Original Author: CryptoTrissy
Original compilation: aididiaojp.eth, Foresight News
Yields have volatility similar to token prices, rising in bull markets and falling in bear markets. Pendle Finance’s goal is to provide users with attractive yields by increasing yield exposure during bull markets and hedging yield declines during bear markets.
Simply put, Pendle is a permissionless DeFi yield protocol where users can execute various yield management strategies.
First, Pendle packs the income-generating tokens into SY (standardized income token), and then SY is divided into two parts, the principal and the income, which are PT (principal token) and YT (yield token), which can be Trade through custom V2 AMMs.
In traditional finance, institutional participants rely on various hedging strategies to protect their positions, such as future yield contracts, and Pendle aims to bring the huge derivatives market (over $400 trillion in notional value) into the DeFi category.
By creating yield markets in DeFi, Pendle will unlock the potential of yield. Pendle enables users to execute advanced earning strategies such as:
discounted forward assets
Provide low-risk fixed rate of return, stable growth
Take advantage of exposure to future income streams without collateral
A combination of any of the above strategies
Pendle Liquidity Providers (LPs) earn zero impermanent loss (IL) simply by holding their positions to full maturity. All Pendle liquidity pools will trade PT with its underlying assets, for example, the stETH pool will trade PT-stETH with stETH.
What is PT-stETH?
PT is the principal token, and all PT can be redeemed for the target at a ratio of 1:1 when it expires. This means that all PT-stETH in the liquidity pool can eventually be exchanged for stETH. The same is true for other liquidity pools, given enough time, the value of all PT is equal to the underlying asset.
Knowing this, it doesn’t matter if the liquidity pool contains:
50 PT-stETH + 50 stETH and 90 PT-stETH + 10 stETH at maturity, both contain 100 stETH.
Impermanence Loss IL
There may be fluctuations in the price ratio of the PT underlying prior to expiration, which may result in a slight, temporary IL.
But as long as the holding expires, providing liquidity on Pendle can be a viable way to superimpose yield on top of long positions, or an effective way to accumulate assets such as LSD.
If you think that the rate of return of assets will decline and you need to hedge the rate of return, you can achieve this goal by purchasing PT. Since the underlying asset is guaranteed after maturity, APY is effectively locked in the current implied rate of return when purchasing PT. Another way to think about it is to fix the rate of return at the current implied rate of return.
For example, if you buy PT-aUSDC with a maturity of 1 year at an implied rate of return of 5%, it means that for every 1 USDC spent on PT, you will get 1.05 USDC at maturity and redemption.
On the other hand, if you think that the rate of return of the asset will rise and you need to bet on the rate of return, you can increase your exposure to the rate of return of the asset by purchasing YT only by purchasing the rate of return. The return will be determined by the fluctuation of the base APY.
Additionally, buying YT is more capital efficient than buying the underlying asset, meaning that for the same amount of capital, you can buy more YT, increasing your yield exposure.
For example, if the price of YT is 5% of the price of the underlying asset, any increase in the yield of the underlying will result in a 20x increase in your return because 20x YT can be purchased.
If the yield on an asset is deemed unlikely to fluctuate wildly, one can choose to provide liquidity to gain some additional yield from swap fees and incentives.
Because the prices of PT and YT are linked to the price of the underlying asset, that is, PT + YT is equal to the underlying price, the underlying asset price fluctuation does not have the IL risk that most other yield agreements have. The only IL risk comes from fluctuations in PT and YT demand, which is inherent in all liquidity pools.
If liquidity at maturity is provided, IL will be constrained and minimized because the two assets provided will have the exact same value at maturity. This liquidity provision can also act as a hedge for any PT or YT position.
Say you have 100 aUSDC with an APY of 5%, and after one year you will have 105 aUSDC in your wallet.
Now, instead of waiting for a year, you can directly use Pendle to divide aUSDC into 100 aUSDC-PT and 5 aUSDC-YT.
If yields are thought to fall:
Make an instant profit by selling your aUSDC-YT on the market for $5. To redeem your stake, you will need to buy back 5 aUSDC-YT at a later date.
If you just want to lock in a gain without speculating, you can sell YT for $5 and use the money.
After one year, the principal will be unlocked, which means future earnings can be used immediately now.
Team tokens are locked until April 2023. Beyond that, any increase in circulating supply will be determined by incentives and contributions made by ecosystem builders.
There will be 667,705 unlocks per week until October 2022, a 1.1% weekly decrease until April 2026. Current token economics allow for 2% inflation for incentives.
Pendle governance tokens are escrowed PENDLE or vePENDLE.
vePENDLE further decentralizes Pendle, while using vePENDLE also unlocks new functionality for PENDLE holders, increasing the utility of the token.
vePENDLE also creates another home for the PENDLE token, providing more stability to the price and protocol of the token.
Stake PENDLE to get vePENDLE, and the amount of vePENDLE is proportional to the pledged amount and period, the longest pledged time is 2 years.
vePENDLE will decrease over time and reach zero after the lock duration expires, then staked PENDLE will be unlocked.
If you want to increase the value of vePENDLE, you can choose to extend the pledge period or increase the pledge amount.
revenue stream flywheel
Pendle takes a 3% fee on all earnings accrued by YT. Currently this fee will be fully distributed to vePENDLE holders and the team will not receive any revenue, but this may change in the future.
Part of the proceeds of PT that has not been redeemed at maturity will also be distributed to vePENDLE holders in proportion.
For example, PT-aUSDC at maturity is equivalent to the value of aUSDC. If not redeemed, all proceeds will be converted to stablecoins and distributed to vePENDLE holders as protocol revenue.
All these rewards will be converted to USDC, and vePENDLE holders can earn regular profits through the payment contract.
vePENDLE powers Pendle’s incentive mechanism. vePENDLE holders can obtain effective incentives by voting for rewards to flow to different liquidity pools.
Simply put, the higher the value of vePENDLE, the more incentives you get.
A snapshot of all votes will be taken at midnight every Thursday, and the reward rate for each liquidity pool will be adjusted accordingly. The voting pool also entitles vePENDLE holders to 80% of the swap fees charged by the liquidity pool.
LP reward boost
If you still act as LP during the period of holding vePENDLE, LP’s PENDLE reward and vePENDLE reward will be further increased, and the value of vePENDLE can increase by up to 250%.
Although the vePENDLE value decreases over time, the LP lift rate is calculable upon first application. The boost rate will remain constant until the LP position is updated, in which case the rate will vary based on the current vePENDLE value.
To get boost rewards, you should lock PENDLE into vePENDLE before LPing.
If you are already acting as an LP and want to use vePENDLE to boost your rewards, you must do so manually after voting.
In DeFi, we all like to compare with traditional finance and say something like “There is a 400 trillion market for notional derivatives, if we only capture 1% of it, the DeFi ecosystem will expand 50 times, etc.”
While this is true, it is important to remain rational. We’ll eventually start to take market share from traditional markets, but it’s probably going to be at least five to ten years before we become their focus at some point. ntonio Juliano, founder of dYdX, shared the same sentiment that we haven’t really started to see mass adoption of DeFi in the same time frame.
One of the biggest reasons for this is legalization and regional regulatory policy issues. We’ve seen the recent news about Kraken being targeted by staking services and being treated as a security, and while most of us would agree that’s pretty outrageous, with the FTX debacle, we’ll probably see the SEC for the foreseeable future. A strong shot, and that’s not what we were hoping for.
So far, let’s talk about how infrastructure will play a big role in mass adoption. We will see the continued creation of tools that will benefit mass adoption before the public realizes, as the current user experience lags far behind traditional industries.
Let’s see how traditional bonds work. Ordinary people who want to invest in bonds can buy and hold bonds through brokerage firms and online brokers, which will handle the custody and management of the bonds on behalf of investors. This means the physical bonds will be held by a brokerage firm and investors will receive regular statements showing their ownership and investment details.
When an investor purchases a bond through a brokerage firm, the bond is deposited in the investor’s account with the brokerage firm, and interest payments are credited to the account. Brokerage firms also typically deal with the bond’s maturity date, including repaying the bond’s face value at maturity.
We see that users mainly entrust to brokerage companies and do not have to worry about custody issues. While this is seen as a negative in our decentralized world, most of the wealth accumulated is enough to prosper from this incentive.
Pendle Finance can provide the same service, but users can act as their own brokerage firm and do not have to trust a third party. Not only are users free to self-host, but they can now fully maximize their returns or reduce their risk based on financial projections.
It will be a continuous trend of DeFi to provide users with diversified services of customized income strategies. Market makers or LPs can more effectively hedge their positions through Pendle’s liquidity provisions, allowing larger participants to choose to enter the market due to less volatility. Battle-tested smart contracts and ample liquidity are prerequisites for larger institutions to participate.
Under what conditions is the project able to perform well
Pendle was launched during the last bull market and until recently, activity was low last year. The team is constantly innovating and enabling rapid growth and adapting to new ecosystem designs through new partners.
Pendle Finance has been an innovator in yield strategies and will benefit from the upcoming EIP-4844 upgrade as it will greatly reduce the cost of Rollup. The Arbitrum ecosystem will soon be in the spotlight as economic conditions will greatly favor products and applications. DeFi development has been hindered due to high fees and non-scalable technology, and now that this barrier is no longer there, we will see a rapid increase in user activity.
In addition, vePENDLE’s ability to generate revenue through multiple ecosystems is also worthy of attention. As mentioned earlier, if you act as an LP while holding vePENDLE, the PENDLE incentives and rewards for all LPs will also be further increased, up to 250% based on the value of vePENDLE.
With the recent proliferation of Liquid Staking Derivatives (LSDs), Pendle will accelerate as they develop. In turn, value will flow back to Aura, Balancer, Lido, RocketPool, etc. Because users can reduce risk through Pendle Pro’s yield strategy, depending on their risk tolerance, they can increase single-digit APY to double-digit APY for assets like stETH with little to no security risk.
As DeFi matures, we will see an influx of more institutional players due to this attractive yield and the ability to augment safe assets like ETH. Now that DeFi has learned from Terra’s downfall, what needs to change to provide stable liquidity and pegs for yield.
Liquidity providers can choose to reduce risk, as IL will be limited and minimized if maturing liquidity is provided. The only IL risk comes from fluctuations in PT and YT demand, which is inherent in all liquidity pools. This is possible because the two assets offered have the exact same value at maturity. This way, the liquidity provision can also act as a hedge for any of your PT or YT positions.
This is a step forward in the battle to minimize impermeability losses and increase flow, which is much needed for Pendle to succeed.
With the Shanghai update coming, I believe most people will be looking for alternatives to maximize ETH yield.
Leaving the boring topic of legalization aside, if the SEC continues to treat staking mechanisms as securities, it will stifle innovation and liquidity in the short term, but founders will eventually migrate to more crypto-native countries. We’re already starting to see this to some extent, it’s just a matter of when the SEC will give clear guidelines on what’s allowed.
The smart contract risk is huge, as TVL has had great success in terms of market cap, so if there is any flaw, it will be a prime target for hackers. The team is aware of this and is absolutely transparent when it comes to auditing.
Another consideration is that centralized competitors can offer better yield and custody. Ordinary people fear the complexities of cryptocurrencies and are more inclined to flee to the safety of centralized actors doing the hard work for them. Maybe we’ll see people learn from the recent crashes (FTX, Celsius, etc.), but when adoption increases, uneducated users will flock to centralized entities unless the user experience improves significantly.
With the industry still in its early stages, competition will be fierce and most companies can imagine looking for a way to get a head start on the market. Aave has a huge lead in lending and borrowing, and with Aave, it won’t be hard to add some customizable yield strategies to dominate the market share like it has done in the past few years. At the end of the day, liquidity is everything, and user activity can never make a qualitative leap without real guidance from reliable providers.
Ecosystem development is never easy. As a startup, your existence is unknown and it can be difficult to collaborate with those who are most beneficial to you. Unless the Pendle team continues to forge new partnerships for liquidity pools and incentives on other DEXs and platforms, PENDLE will not see the exposure it deserves. They’ve perfected the infrastructure, now it’s up to the team to prove they have the marketing talent needed to drive users to the product.
From a fundamental and price point of view:
One of the best demonstrations of DeFi’s ability to attract new players is TVL. Much of Lido’s success came from its super high TVL, which led to more trust in its mechanics, leading to more participation. Due to Pendle’s lock-up mechanism, if the price action remains stable, we will see their TVL consistently exceed the market cap with the incentive structure. That looks good for the valuation and could demonstrate to investors that they have product market fit.
To me, Pendle is like a more complete Aave, allowing for a greater degree of customization and internal hedging options, meaning users don’t have to look elsewhere. As mentioned earlier, liquidity plays a decisive role, and if the team can manage to continuously introduce new ecosystems and create impact, like they did with Camelot, then I think it has some potential to be a dark horse.
With LSD becoming a market hotspot, unstaked ETH and better Rollup scaling will generate new sparks in DeFi activity. Pendle will be in a perfect position for users looking to cash in on the buzzing ecosystem.
With the recent growth of wsETH and rETH, the Pendle team clearly understands the scale of this unlock and the potential it creates for their ecosystem. You can now provide liquidity and earn 28-63% APY, which is insane for one of the safest investments that can be made in cryptocurrency.
Even if Pendle grows 10x and hits a $170M market cap, it still needs to double to catch up to some top projects. Based on recent marketing and upcoming events, I believe it will have a nice price increase.
There are currently 27.5 million PENDLE locked, representing 18.3% of the circulating supply.
Charts and Liquidity Overview
Liquidity: Across the four listed DEXs (Sushiswap, Camelot, Kyberswap, and TraderJoe), there is ~$1.9 million in liquidity.
The only CEX it is listed on is Gate.io, so the liquidity is limited, and the 2% spread is only $500.
TVL is $27M and continues to grow, the previous ATH was $37M and the coin was around $0.8-$1 at the time, so the current price does not reflect the TVL.
Price levels to watch: $0.24, $0.33, $0.5, and $0.8-$1 until previous ATH of $2.
The condition to reach close to $2 in the next few months is a steady continuation of ETH’s uptrend, which will of course be affected by the explosion of the Arbitrum and Optimism ecosystems. Hopefully we see more LSD pools and new partnerships to facilitate more liquidity.