1. Project introduction
Pendle Finance is a DeFi Yield Trading protocol deployed on Ethereum and Arbitrum. Yield trading may be difficult to understand. Simply put, Pendle is a DeFi protocol that allows users to achieve the following:
- Purchase an asset at a discount
- long short yield
- Low Risk Fixed Income
Pendle Finance achieves the above functions by splitting the interest-earning assets on DeFi into PT (principal token) and YT (yield token)
2. Implementation principle
The Pendle project team wrote an easy-to-understand tutorial to explain PT, YT and the meaning of their existence. The tutorial is very well written. If you are patient, you can directly click the link: https://app.pendle.finance/pro/ learn
If you are a financial professional friend, explain the principles of PT and YT in one sentence: PT is approximately equal to a zero coupon bond (Zero coupon bond), and YT is approximately equal to an interest rate swap agreement (Interest swap)
If you think the official tutorial is too long and you don’t want to read it, you can read the principles I wrote below, and try to understand it with zero foundation.
First of all, a concept was mentioned earlier – interest-bearing assets
All the underlying assets of the Pendle protocol are interest-earning assets. What are interest-earning assets? The stETH that everyone has come into contact with during the recent Shanghai upgrade, the aUSDC you get in AAVE, and the cDAI you store in Compound are all interest-earning assets.
For example, you pledged 1ETH in Lido to get 1stETH, and the current pledge income is 5%, then this 1stETH will become 1.05stETH in one year. In this example, your principal is 1stETH, and the interest is 0.05stETH.
So Pendle packaged the principal 1stETH into PT, and the income 0.05stETH into YT.
Seeing this, you may wonder, what is the point of doing this?
The essence of PT packaged with 1stETH principal is: if you hold this PT, you can get 1stETH after one year
The essence of the PY packaged with the future income of 0.05stETH is: if you hold this PY, then you can get the income corresponding to the principal of 1stETH after one year
The price of 1PT stETH will be less than 1stETH, because 1PT stETH can only get 1stETH after one year
So suppose you take PT to the market to sell, the selling price may be 0.96stETH, and you will price it at 0.04stETH corresponding to YT (PT+YT=1stETH, otherwise you can arbitrage without risk)
Funny things happen when you put PT YT on the market.
For buyers, PT is like selling stETH at a discount, but you have to wait a year before you can get stETH.
For buyers, YT is betting on the changes in the yield of stETH. Under the expectation of 5% pledged income, the price of YT is 0.04stETH, but there will always be someone who expects that the pledged income of stETH will increase in the future, so he will Buying YT, if the rate of return becomes 6%, then YT can get 0.06st ETH after one year.
The picture above is a PT stETH and PT stETH with an expiration time of one year. Among them, the price of PT is 0.957stETH, and the price of YT is 0.043stETH. The implied APY of YT is 4.5% (implied APY is the APY data deduced by price), which means that the market generally believes that the annualized return of YT is 4.5%. At this time, there is a user who expects the rate of return to rise in the future, for example, to 5.5%, then he will buy YT because he believes that YT is now undervalued. Therefore, the user’s operation is long the yield, and the corresponding YT seller is short the yield.
3. Project Highlights
1. The positive flywheel effect of the development of the DeFi industry and the increase in the types of interest-earning assets
Pendle is an “old” DeFi protocol that will be launched in 2021, but it has been tepid before. TVL will decline all the way in 2022, but will start to grow rapidly at the end of 2022. One of the key points is that Shanghai’s upgrade has brought the LSD sector into flames.
As mentioned earlier, Pendle’s protocols are all based on interest-earning assets. In 2021 when Pendle goes online, interest-earning assets are nothing more than aToken, cToken or LP that appear around lending agreements and DEXs. There are limited things that can be played. The POS pledge concept that emerged after the Ethereum Merge made the LSD pledge matryoshka segment more and larger in the type and volume of interest-earning assets. Pendle also launched a series of income strategies related to ETH LSD in the second half of 2022, allowing its TVL to grow rapidly. And the upcoming Shanghai upgrade is sure to further boost its TVL growth.
2. Simple is good
Different from most complex DeFi protocols, although Pendle has innovated the gameplay of PT and YT, they do not want to make the product too complicated. After all, things like interest rate swaps and zero-coupon bonds are really far away from users.
To use Pendle’s products, you don’t even need to understand his most basic principles of PT and YT. Pendle’s front-end interface looks like this:
In the front end of its Simple version, users only need to know that they can buy ETH at a discount through the agreement, and do not need to understand that the essence behind it is trading PT.
But there’s an old saying “If you don’t know where the revenue is coming from? Then you are the revenue”
So after clicking the corresponding strategy, the FAQ is displayed on the right side of the interface, briefly introducing several issues that users are most concerned about.
And as I said before when I introduced the principle, the principle tutorial written by Pendle is rare in the currency circle. It shows you the principle of the project like a cocoon, and users with basic DEFI knowledge can understand it. Pendle’s principle tutorial document is the core reason why I wrote this article, because in the big dye vat of the currency circle, reading good documents is really a kind of enjoyment.
3. Real income
In terms of token economics, Pendle refers to Curve’s VE model, and distributes all protocol income to vePendle’s Holder, which means that the higher the protocol’s TVL, the more management fees it charges, and the greater the Holder’s income.
From the perspective of innovation, Pendle’s mechanism is not new, but the highlight of Pendle is to package a product with complex principles as simple and easy to understand and operate as possible. **This is something I haven’t seen in many, especially recent DeFi protocols.
With the development of the industry, the composability of the DeFi protocol has spawned a variety of nesting doll products. But no matter how good or complex the product is, it still needs people to use it. Many DeFi protocols make people confused just by clicking on the operation interface. It is difficult for you to learn how to use it without spending hours in its documentation.
One of the original intentions of DeFi is to give ordinary people the opportunity to access finance at low cost, but DeFi is gradually developing in the direction of complexity and high barriers to entry. (Related reading: “Analysis of Pendle Finance: 3 times in 3 months, how to tell the LSD narrative?”)