stems solely from liquidity mining incentives, with a daily emission of approximately 34.1k PENDLE. Based on the token price on August 5 ($2), the daily unlock selling pressure is $68.2k, which is relatively minor.
3 Application Scenario Development: Stable Wealth Management, Interest Rate Trading, and Points Leverage
Pendle's development can be roughly divided into three stages:
Pendle was founded in 2021, during which time, although it was DeFi Summer, DeFi was still in its infrastructure phase, with major projects focused on DEX, stablecoins, and lending, and as an interest rate swap product, it did not receive much attention.
Until the end of 2022, as Ethereum completed its transition to PoS, Ethereum staking rates became the native rates in the crypto circle. A plethora of LSD assets quickly emerged, leading to: (1) interest rates becoming one of the focal points in the crypto circle; (2) a large number of income-generating assets being born, allowing Pendle to find its PMF; (3) Pendle becoming a small-cap target for speculating on the LSD track, with relatively few competitors in the niche track. The launch on Binance during this period further raised Pendle's valuation ceiling.
From the end of 2023 to early 2024, Eigenlayer initiated the re-staking narrative for Ethereum, leading to the emergence of various liquidity re-staking (LRT) projects. Both Eigenlayer and LRT projects have announced points and airdrop plans, setting the stage for a points battle. This results in: (1) the emergence of more income-generating assets, effectively broadening Pendle's paths to increase TVL; (2) most importantly, Pendle captures the intersection of principal-yield trading and points leverage, finding new PMF. The following sections will further detail how Pendle plays a role in the points battle and how it empowers the PENDLE token.
In summary, apart from becoming LPs and vePENDLE holders, Pendle's main usage scenarios currently include three: stable wealth management, interest rate trading, and points leverage.
3.1 Stable Wealth Management
This functionality primarily corresponds to PT assets, allowing users to receive a fixed number of corresponding assets at maturity by holding PT assets. This fixed rate is established at the time of purchase, thus users do not need to constantly monitor APR changes. This functionality provides stable yields, with both risks and returns being relatively low. After the opening of points trading, this functionality has further enhanced user yield: taking eETH as an example, users have opted to forgo the yield from holding eETH in exchange for a higher fixed yield. Consequently, the current yield of PT assets (7.189%) far exceeds that of (2.597%), providing a financial tool for users seeking higher fixed income denominated in Ethereum. Some users who are pessimistic about the future token performance of LRT projects can buy PT assets at low prices when the market FOMO drives up YT prices, effectively shorting the LRT tokens.
3.2 Interest Rate / Yield Expectation Trading
By using swing trading on YT assets, one can go long or short on interest rates. When it is believed that future yields will significantly increase, buy YT assets and sell them when the YT asset price rises. This strategy is suitable for trading assets with high yield volatility, such as sUSDe, which is a staking certificate for the stablecoin issued by Ethena. The staking yield mainly comes from the funding rate on ETH; the higher the funding rate, the higher the staking yield, which depends on market sentiment changes, thus the staking yield also exhibits a certain volatility. By trading YT-sUSDe, one can quickly profit from swing trading. Moreover, after the introduction of point yield rights, trading YT assets also includes pricing changes based on airdrop expectations. For example, before the ENA token launch, one can buy YT-USDe early and sell tokens when the market begins to FOMO on ENA airdrops, potentially yielding high returns. However, this swing trading faces high returns and risks; for instance, the recent price of YT-sUSDE has repeatedly declined, partly because the rewards from holding YT assets are decreasing with shortened holding periods, and partly due to the continuous decline in ENA prices, leading to a reduction in market expectations for the airdrop's value. Early buyers may face significant losses.
3.3 Points Leverage and Trading
The most significant impact on Pendle in this cycle comes from the points trading feature, which provides users with potentially high leverage for points and airdrops. This article will focus on this feature and aims to answer the following questions:
(1) Which projects is Pendle's points trading suitable for?
Points have become the main form of airdrop distribution in this cycle. The means of acquiring points include interactive, volume-farming, and deposit categories, among which the deposit category has become the most significant method. With the emergence of various LRT protocols, BTC layer 2s, and staking protocols, the TVL battle has become a major theme this year. Some protocols directly lock relevant assets, such as BTC layer 2s directly locking BTC and inscribed assets, while Blast directly deposits ETH, etc. Other protocols return corresponding liquidity assets as deposit certificates after deposits to accrue points. Pendle's separation of principal and yield mechanism is particularly suitable for the second category, which requires a base asset to accumulate points.
(2) In which aspects has Pendle's points trading achieved PMF?
Pendle mainly achieves PMF in two aspects: first, the leverage of points; second, early pricing and expected trading of airdrops. The TVL battle is a game for whales; ordinary retail investors lack sufficient ETH to deposit. Pendle supports the direct acquisition of points yield rights through purchasing YT assets, allowing users to gain corresponding points without needing principal. It has achieved tens of times leverage in projects like LRT and Ethena. Additionally, Pendle fundamentally provides the earliest market pricing for points; trading YT assets also involves trading expectations regarding project airdrops and token prices. This can be subdivided into two scenarios: ① For tokens that have not yet undergone TGE, most airdrop rules remain unclear, thus encompassing both market expectations for potentially obtainable tokens and early pricing for these tokens; ② For tokens that have already undergone TGE, with a clear market price established, the unknown information is how many airdrop tokens correspond to one point. If the airdrop rules are relatively clear and it is known how many tokens this underlying asset can acquire upon maturity, then this YT asset functions like an option, and the current price reflects expectations for the token price at the maturity date.
(3) How does points trading influence Pendle's business income and token prices?
According to the previous analysis, the introduction of points trading has brought about trading of future airdrop expectations, which, compared to yield rates, has rapidly changing and fluctuating expectations. This has led to higher speculation and trading demand. Most directly, it has rapidly expanded Pendle's trading volume and trading fee income, and the diversification of asset categories has also increased Pendle's TVL.
The empowerment of PENDLE is even more evident. The income of vePENDLE holders primarily comes from sharing trading fees. Without sufficient volatility and speculative demand, there won't be enough trading activity, leading to extremely low yields for vePENDLE. In July 2023, the total APY for vePENDLE was only around 2%. Therefore, even though Pendle was hot in the LSD track, the token price still couldn't benefit from the business. The introduction of points trading has changed this predicament; currently, the APY for vePENDLE in multiple pools exceeds 15%, with several LST asset pools reaching over 30%.
(4) How do the performances of related projects affect Pendle?
The two core negative impacts surrounding Pendle include: the landing of airdrops for major assets (LRT and Ethena); and the continuous decline in the prices of major project tokens. The landing of airdrops reduces speculative demand; despite the points program continuing for multiple periods, combined with the declining token prices, market confidence and expectations for the project have significantly decreased, leading to a reduction in users choosing to continue depositing and a significant shrinkage in related trading volume. Currently, Pendle's TVL and trading volume have both seen a major decline, and the same predicament is reflected in token prices.
4 Data Analysis: TVL and Trading Volume are KPIs for Pendle
This article posits that Pendle's business data can be mainly divided into two parts: stock and flow. Stock is primarily represented by TVL, and it is necessary to closely monitor indicators affecting the health and sustainability of TVL, such as the composition structure of TVL, asset pool maturity timing, and extension ratios; flow is primarily represented by trading volume, including trading volume, trading fees, composition of trading volume, etc., as changes in trading volume directly impact token empowerment.
4.1 TVL and Related Metrics
The TVL denominated in ETH rapidly grew after mid-January 2024, maintaining a high correlation with the PENDLE token price. The TVL peaked at over 1.8M ETH, experiencing rapid declines on June 28 and July 25, primarily due to a large number of asset pools reaching maturity, with insufficient demand for new investments after maturity, resulting in a swift loss of TVL. Currently, Pendle's TVL is approximately 1M ETH, nearly a 50% drop from its peak, and the downward trend shows no signs of effective relief.
Specifically, on June 27, 2024, multiple LRT asset pools, including Ether.Fi's eETH, Renzo's ezETH, Puffer's pufETH, Kelp's rsETH, and Swell's rswETH, will mature. Users redeem their principal investment. Although there are still asset pools with other maturity dates, the extension ratio among users is low, and the TVL has shown no recovery trend to date. This also confirms the previous analysis: as LRT projects issue tokens and their price performances decline, users' demand for further participation in related asset wealth management and investment decreases. In this cycle, the lack of innovation in the Ethereum ecosystem and the market's pessimism regarding ETH prices could directly affect Pendle's business income level, thus Pendle and Ethereum are closely bound.
In the composition of Pendle's TVL, the total TVL currently stands at $2.43B, with 11 asset pools exceeding $10M in TVL. The pool with the highest TVL is SolvBTC.BBN, accounting for approximately 3.51% of the total TVL. The structure of the TVL composition is relatively healthy, with no single asset pool dominating a large portion of the TVL. Looking at the maturity of asset pools, the next significant maturity date will be December 26, 2024, and Pendle's TVL may present a relatively stable trend in the near term.
After the wave of Ethereum re-staking ended, Pendle smoothly transitioned to stablecoin assets like BTCfi and USDe/USD0. Although business data and market sentiment are not as robust as in April, it has maintained its TVL data without a significant decline. However, with the issuance of tokens by various Ethereum LRT protocols and the entry of EIGEN into trading, the imagination around the re-staking track is reducing, which to some extent compresses the speculative enthusiasm for the BTC staking track, reflected in the decline of Pendle's trading volume. The next potential event that could impact Pendle significantly would be the issuance of Babylon and the BTC staking track. Can Pendle find new application scenarios after the end of BTC re-staking?
4.2 Trading Volume and Composition
Pendle AMM's trading volume also rose rapidly after January 2024, peaking around April. In late April, Eigenlayer announced its token issuance, accompanied by the realization of airdrop expectations like Ether.fi and other LRT projects, leading to a significant decline in trading volume. Currently, trading volume continues to drop, reaching a low level since 2024.
From the composition of trading volume, in the first half of 2024, trading volume will mainly consist of transactions related to Renzo and Ether.fi assets. Currently, the trading volume of Pendle AMM mainly comes from the Ethena and USD0 protocols, with limited trading volume from BTCfi assets. Trading volume directly relates to trading fees and the annualized yield for vePENDLE holders and is a more direct transmission factor compared to TVL.
4.3 Token Locking Ratio
The proportion of locked tokens directly affects the supply-demand relationship of the tokens. With a relatively stable daily release of tokens, the more PENDLE is locked as vePENDLE, the more positively it stimulates the token price. Changes in the number of PENDLE locked exhibit a similar trend to the changes in its business data and token prices. Since November 2023, the amount of PENDLE locked has risen rapidly, from 38M to a peak of 55M. After reaching 54M in April 2024, the growth rate of locked PENDLE began to slow, and even saw a net outflow of vePENDLE. This aligns with the previous analysis of the business— as TVL and trading volume decrease, the yield of vePENDLE starts to decline, thus the attractiveness of locking PENDLE begins to wane. Currently, there hasn't been a significant outflow of vePENDLE; on one hand, due to lock-up restrictions, this indicator reacts slower than TVL, trading volume, and token prices, and major changes cannot occur in the short term. On the other hand, leading asset pools still yield decent returns, mitigating the outflow of vePENDLE. However, it should still be pointed out that whether in business data or vePENDLE growth data, it reflects that Pendle is facing short-term operational pains and has yet to find new growth points after the cooling of re-staking and points.
5 Conclusion: Pendle urgently needs to find new scenarios post re-staking
In summary, Pendle's success lies in accurately identifying PMF. Even more remarkably, business income directly empowers the token, finding a direct factor for price transmission—packaging YT products as points trading targets, thus increasing AMM trading volume and enhancing vePENDLE income.
Since starting to decline from $7.5, Pendle has not reversed its downward trend. It is undeniable that Pendle is an excellent DeFi product, combining both wealth management and speculative attributes, meeting the needs of investors with different risk preferences. However, with the decline of Ethereum-based TVL and no signs of recovery, poor performance from re-staking projects and Ethena has reduced market expectations for subsequent airdrops, leading to a decline in Pendle's usage demand, and thus the price of PENDLE is also seeking a new position. Pendle needs to find new product packaging or expand into new ecosystems like Solana to increase its TVL and trading volume to possibly find a new growth space.
Pendle's other positioning is Ethereum Beta, but it is recently transitioning: in the era of Ethereum re-staking, Pendle is an important financial product for Ethereum and derivative assets. Even Ethena, while being a stablecoin, has its USDe staking yield rate directly related to the funding rate of ETH. If the market temporarily loses information about the Ethereum ecosystem and ETH lacks upward momentum, Pendle will also find itself in a difficult position. It is crucial to note that unlike Pendle, which is not a meme category like PEPE, the price of ETH has a direct transmission effect on the price of PENDLE: ETH's lack of upward momentum → decline in ETH-based wealth management demand / cooling performance of re-staking track → decreased demand for Pendle usage → decline in Pendle business income → drop in PENDLE token price. However, Bitcoin staking assets on Pendle have already replaced Ethereum, which may weaken this transmission effect.
Finally, this article outlines key points of focus from a fundamental perspective:
Monitor the progress of point programs in LRT projects and stablecoin projects like Ethena and USD0, as the end of the points season may again reduce Pendle's business income.
Keep an eye on the changes in Pendle's TVL and trading volume; if multiple asset pools mature again, it may trigger a significant drop in TVL, at which point part of the PENDLE position can be sold in advance to hedge.
Continue to monitor Pendle's product developments, including but not limited to: the launch of Pendle V3; the introduction of new asset pools and trading strategies; the possibility of expanding to new public chain ecosystems.
