What Is Pendle (PENDLE)?
Pendle (PENDLE) is a permissionless yield-trading protocol that offers users the ability to manage and trade future yields of various yield-bearing Etherum assets such as staked Ether (stETH) or Aave’s interest-bearing tokens (aTokens). In traditional DeFi setups, managing and maximizing yield can be challenging due to the fluctuating nature of interest rates and the inability to separate the yield component from the underlying asset, limiting the flexibility and strategies that traders can employ to optimize their returns.
Pendle addresses this problem by enabling the tokenization of yield, which allows users to separate their yield-bearing assets into distinct, separate components: the Principal Token (PT) and the Yield Token (YT). Tokenization of these assets allows traders to better manage their yield trading, such as locking in fixed yields, speculating on yield changes, or hedging against market volatility.
Who Created Pendle?
Pendle was officially launched in 2021 by TN Lee, Vu Nguyen, and a pair of pseudonymous developers going by GT and YK.
Before founding Pendle, TN Lee, who serves as the CEO, was previously the head of Business Development at Kyber Network, a decentralized exchange (DEX) aggregator. His experience at Kyber Network provided him with the expertise in blockchain and DeFi protocols that was crucial in shaping Pendle’s approach to yield tokenization and yield trading.
Vu Nguyen, the Chief Engineer at Pendle, is a 3-time Math Olympiad gold medalist and was previously in charge of smart contract development at Digix, a project focused on tokenizing gold. His technical skills and experience in smart contract development were pivotal in creating Pendle’s protocol.
How Does Pendle Work?
Pendle operates as a permissionless yield trading protocol, allowing users to manage and optimize their yield strategies. The protocol's core functionality revolves around the concept of yield tokenization, which enables the segmentation of yield-bearing assets.
Standardized Yield Tokens (SY): Pendle begins the process by wrapping existing yield-bearing assets (such as stETH, aTokens, or cTokens) into Standardized Yield Tokens. SY tokens are then used within the Pendle ecosystem to facilitate the trading of yield and principal separately on Pendle’s Automated Market Maker (AMM).
The SY tokens serve as a standardized version of the original yield-bearing tokens, making it easier for them to be traded, split, and managed within the Pendle protocol. Once the tokens are standardized, they can be further segmented into Principal Tokens (PT) and Yield Tokens (LT).
Principal Token (PT): Principal tokens represent the original asset you’ve invested in and can be redeemed once the yield period (the time during which the asset generates returns) is over. You will receive the full value of the current market price of the asset at the time of redemption.
Because PTs have the future yield separated out, they often trade for less than the full value of the asset when initially purchased. The price of a PT at the time of purchase reflects only the principal amount of the investment, excluding any potential future returns or interest the asset might generate. As a result, PTs are typically sold at a discount compared to the total value of the original asset.
In traditional finance, PTs are similar to "zero-coupon bonds," which don’t pay interest but increase in value over time, giving you a fixed yield as they get closer to maturity.
Yield Token (YT): Yield tokens represent the future returns generated by the asset. The value of YTs fluctuates based on market expectations of the asset’s yield performance. Speculation comes from trading YTs, where traders buy or sell these tokens depending on their predictions of how much yield the underlying asset will produce over time.
If you anticipate that the asset will generate higher yields, you might purchase YTs expecting their value to rise, allowing you to profit when the yield is realized. The value of YTs reflects the market’s collective expectations of future yield, and traders can profit by accurately predicting these outcomes.
In traditional finance, YTs are like "coupon payments" from bonds, where you can earn money from the interest if it ends up being more than what you paid for the YT.
Yield tokenization lays the groundwork for the trading that takes place on the Pendle platform, which is made possible by its Automated Market Maker (AMM).
Pendle’s Automated Market Maker (AMM)
A market maker in traditional finance terms refers to a middleman who actively quotes two-sided markets in a security. If you want to buy a stock and there's no one selling it at the exact moment you want to buy. A market maker steps in and offers to sell you that stock at a price they’ve set. Similarly, if you want to sell a stock, the market maker might buy it from you. Market makers ensure there’s always someone to trade with, ensuring liquidity and smooth transactions.
Pendle’s v2 Automated Market Maker (AMM) plays a similar role in the world of DeFi. Instead of a person or firm acting as the market maker, Pendle uses smart contracts to automatically set prices and facilitate trades between different tokens. By doing so, Pendle allows PTs and YTs to be traded in a way that maintains continuous liquidity, dynamically adjusting prices based on real-time supply and demand. The process reduces slippage and ensures that trades can be executed at fair market values, minimizing costs for traders while enhancing overall market stability.
How Does Pendle Improve Yield Management?
Unlike traditional yield farming, where users typically lock up assets to earn variable returns that are heavily influenced by market conditions, Pendle offers more granular control over yield management. Yield tokenization allows users to separate the yield from the principal, enabling them to trade these components independently. Segmenting funds this way gives traders the flexibility to secure fixed yields or speculate on future yield.
Fixed Yield: Users can secure a predictable return by holding their Principal Tokens (PT) until they reach maturity. Suitable for traders looking for steady gains, as the value of PTs appreciates towards the full value of the underlying asset over time, regardless of market volatility.
Example: If you purchase a PT that represents 1 stETH at a discount (say, for 0.95 stETH), and you hold it until maturity, you can redeem it for the full face value of 1 stETH, which is the value at the time you bought it. The yield you earn is the 0.05 stETH difference, which is guaranteed, hence "fixed yield".
Yield Trading: By trading Yield Tokens (YT), users can speculate on changes in future yields, allowing them to maximize returns during bullish markets when yields are expected to rise or to hedge against potential downturns by adjusting their exposure to future yield.
Example: You purchase a Yield Token (YT) tied to stETH with a 10% expected annual yield. At the time of purchase, you pay a price based on this expected yield.
Speculating on Rising Yields: If you expect the yield on stETH to increase due to positive market conditions (like a rise in demand for staking or changes in Ethereum network activity), you can buy YTs anticipating that their value will go up. For instance, if the yield on stETH increases from 10% to 15%, the value of your YT would rise because it now represents a higher expected return. You could then sell the YT at a higher price than you bought it, thus profiting from the increase in yield.
Hedging Against Falling Yields: Conversely, if you believe the yield might decrease due to market downturns or less favorable conditions (like lower staking rewards or increased network fees), you might choose to sell your YTs before the yield drops. By selling early, you avoid holding a YT that represents a lower future yield, thus hedging against potential losses.
Liquidity Provision: Users can provide liquidity to Pendle’s AMM pools, which supplies both PTs and YTs. In doing so, users can earn trading fees from both the PT and YT transactions within the pool.
Why Trade PENDLE?
The PENDLE token serves several important functions within the Pendle network, contributing to the overall operation of the protocol. Here are some of its key use cases:
Bootstrapping Liquidity
PENDLE is used as an incentive to bootstrap liquidity for protocols within the Pendle network. By providing these rewards, the platform encourages users to contribute liquidity, which is essential for maintaining active and efficient trading pools.
Incentive Channeling
Users can lock their PENDLE as vePENDLE (vote-escrowed PENDLE) for up to two years. Holding vePENDLE allows users to participate in governance by voting on the direction of emission rewards to different pools.
Different Pools: Pendle has multiple liquidity pools where users can deposit their assets to provide liquidity. Each pool might involve different assets or pairs of assets.
Voting on Emission Rewards: By holding vePENDLE, you can vote on which of these pools should receive more of the newly created PENDLE tokens as rewards. The idea is that if a pool has more rewards allocated to it, more users will be incentivized to provide liquidity to that pool, making it more robust and liquid.
Fee Accrual
Locked vePENDLE holders accrue fees from two primary revenue sources:
Swap Fees: These are fees generated from all swaps conducted on Pendle’s Automated Market Maker (AMM). Pendle collects a percentage-based fee that varies based on the time to maturity of the assets being swapped. The specific fees are shown in the dApp and are currently set by the pool deployer, which is the Pendle team.
Yield Token (YT) Fees: Pendle collects a 3% fee from all yield accrued via YT. Remarkably, 100% of this fee is redistributed back to vePENDLE holders, providing a continuous stream of revenue to those who are actively involved in the ecosystem.
PENDLE Tokenomics
Launched On: April 2021
Total Supply: 258,446,028 PENDLE
Circulating Supply: 157,852,084 PENDLE
Price Per Token: US$2.75 (as of 15 August 2024)
Total Market Cap: US$433,962,722 (as of 15 August 2024)
Token Distribution:
Binance Launchpool: 2.00% of the total token supply
Investors: 15.00% of the total token supply
Public Sales: 7.00% of the total token supply
Team: 22.00% of the total token supply
Foundation/Treasury: 16.00% of the total token supply
Advisors: 1.00% of the total token supply
Liquidity Incentives: 37.00% of the total token supply
Vesting Schedule: All token categories fully vested as of April 2023.
How to Trade PENDLE on Flipster?
Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).
Click the [Trade] tab.
Search for PENDLE and click on it.
Select the leverage (up to 100x).
Select either a Trigger Order or Market Order.
Input the amount of crypto you wish to trade, or select a percentage of your available funds to use.
Once you have confirmed the details, click the [Long] or [Short] button to open a position.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.