I. Introduction
With the advancement of technology and the adaptation of the market, DeFi is expected to further change the traditional financial market structure and provide market participants with more efficient, safer and more transparent trading options. This Bing Ventures study looks forward to the possible continued impact of DeFi technology in the future, especially its potential contribution to improving market inclusiveness, reducing transaction costs and enhancing market efficiency, with a particular focus on cases in Pendle and pre-market trading.
Pendle introduces traditional interest rate trading and financial derivatives into the blockchain through tokenization, and innovates financial products that separate principal and income, such as PT and YT. In this way, Pendle not only provides a flexible interest rate trading method, but also promotes the liquidity and efficiency of the DeFi market. Pendle's technical practice separates principal tokens and income tokens, allowing investors to independently manage assets according to their own risk preferences and market forecasts.
In the traditional stock market, premarket trading is usually limited to large institutional investors and high-net-worth individuals. In the context of Web3, Premarket has changed this model, enabling a wider range of investors to participate in pre-market trading through smart contracts and decentralized trading platforms such as AEVO and Whales Market. This reform not only increases the transparency and security of the market, but also improves the efficiency of capital use and the overall liquidity of the market.
2. Pendle’s innovative practice: the transformation of interest rate trading
In the traditional financial market, interest rate trading has always been one of the important financial tools. It not only affects the money supply and market liquidity, but also directly affects the formation of the interest rate curve. In Web3, with the development of blockchain technology and the rise of the DeFi ecosystem, interest rate trading is undergoing a radical change. DeFi interest rate trading will no longer be limited by the cumbersome procedures and geographical restrictions of traditional financial institutions, but will be carried out on a decentralized platform through smart contracts, bringing users more efficient and flexible financial services.
In the emerging DeFi interest rate trading field in 2024, Pendle is undoubtedly one of the pioneers leading the trend. Pendle tokenizes income assets into SY tokens, such as packaging stETH into SY-stETH, and then SY is divided into principal and income components, namely PT (Principal Token) and YT (Yield Token), to achieve flexible management and optimization of interest rate income.
With the rise of the concept of Restaking and the growing scale of synthetic stablecoins, the interest rate swap market has also ushered in more new ways of playing, and has expanded the growth space of the interest rate swap market. We will take Pendle as an example to explore these derived PT/YT new ways of playing, as well as their impact on the DeFi interest rate trading ecosystem and future development prospects.
Space in the interest rate market
Taking Pendle, the largest interest rate market at present, as an example, Pendle became popular for a short period of time in 2021 thanks to the interest rate market. At that time, no one quite understood how Pendle's interest rate swaps could be used in the blockchain market. But today in 2024, LRT is flourishing and ETHENA has emerged. Pendle seems to have found a path that suits it best.
According to defillama data, Pendle's current TVL has reached $86.884B, ranking 7th among Defi protocols. In the past month, Pendle's TVL has increased by 91.62%.
Source: defillama
According to the products in the protocol, most of the TVL growth comes from the tokens of the LRT protocol and the synthetic dollars of Ethena. Pendle is well connected with them to amplify the benefits of users. Behind the TVL growth is the points bonus of Eigenlayer, the top narrative Restaking track in this round of bull market + PT/YT gameplay + high returns of Ethena.
Source: Pendle
Based on the above content, it can be found that the key factor in whether the Pendle interest rate market can continue to increase is whether LRT and ETHENA can obtain more market funds in the future, thereby promoting the growth of Pendle.
New ways to play YT/PT
In the past, Pendle’s main business was to serve users with interest-bearing assets, such as stETH users who had staked ETH on Lido, enabling them to obtain satisfactory returns through the characteristics of PT/YT.
Now, Pendle can generate new ways to play PT/YT through the high returns of Eigenlayer Points+ and the synthetic dollar protocol Ethena:
Points swap: Eigenlayer and the synthetic dollar protocol Ethena both have high return rate airdrop expectations, and staking assets (such as ETH) to obtain points is the core standard of airdrops. Through the cooperation of various project parties that issue points on Pendle, points swaps can be achieved. Large funds can see reliable PT to provide liquidity, and small funds can bet on greater returns. The point swap gameplay has also allowed Pendle to gain huge TVL in this bull market.
a) For example, after staking ETH to Eigenlayer, you can get eETH + points rewards. Pendle divides eETH into PT (principal token) and YT (yield token). Buying YT means buying all the points rewards to obtain potential airdrops in the future.
b) Take Ethena’s current interest rate on Pendle as an example: When using sUSDe to participate in Pendle
i) If you exchange sUSDe for YT sUSDe, you can get 466x Pendle points
ii) If you exchange sUSDe for LP sUSDe, you can get APY 46.15% (floating interest rate) and points for holding sUSDe
iii) If you exchange sUSDe for PT sUSDe, you can get an APY rate of return of 54.09%
c) Large funds see reliable PT to provide liquidity, and small funds can bet on greater returns. As the scale of Ethena grows, it will drive the growth of Pendle.
d) The cooperation between Ethena and Pendle can also be used in the LRT protocol, giving users more options to increase their returns. At the same time, the development of the Restaking ecosystem will also promote the growth of Pendle.
Funding Swap: Assuming that the future funding scale of the synthetic stablecoin protocol can continue to expand in the context of a bull market, for example, the number of users using ETHENA continues to increase, there will be a lot of sUSDe on the market, and then sUSDe will be split into YT sUSDe and PT sUSDe through the interest rate swap agreement. When judging the general direction of the market, users can judge the trend of future funding fees and make profits. For example, if it is judged that the market will turn from bearish to bullish, YT-sUSDe can be purchased at a lower APY when the market is bearish (the APY of stablecoins in bearish markets is low), and in the bull market, it can be sold at a premium to realize profits, which increases more opportunities for gaming.
Rich strategies: In the PT/YT exchange, investors with different risk preferences can use different investment strategies. You can use Pendle to achieve bullish returns, risk hedging, and discounted long positions.
a) If the market returns are expected to increase, traders can buy YT to gain exposure to the returns. When returns rise, traders who are long YT will benefit.
b) On the other hand, if the market speculates that earnings will decrease, the trader can hedge the risk by selling YT and collecting the upfront payment.
3. On-chain Premarket Trading Platform
Premarket often refers to "pre-market trading" in the stock market, which refers to trading activities that begin before the official opening of the market. This type of trading mainly occurs in electronic trading systems rather than traditional stock exchanges. In pre-market trading, investors can buy and sell stocks, but the trading volume is relatively small and the price fluctuations may be large. The purpose of this type of trading includes taking advantage of the impact of important news or events released by the company to obtain better trading prices before the official trading begins.
When the Premarke method is applied to Web3, investors use it to find investment opportunities in advance through over-the-counter transactions before the token TGE of hot projects. The main objects of these transactions are mostly airdropped tokens that have been confirmed by the project party, which are traded in the form of shares or points.
Source:https://edition.cnn.com/markets/premarkets
Premarket's iteration of trading methods in Web3
Source:https://www.racent.com/blog/man-in-the-middle-attack
In the earliest OTC transactions, mainstream social platforms, such as Discord, Telegram, and WeChat, were common places for transactions. At that time, the transaction method was mainly to match orders with the role of a "middleman", and to find buyers and sellers at the same time, to trade with margin, and to complete the transaction at the time of delivery. The "middleman" took different rewards.
However, this method obviously has a lot of problems. The most common one is the "middleman" doing evil. Because all transactions are matched by the "middleman", the actual buy and sell prices are all carried out in a black box. It is very likely that the transaction price is far away from the actual seller, and there is a situation where RUG occurs after the middleman collects the deposit.
In the second stage, after everyone knows that the middleman may do evil, KOLs and bloggers with a certain fan base begin to use their own credibility to endorse and become the "middleman" to continue to match transactions, and pull the buyer, seller, and middleman into the same group chat to ensure the openness and transparency of prices. This stage is also the most common OTC trading method before the emergence of the on-chain Pre-marketplace.
The second phase of transactions lasted for a long time, but many problems still emerged, such as low transaction efficiency, problems that may arise from pure manual work, and potential risks of the "middleman" role. As a result, two of the most representative on-chain Pre-marketplaces were born: AEVO and Whales Market.
Web3 Pre-marketplace Product Introduction
AEVO: AEVO is a decentralized options platform that focuses on options and perpetual trading. It currently supports Optimism, Arbitrum, and Ethereum chains. AEVO used to be used for perpetual trading on the chain, and recently launched the Pre-Launch Tokens section, allowing users to trade before the token TGE.
a) Trading process: Users can select relevant tokens for perpetual trading in the Pre-Launch Tokens section. Most tokens support 1-2X leverage. The actual operation process is the same as the normal perpetual trading process. Different short or long strategies can be adopted.
b) Platform data: As can be seen from the figure, the current price of $SWELL, the token of the Restake protocol Swell, on AEVO is $2.1, and the 24-hour trading volume has reached $973,762, which is also the first in the 24h volume in the current Pre-Launch Tokens section.
c) Platform features:
i) Compared with the traditional over-the-counter trading method of social platforms, AEVO's trading process is more formal, transparent and secure.
ii) Support users to perform short or long operations with a 1–2X margin to gain profits.
Whales.Market: Whales.Market is an OTC trading platform built within the Solana ecosystem, using smart contract technology to provide a secure, trustless environment for trading pre-TGE allocations, tokens, and NFTs. Unlike AEVO, Whales.Market can trade not only tokens, but also Points, and NFTs will be open to NFT whitelist trading in the future.
a) Trading process: Users can choose different targets for trading in Whales Market, and can clearly see the purchase quantity, unit price, total price and other related data on the purchase page. During the process, the buyer and seller perform point-to-point transactions on the chain, and the margin is locked in the smart contract and released to all parties after the transaction is successfully settled. The process of determining whether the transaction is completed mostly requires manual review. It simplifies the transaction process, makes prices transparent, and greatly reduces the risk of financial losses caused by fraud.
b) Platform data: Taking $SWELL as an example, the Total Volume in the Whales Market on the same day was $242,394. However, the OTC assets supported by the Whales Market are far more than AEVO.
c) Platform features:
i) Security: Matching orders in a transparent and open manner through smart contracts to ensure the safety of users’ funds.
ii) Asset diversity: Supports a variety of different target transactions, such as NFT and protocol points.
iii) Better experience: When a large order appears and one user cannot purchase it, he or she can choose to purchase a certain amount of shares and place an order with other buyers.
Current dilemma
The evolution from high-risk over-the-counter transactions guaranteed by intermediaries to transactions completed by platforms through smart contracts is a crucial step for the entire premarket, but we still cannot ignore the current difficulties.
Source: People Matters
Liquidity crisis: Currently, most of the Pre-Launch Tokens are facing the risk of insufficient liquidity. Even Swell, which has the largest trading volume on AEVO, has a trading volume of less than $1M in 24 hours. Low liquidity leads to large fluctuations in token prices, which is extremely risky. On the other hand, it also prevents whales with strong financial resources from participating in the trading of the token with large positions. In theory, the higher the total trading volume, the closer the price is to a reasonable value.
Risks brought by some centralized mechanisms: Take the Whales Market as an example. In the recent transaction of a popular BTC NFT "RuneStone", the risk brought by centralization appeared. Due to the huge transaction volume of the NFT and the transfer on the BTC chain, it requires a lot of manual review to verify whether the NFT has arrived and whether the GAS fee used for the transfer is sufficient. In addition, the airdrop arrival time of the NFT itself is different. During the delivery, many users said they encountered problems. Under the influence of these multiple factors, the process of completing the order has become more tortuous, and centralized review still has problems.
High risk of premarket: There are many uncertainties in the premarket transaction process. These factors may come from sellers, platforms, and changes in the airdrop standards of the agreement, all of which may cause you losses. In addition, investors need to face challenges that are higher than those in secondary market transactions. They need to have superb professional capabilities in token pricing, and the risks are extremely high.
Low efficiency in the use of funds: In the process of over-the-counter transactions, it is often necessary to pledge margin to lock orders, but the actual delivery date of most projects is still some time away from the order locking date. During this process, the margin needs to be locked all the time, which greatly reduces the efficiency of fund use.
4. Technology Integration: Interaction between DeFi and Traditional Markets
Although DeFi has been questioned countless times in the past bear market, we believe that this track is still full of infinite possibilities and opportunities in the future. With the continuous emergence and innovation of new gameplays of protocols such as Pendle, Ethena, and Eigenlayer, DeFi will further expand its boundaries and provide users with more diversified services and more flexible asset management tools. At the same time, with continuous innovation, we will see more gameplay based on PT/YT. This good cooperation with LRT has also opened up a higher ceiling for the interest rate swap market.
We look forward to seeing more and more applications of interest rate swaps, and to a future where everything can be swapped, bringing more innovative products and services to users. However, we still need to pay attention to risks. There are still risks behind LRT's continuous nesting of dolls to obtain profits, because the liquidity correlation between most protocols is extremely strong and the volume is huge. The impact caused by hacker attacks or protocol abuse is also very terrible. DeFi's continuous innovation subdivision track is a fertile ground, and interest rate swaps are precious seeds on this fertile ground, full of possibilities.
Pendle's innovative practices
Pendle's model provides investors with a new way to flexibly manage and optimize interest rate returns in a bull market by separating financial products (PT and YT) that separate principal and returns. This innovative practice not only improves market liquidity, but also introduces a new way of changing hands, namely, asset management and trading through the automation of smart contracts. Although it provides an efficient trading mechanism, this model also places higher demands on the expertise and risk management capabilities of market participants. For example, the separation of PT and YT may lead investors to invest without fully understanding their structure, increasing the speculation and instability of the market.
Premarket's on-chain trading platform
Through decentralized platforms such as AEVO and Whales Market, Premarket trading has introduced pre-market trading in the traditional stock market to the Web3 world, allowing a wider group of investors to participate in token trading of high-profile projects. This trading method not only improves the accessibility and transparency of transactions, but also reduces the intermediary risk in traditional over-the-counter transactions. Although on-chain platforms reduce the risk of middlemen doing evil, new technical challenges and the possibility of operational errors still exist. For example, vulnerabilities in smart contracts or operational errors may lead to the loss of funds, especially when complex transaction logic and high amounts of funds are involved.
In this round of bull market, we have seen many projects issuing tokens when the market liquidity is sufficient, and this phenomenon will continue to occur. The trading process before TGE is also indispensable. The gameplay of Premarket will also be known to more people. At the same time, we can also expect good development in the subsequent Premarket:
source:RISMedia
Higher degree of decentralization: As the platform continues to improve its rules, Premarketplace may place more emphasis on decentralization in the future. This means that Premarketplace will continue to reduce the number of steps that require human participation, increase transaction speed, and become more decentralized.
Wider asset coverage: Future Premarkets may support more types of asset transactions and create more diverse asset transactions, just as Whales Market began to support asset transactions such as protocol points and NFTs. This will provide investors with more diversified investment options and promote liquidity and trading activities for more assets.
Smarter trading experience: In the future, PremarketPlace may provide a smarter trading experience through the use of smart contracts + AI. For example, AI functions can be used to estimate the price range of projects, AI can be used to lower the user's participation threshold, and personalized trading suggestions can be provided, thereby improving trading efficiency and user experience.
Based on the current innovation trends of Pendle and Premarket, the following interesting and innovative ways of playing can be derived, which are closely linked to the existing trading mechanism and market structure:
1. Dynamic Interest Rate Swap Protocols
Pendle's PT and YT mechanisms can be further developed into dynamic interest rate swap agreements, allowing users to dynamically adjust their interest rate swap contracts according to market conditions. This agreement can combine real-time market data and AI prediction models to automatically adjust interest rates, allowing users to obtain the best interest rate returns in market fluctuations.
Core mechanism: Through the combination of smart contracts and AI models, market changes can be monitored in real time and interest rates can be automatically adjusted.
Advantages: Improve the flexibility of investment income and reduce the tedious operation of users manually adjusting interest rates.
Risk management: High-precision market prediction models and sound smart contract codes are required to avoid prediction errors and contract loopholes.
2. Decentralized Cross-Platform Arbitrage Tools
Using Premarket's on-chain trading platform, decentralized cross-platform arbitrage tools can be developed. These tools allow users to conduct arbitrage transactions between different DeFi platforms, automatically identifying and executing price difference transactions through smart contracts, thereby achieving risk-free arbitrage.
Core Mechanism: Use smart contracts to monitor price differences across multiple trading platforms and automatically execute arbitrage transactions.
Advantages: Improve market efficiency, reduce price differences, and provide risk-free profit opportunities.
Risk management: Real-time data synchronization and low-latency trade execution are required to prevent arbitrage trade failures.
3. Smart Contract Insurance Mechanisms
Introducing smart contract insurance mechanism in Pendle and Premarket transactions to provide users with transaction insurance services. When a smart contract fails or the market fluctuates abnormally, the insurance mechanism can automatically compensate users for losses and ensure the safety of users' funds.
Core mechanism: Insurance conditions are set through smart contracts, and compensation is automatically executed when specific events are triggered.
Advantages: Increase user confidence and encourage more users to participate in DeFi transactions.
Risk management: Adequate insurance fund pools and clear compensation conditions are needed to prevent abuse and insufficient funds.
4. Multi-Layer Staking of Synthetic Assets
Based on Pendle's PT and YT mechanisms, a multi-level pledge mechanism can be developed, allowing users to pledge their income assets at multiple levels and obtain different levels of income and rewards. This mechanism can attract more funds to participate in staking and improve overall market liquidity.
Core mechanism: Users can pledge their assets at different levels, with each level corresponding to different returns and rewards.
Advantages: Provides diversified investment options and attracts investors with different risk preferences.
Risk management: A clear hierarchy and profit calculation method is required to prevent management difficulties caused by complex pledge levels.
These cases reveal how new trading mechanisms improve efficiency and transparency in the cryptocurrency bull market, while also bringing new risks and challenges. The Pendle and Premarket cases show that the integration of DeFi technology with traditional markets is driving financial product innovation, such as intelligent trading systems combined with AI, which can provide more personalized and efficient trading strategies.
