In-depth analysis of Pendle: The "Yield Flywheel" of the LSDFi track

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Biteye
7 months ago
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Pendle yield tokenization protocol enables discounted asset purchases and yield rate trading.

Original Author: Biteye Core Contributor Lucky

Original Editor: Biteye Core Contributor Crush

Original Source: @BiteyeCN

Pendle is a yield tokenization protocol built on multiple chains, allowing users to purchase underlying assets at a discount by separating the principal and interest of the yield tokens.

At the same time, for yield traders, they can express their bullish or bearish views on yield assets by trading yield tokens (YT). The detailed mechanism will be explained in the following text.

The development history of Pendle is as follows:

  • Pendle was launched on the Ethereum mainnet in June 2021;

  • In November 2021, it launched on Avalanche and completed two rounds of financing in the same year, including institutional financing of USD 370 million and crowdfunding financing of 4337 ETH;

  • In November 2022, the V2 version was officially launched, and the AMM model was redesigned to improve trading efficiency;

  • In March 2023, Pendle launched on Arbitrum;

  • In July 2023, Binance announced the listing of Pendle, and then Pendle announced the launch on the BSC mainnet, taking another big step in the multi-chain process;

01 Earn Rewards with Liquidity Mining

Before understanding how to earn rewards through liquidity mining, let's briefly understand the mechanism of Pendle:

First, Pendle encapsulates interest-bearing tokens such as cDAI and stETH into SY (Standardized Yield Tokens), for example, stETH becomes SY-stETH after encapsulation.

Then, SY is split into principal and yield, which are PT (Principal Tokens) and YT (Yield Tokens) respectively. This process is called yield tokenization, which separates the yield into independent tokens.

PT is the principal token, and holding PT represents ownership of the principal, which can be redeemed after maturity. For example, if a user owns a PT-stETH that matures after 1 year, it means that the user can redeem stETH worth 1 ETH after 1 year.

YT is an income token that represents ownership of all current earnings generated by the underlying assets and can be claimed at any time. For example, if a user holds 1 YT-stETH and the stETH yield is 5%, then after one year, the YT token will accumulate 0.05 stETH.

Therefore, from the above process, we can derive that YT+PT=SY.

Through this mechanism, Pendle has designed an AMM pool that only requires providing single-sided liquidity. The default setting for the liquidity pool is PT/SY, and by leveraging the YT+PT=SY relationship, PT/SY pool can be used for lightning swaps of YT tokens.

(Example: When a buyer purchases an income token (YT), they can send SY tokens, and the AMM contract will extract SY from the liquidity pool to mint PT and YT, which is then sent to the buyer. The PT can be sold and exchanged for SY back into the liquidity pool.)

In summary, Pendle achieves the effect of trading principal token PT and income token YT through a single PT/SY pool.

(It is important to note that both the principal token and the income token have an expiry date, and in the AMM model, their prices are influenced not only by market traders but also by time.

For the principal token PT, its trading value increases over time to ensure a 1:1 exchange with the underlying assets at expiry;

For the income token YT, as it represents the interest generated from the current date until the expiry date, with the passage of time, the duration from now to the expiry date becomes shorter, and the generated interest decreases gradually. Therefore, the value of YT automatically decreases over time and becomes 0 at the expiry date.

For LP, the LP's position value = PT+SY = 2SY-YT, so if LP is held until expiry, liquidity providers will not incur any loss without compensation.)

Liquidity Provision:

1) In Simple mode: After selecting the desired liquidity pool, users can choose any single mainstream asset to provide liquidity, such as ETH, wBTC, USDT, USDC, etc.

Pendle will automatically convert the user-provided assets into income assets on KyberSwap, which are then wrapped into standardized SY tokens and added to the liquidity pool.

2) In Pro mode: Users can provide or withdraw liquidity by using the Zap in/Zap out operation, and they can also choose whether to enable zero impact price Zap mode.

In Zap in mode of the pattern, simply put, when adding liquidity, a portion of the underlying assets will be used to purchase PT from the PT/SY pool, and the rest will be wrapped as SY. However, buying PT may cause price impact. When Zero Price Impact Zap mode is enabled, the underlying assets will be fully wrapped as SY, with a portion used to mint PT and YT. Then PT and the remaining SY are used to provide liquidity, and YT is returned to the user's wallet. This eliminates the steps of buying PT, thus avoiding any potential price impact.

As we mentioned before, providing liquidity in Pendle doesn't incur impermanent loss as long as it's held until maturity. So as LPs, what are the sources of income available to us? Here are the main sources of income for LPs in Pendle:

1. Transaction fees generated by the liquidity pool;

2. Rewards in $PENDLE tokens;

3. Yield from the underlying assets;

4. Incentives from token projects (not always present);

(In addition, vePendle holders can also have boosted yield)

In-depth analysis of Pendle: The

02 How to engage in yield farming

When understanding yield farming, it's important to realize that the underlying yield of any asset is volatile.

For example, when depositing in Compound, we deposit USDC, but the interest rate we receive will fluctuate based on market loan demand.

When staking ETH, the staking yield we receive also fluctuates based on the number of miners and the activity and income of the blocks.

The following chart shows the deposit asset interest rate curve in Compound from 2020 to 2022, and it can be observed that in bull markets, interest rates rise, and in bear markets, interest rates decline, with fluctuations ranging from 0% to -15%. In-depth analysis of Pendle: The

Therefore, in response to interest rate fluctuations, users can make corresponding operations in Pendle to express their views and profit. The following will be introduced one by one:

1) When users are optimistic about future yields, they can hold/buy YT.

Because YT represents the yield from the present to the expiration date, users can take a long position on YT to express their bullish view on yield rates if they believe in the future performance of the underlying asset yield rates.

2) When users are not optimistic about future yields, they can hold PT/sell YT.

If users do not have a positive outlook on the future trend, they perceive that the current interest rate is higher than future interest rates. Therefore, it is best to lock in the current interest rate by holding PT. Therefore, holding PT to lock in the current interest rate would be a better operation.

At the same time, Pendle has also introduced a reference value for underlying APY, which serves as a convenient reference for users to trade yields. (Comparing the yield of underlying assets with the implied yield, the latter is the yield obtained from market transactions, which is the fixed yield rate/buying discount.)

1) When the yield of holding underlying assets is greater than the implied yield, it is a good time to consider buying YT to long the implied yield of assets or selling PT to obtain underlying assets and become an LP at the same time.

2) When the yield of holding underlying assets is less than the implied yield, it is a good time to consider the opposite direction of the aforementioned operations.In-depth analysis of Pendle: The

In order to better understand the profitability of different operations, Pendle has launched a profit calculator. Figure 1 shows the profit that can be generated by various operations when expecting a future yield rate of 6% for stETH.

It can be seen that buying YT at this time can yield a nearly 50% increase when the future yield rate reaches 6%.

However, it should be noted that if the future yield rate only reaches 2%, as seen in Figure 2, the loss would be as high as 53%. Therefore, trading YT is a high-risk high-reward operation.

In-depth analysis of Pendle: The In-depth analysis of Pendle: The

03 vePendle and its Ecological Status

In version 2, the Pendle team officially introduced the Ve model into the Pendle token, giving the Pendle token value capture ability.

Currently, users can obtain vePendle by locking Pendle. The lock-up period ranges from 1 week to 2 years. The longer the lock-up period, the more vePendle one can obtain with the same amount of Pendle. Currently, the total locked Pendle has reached 38,038,735 tokens, with an average lock-up period of 429 days.

Here are the benefits of holding vePendle:

1) It can boost rewards when providing liquidity, with a maximum boost of 2.5 times the original base APY.

2) vePendle holders will receive the combined rewards of "Base APY" + "Voter APY"=Max APY from holding and voting.

Base APY source: Pendle charges a 3% fee on all income generated from YT. Currently, 100% of this fee is allocated to vePENDLE holders. The portion of income from PT that has matured but has not been redeemed by the holder will also be distributed proportionally to vePENDLE holders. These rewards constitute the "Base APY" of vePENDLE.

Voter APY source: veP holders can use voting to allocate liquidity rewards from the Pendle token model to different pools, thereby incentivizing liquidity in the voting pool.

vePendle voters will have the right to receive 80% of the trading fees from the voted pool, which constitutes the "Voter's APY".

The following graph shows the historical and current APYs that vePendle holders can receive from voting:

In-depth analysis of Pendle: The In-depth analysis of Pendle: The

It can be seen that the adoption of the vePENDLE model has increased its value capturing ability and has attracted greater interest and demand from liquidity providers and long-term investors who are optimistic about Pendle.

Currently, the Pendle protocol uses the veToken and Gauge voting model for liquidity mining incentives. Therefore, there are multiple projects seeking vePENDLE voting rights through similar approaches to Convex in order to guide liquidity incentives for Pendle. The following examples show this:

In-depth analysis of Pendle: The

Above projects attract a large number of ordinary users to provide liquidity through the mechanism of obtaining Boost returns without the need for collateral, through the collection of vePEDNLE.

Currently, the construction of these protocols around Pendle is conducive to the long-term development of the Pendle protocol, from the perspectives of increasing influence and attracting funds.

(It should be noted that the liquidity of $mPENDLE, $ePENDLE, and $PENDLE is currently poor, with significant discounts.)

04 Pendle Data Analysis

As of July 18th, the total TVL of Pendle is 143.76 M. From the data from Defillama, we can see that the TVL of Pendle has been growing significantly since 2023, increasing nearly 10 times from around 15 M at the beginning of the year. Among them, nearly 70% of TVL comes from the contribution of the LSD sector.In-depth analysis of Pendle: The

(Source: https://defillama.com/protocol/pendle)

In-depth analysis of Pendle: The

(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?&)

In order to better understand the adoption rate of Pendle in the cryptocurrency market, we selected the collateralization rate and the number of Twitter tweets as observation indicators.

From the following graph, we can see that since the beginning of the year, the social media influence of Pendle has been increasing, with the number of Twitter tweets going from 0 for several consecutive months to nearly 20-40 tweets per week for discussion.

Twitter is one of the most influential platforms in crypto adoption, and the continued growth of Twitter influence can lay a good foundation for the large-scale adoption of Pendle.

From the perspective of user pledge, the amount of pledge on Pendle is also continuously increasing.

In-depth analysis of Pendle: The

The number of holders of Pendle can also indirectly reflect the confidence of users in the future of Pendle. The growth is shown as follows:

In-depth analysis of Pendle: The

(Source: https://dune.com/yulesa/Pendle)

From the current trading volume of Pendle protocol, its main protocol transactions are concentrated in the LSD sector, accounting for 55.58%. This indicates a close relationship between the development of Pendle protocol and the LSD track.

In the future, with further development of the LSD track, if Pendle can continue to maintain this growth trend, there is a high possibility of synchronous growth in TVL and various data with the LSD track.

At the same time, the second largest asset in terms of trading volume on this protocol is GLP, which is an interest-bearing token within GMX. GMX is currently the largest perpetual exchange on ARB, and its development status is also relatively good.

It can be seen that the major trading targets of Pendle are assets with stable development and a certain guarantee of yield, indicating a high attractiveness of such assets to users.In-depth analysis of Pendle: The

(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?&)

05 Pendle's multi-chain development

From the development history of Pendle, it first deployed on the Ethereum mainnet, and then successively launched on Avalanche and Arbitrum. Recently, it has also been launched on BSC.

It can be seen that Pendle has always maintained a good development plan and has been expanding in the direction of multi-chain. It can be said that it is currently the protocol that supports the most chains in the LSDFI track.

From the distribution of TVL in the graph below, it can be seen that due to the short time since the launch of the BSC chain, its TVL is mainly concentrated on ETH and Arbitrum.

(Due to the significant decrease in TVL and adoption rate of Avalanche in 2023, Pendle has shifted its development focus from this chain.)

On the other hand, since the launch of BSC is only a little over a week, its TVL is currently $4.6M, which is a good performance for a cold start. Currently, there are only 2 pools on BSC, all of which are for ETH. With the increase in pools in the future, the TVL on this chain is expected to further increase.

In-depth analysis of Pendle: The In-depth analysis of Pendle: The

(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?&)

06 Summary

Pendle is a relatively old Defi protocol that has recently developed rapidly. On the one hand, it keeps up with the development of the LSD track and timely launches relevant products;

On the other hand, it keeps up with the current trend of multi-chain development in the blockchain industry and actively deploys its products on multiple chains.

At the same time, this protocol has made significant changes to its token model this year. In version 2, it introduced the vePendle model, which greatly enhances the value capture capability of its tokens, attracting more users and investors to participate and build around the protocol.

In the future, if Pendle can continue to maintain a leading position in the LSDFi and develop along with the LSD track, it will likely have great growth potential.

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