Pendle is a DeFi protocol that provides a liquidity pool with low impermanent loss. It uses the veToken design. Holders can stake tokens to obtain vePendle, obtain income sharing, vote on the allocation of weekly liquidity incentives, and enhance their own LP income. Pendle has launched pools such as GLP and RWA to provide additional rewards to help other protocols attract liquidity and promote interest synergy in the DeFi ecosystem. Pendle strives to innovate and do things that don’t scale steadily, hoping to eventually verify PMF.
What is Pendle?

Product Introduction

Pendle is a DeFi protocol designed for the fixed income/interest rate swap market. Interest rate swap is a very large track in traditional finance, which refers to the exchange of fixed income and floating income of the same principal: for example, for the same dollar-denominated income, Xiao Y gives up fixed income in exchange for current income, and Xiao X gives up current income in exchange for fixed income.

Pendle achieves something similar on-chain, first splitting out two types of revenue:

The interest-earning assets (that is, the underlying assets that provide yields) are decomposed into YT and PT. For the same interest-earning asset, Pendle will decompose it into independent YT and PT based on different maturity dates.

YT represents the income rights of interest-earning assets. Holding YT will continue to obtain floating income from interest-earning assets until maturity, so holding YT means obtaining floating income; PT represents the residual value of interest-earning assets after stripping away the income rights. There is no income during the holding period, but after maturity, it can be exchanged for the corresponding underlying assets at a 1:1 ratio. Holding PT means obtaining fixed income.
Secondly, the AMM is designed so that these two types of income (PT and YT) can be swapped:

Pendle packaged interest-bearing assets into SY, and standardized the three common interest-bearing assets (Rebase, Accumulate, Distribute) into one type of token. Then it designed an AMM specifically for transactions between SY and PT. Through a mechanism called FlashSwap, YT transactions can also be conducted through this AMM without the need for an additional secondary market.

PTs of different maturity will have independent PT-SY liquidity pools. Because PTs face different duration risks, they will have different prices, which means different implied yields under different maturity.

In terms of token value capture, Pendle follows Curve and uses the veToken design. Pendle token holders can stake their tokens to obtain vePendle. The longer they stake, the more vePendle they will have. Holding vePendle can earn a share of the protocol's revenue, vote on the allocation of weekly liquidity incentives, and increase their own LP income.

Glossary

Base Asset: The principal of an interest-bearing asset with no yield, such as ETH or DAI

Interest-Bearing Assets: Interest-Bearing Assets, also called underlying assets, are assets with yields obtained after investing underlying assets in other DeFi protocols, such as stETH for ETH and sDAI for DAI.

a. Rebase type: If you hold a Rebase type token, the number of tokens will change automatically, and the income will be reflected through the change in the number of tokens. The exchange rate between the interest-bearing asset token and the underlying asset token is always 1:1, such as stETH and aToken.

b. Accumulate class: Holding accumulate class tokens, the number of tokens will not change, and the income will be reflected through the increase in the intrinsic value of the token. The exchange rate between the interest-bearing asset token and the underlying asset token will increase as the income accumulates, such as wstETH and cToken.

c. Distribute class: For holders of Distribute class tokens, the number of tokens will not change, and the income will be reflected through additional distributions, which require users to manually claim, such as the liquidity incentive part of GLP and LP tokens.
The Pendle product has the following types of users:

PT Buyer:

The logic of PT is similar to that of zero-coupon bonds. Users who want to obtain fixed income can directly purchase PT and wait for maturity to obtain the same amount of underlying assets. When purchasing PT, the discount of PT relative to the underlying assets represents the fixed rate of return under this period. It is suitable for ordinary users who need simple and stable financial products, as well as institutional users who want to reduce risks or build a more stable Market Neutral strategy.

PT/YT Traders:

The prices of PT and YT represent the implied interest rates under different duration risks. However, there are always differences in the market. Traders with different views on interest rates can express their views by trading PT/YT and profit from the transaction. Compared with holding PT until maturity, trading PT/YT or holding YT has the risk of losing principal. The essence of trading PT and trading YT is the same, but trading YT will have greater leverage, using less funds to leverage the implicit income of the underlying assets by dozens of times, and expand its income exposure several times.

Liquidity Providers:

Due to the characteristics of PT - there is a correlation between the price and the underlying asset, and the price of the underlying asset fluctuates within a certain negative premium range. After maturity, the price of PT is equal to the underlying asset, so the impermanent loss of providing liquidity for PT-SY is relatively small. The Pendle team has posted some IL backtests of liquidity pools on Twitter: in the worst case, IL is 0.85%, which is still very low. This type of liquidity pool with low impermanent loss has always been the favorite target of liquidity providers in the DeFi world. They use the currency standard to measure gains and losses, are willing to accept floating yields, and are willing to use the protocol relatively deeply.

Liquidity Buyers:

Liquidity buyers refer to various DeFi protocols that need to attract funds, such as the LSD protocol, the RWA protocol, etc. Because Pendle is built on the interest-bearing assets of other protocols and has a token design similar to Curve, for these DeFi protocols, incentivizing liquidity on Pendle is a more efficient way to attract funds, and also adds fixed income to their own interest-bearing assets.

Other DeFi protocols “nesting dolls”:

Due to the token design of Pendle and the unique characteristics of the two assets, PT and YT, a number of DeFi protocols have emerged in the market that are built on the basis of Pendle or have introduced Pendle assets to expand their own scenarios, such as StakeDAO, Penpie, Dolomite, Stella, Teller, Archi, etc.

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