Due to the complexity of the protocol, I will be breaking this down into two threads. In part 1 we will go through:
How Pendle works
Understanding PT/YT
vePENDLE
Ecosystem+adoption
I. How pendle works?
Pendle is a yield protocol that splits up a yield-bearing token into two components
with a fixed maturity date:
PT: Represents the principal of the underlying token
YT: Represents the yield accrued for the underlying asset
At maturity, PT is redeemable for the underlying asset, and YT is redeemable for the
yield earned by the underlying asset through the duration.
What qualifies as a yield-bearing token?
Proof-of-stake tokens, e.g. $stETH
LP Tokens, e.g. $GLP, $gDAI
Protocol tokens with staking emissions or fee sharing mechanism e.g., $APE,
$LOOKS.
In TarFi terms, this is analogous to valuing a vanilla bond, which is comprised of
face value redeemable at maturity, and coupon payments throughout the duration
of the bond. The current value is the discounted value of the two components.
A bond’s principal and future coupon payments are discounted based on the time
and discount rate to get the current value of the bond:
PT: Face value
YT: Coupon payments
Take stETH as an example, providing 1 ETH into Pendle, you can get: 1 PT stETH,
redeemable for 1 ETH at expiry (29 Jun) 1 YT stETH, redeemable for the yield
earned for 1 stETH from now - 29 Jun
PT/YT is traded through an embedded AMM, which allows for price discovery
between the two based on future expectations of the underlying token's yield.
II. Understanding PT/YT
Taking the same stETH example, at current prices:
PT stETH = 1735.31
YT stETH = 21.63
Days to maturity = 93 Days
Buying PT stETH is the equivalent to buying ETH at a discount, where in 93 days you
would be able to redeem it for 1 stETH.
Buying at current prices would net you:
(1+ 21.63/1735.31)^(365/93) = 4.95% APY.
Regardless of how much stETH earns in yield over the next 93 days, you lock up
4.95% up front.
Alternatively, buying YT is a leveraged bet on the future yield (until maturity) of
stETH.
Recall that at maturity, 1 YT is entitled to accumulated yield of 1 stETH throughout
the duration.
Should the yield of stETH increase above 4.95%, profits will be magnified.
III. vePENDLE
PENDLE is the native token of the protocol, it can be locked and staked for
vePENDLE, the vote locked token entitled to:
Governance rights
Protocol fees
Boosted rewards
PENDLE can be locked for anywhere from 1 week to 2 years, and decays overtime
until the end of the lock
A key difference between Pendle and other ve-models is that voting for a pool
allows you to earn 80% of swap fees earned from that pool in exchange for directing
emissions to the pool.
Additionally, vePENDLE holders also earns a 3% fee from all yield accrued by YT.
Lastly, if you are a LP in a pool while holding vePENDLE, your emissions and
rewards will be boosted by up to 250% based on your vePENDLE balance.
IV. Ecosystem+adoption
If you've been active at all on CT, you'd see the Pendle is the talk of the town.
However, Pendle isn't your hottest AI shitcoin.
In fact, the team has been building since 2021
Its TVL visibly died down in 2022, but has seen a resurgence over the past 4 months
- I would attribute this to:
LSD Narrative
Arbitrum deployment
#LSD - the original idea behind the project was create yield derivative markets for
PoS tokens, and Pendle has already integrated with @LidoFinance, @ankr, and
@Rocket_Pool
A renewed interest in ETH staking = good for Pendle
The biggest catalyst for any non-Arb project is deploying on Arbitrum. With
Realyield running rampant, degens are rushing over to trade the likes of $GLP and
$gDA
I still believe we're quite early to on-chain credit markets. For the most part I think
pendle is still mostly used by speculators (if there's data that says otherwise lmk),
but yield hedging will be an extremely important use case for sophisticated
investors.