In-depth analysis of Pendle The Yield Flywheel in the LSDFi Track
Analysis of Pendle's Yield Flywheel in the LSDFi Track
Pendle is a yield tokenization protocol built on multiple chains, allowing users to purchase underlying assets at a discount by separating interest-bearing tokens from their principal.
At the same time, for yield traders, they can express their bullish or bearish views on the yield of interest-bearing assets through trading yield tokens (YT). The detailed mechanism will be explained below.
The development history of Pendle is as follows:
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Pendle was launched on the Ethereum mainnet in June 2021;
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In November 2021, it was launched on Avalanche, and completed two rounds of financing in the same year, including institutional financing of USD 3.7 million and crowdfunding financing of 4,337 ETH;
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In November 2022, the V2 version was officially launched, and the AMM model was rebuilt to improve trading efficiency;
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In March 2023, Pendle was launched on Arbitrum;
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In July 2023, Binance announced the listing of Pendle, and subsequently Pendle announced the listing on the BSC mainnet, taking another big step in the multi-chain process;
Earn rewards through liquidity mining
Before understanding how to earn rewards through liquidity mining, let’s briefly understand the mechanism of Pendle:
First, Pendle packages interest-bearing tokens such as cDAI and stETH into SY (Standardized Yield Tokens), for example, stETH becomes SY-stETH after packaging.
Then, SY is split into two components, 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 represents the ownership of the principal, and can be redeemed and claimed back after maturity. For example, if a user has a PT-stETH that matures after one year, it means that the user can redeem stETH worth 1 ETH after one year.
YT represents the current income generated by the underlying assets, and can be claimed at any time. If a user has 1 YT-stETH and the yield rate of stETH is 5%, then the YT token will accumulate 0.05 stETH at the end of one year.
Therefore, from the above process, we can conclude that YT+PT=SY.
Through this approach, Pendle has designed an AMM pool that only requires providing single-sided liquidity. The default setting of the liquidity pool is PT/SY. By utilizing the relationship between YT+PT=SY, YT can be exchanged with lightning speed using the PT/SY pool.
(Example: When a buyer purchases yield tokens (YT), the buyer can send SY tokens, and the AMM contract will extract SY from the liquidity pool to mint PT and YT, send YT to the buyer, and sell PT for SY to return to the liquidity pool.)
Pendle achieves the effect of trading principal token PT and yield token YT through a single pool called PT/SY.
(It should be noted that since both principal tokens and yield tokens are tokens with expiration dates, in the AMM model, the prices of both tokens are not only influenced by market traders, but also affected by time.
For the principal token PT, its trading value will increase with time to ensure a 1:1 exchange with the underlying assets at maturity;
For the yield token YT, as it represents the interest generated from the current time to the expiration date, the time gradually shortens and the interest generated gradually decreases over time, so the value of YT will automatically decrease over time and become 0 at the expiration date.
For LPs, the LP position value = PT + SY = 2SY – YT, so if LPs are held until expiration, liquidity providers will not suffer any loss for free.
Liquidity Providers:
1) In Simple mode: Users can choose any single mainstream asset such as ETH, wBTC, USDT, USDC, etc. to provide liquidity after selecting the liquidity pool they want to provide.
Pendle will automatically convert the assets provided by users into yield assets in KyberSwap, and then package them into standardized tokens SY and add them to the liquidity pool.
2) In Pro mode: Users can provide/withdraw liquidity through the Zap in/Zap out operation, and can also choose whether to enable zero-price-impact Zap mode.
In simple terms, in the Zap in mode of the mode, when adding liquidity, a portion of the underlying assets will be used to purchase PT from the PT/SY pool, and the remaining assets will be packaged as SY. However, purchasing PT may cause price impact. When the zero-price-impact Zap mode is enabled, the underlying assets will be fully packaged as SY, and a portion of them will be used to mint PT and YT. Then PT and the remaining SY will be used to provide liquidity, and YT will be returned to the user’s wallet. This eliminates the step of purchasing PT, thus avoiding any potential price impact.
As mentioned above, when providing liquidity in Pendle, as long as it is held until maturity, there will be no impermanent loss. So as LPs, what are the sources of income we can obtain? The following are the main sources of income for LPs in Pendle:
1. Transaction fees generated by the liquidity pool;
2. $PENDLE token rewards;
3. Yield from underlying assets;
4. Incentives from token projects; (Not necessarily available)
(At the same time, vePendle holders can also have boosted returns.)
How to conduct yield farming
When understanding yield farming, we need to understand 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 vary based on market loan demand.
When we pledge ETH, the pledge yield we receive also varies with the number of miners, block activity, and income.
The chart below shows the deposit asset interest rate curve in Compound from 2020 to 2022. It can be seen that during a bull market, the interest rates of most assets rise, while during a bear market, the interest rates of most assets decrease, with fluctuations ranging from 0% to 15%.
Therefore, in response to interest rate fluctuations, users can take corresponding actions 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 maturity date, if users are optimistic about the future trend of underlying asset yields, they can take a long position in YT to express their bullish view on yields.
2) When users are not optimistic about future yields, they can hold PT/sell YT.
If users are not optimistic about the future trend, then in their perception, the current interest rate is higher than the future interest rate. Therefore, locking in the current interest rate would be the best way, and holding PT to lock in the current interest rate would be a better operation.
At the same time, Pendle has also launched the numerical reference of underlying APY, which is the yield rate of holding assets as a reference to facilitate users to conduct yield rate trading (comparing the yield rate of underlying assets with the implied yield rate, the latter is the yield rate traded in the market, that is, fixed yield rate/buying discount).
1) When the yield rate of holding underlying assets is greater than the implied yield rate, you can consider buying YT to take a long position in the implied yield rate of assets, or sell PT to obtain underlying assets and at the same time become an LP.
2) When the yield rate of holding underlying assets is less than the implied yield rate, you can consider taking the opposite direction of the above operations.
To better understand the profitability of different operations, Pendle has launched a profit calculator. Figure 1 shows the profitability of various operations when being bullish on future yields and expecting stETH’s future yield rate to reach 6%.
It can be seen that at this time, buying YT and if the future yield rate reaches 6%, it can bring nearly 50% increase in profit.
However, it should be noted that if the future yield rate only reaches 2%, as can be seen from Figure 2, the loss also reaches 53%. Therefore, for YT transactions, it is a high-risk operation with high potential returns.
vePendle and its ecosystem status
In version 2, the Pendle team officially introduced the Ve model into the Pendle token, giving the Pendle token value capture capabilities.
Currently, users can obtain vePendle by locking up Pendle. The lock-up period ranges from 1 week to 2 years. The longer the lock-up period, the more vePendle can be obtained for the same amount of Pendle. Currently, a total of 38,038,735 Pendle tokens are locked up, with an average lock-up period of 429 days.
The rights that can be obtained by holding vePendle are as follows:
1) Can boost rewards when providing liquidity, with a maximum boost of 2.5 times the original base APY.
2) vePendle holders will be able to receive the holding and voting rewards of “Base APY” + “Voter APY” = Max APY.
Base APY source: Pendle charges a 3% fee on all income generated from YT. Currently, 100% of this fee is distributed to vePendle holders. The portion of income from PT that has expired (Matured) but has not been redeemed by the holder (Redeem) will also be distributed proportionally to vePendle holders. The above rewards constitute the “Base APY” of vePendle.
Voter APY source: veP holders can allocate liquidity rewards from the Pendle token model to different pools through voting, thereby incentivizing liquidity in the voting pool.
vePendle voters will have the right to receive 80% of the transaction fees from the voted pool, which constitutes the “Voter’s APY”.
The following figures show the historical and current APY that vePendle holders can obtain through voting.
It can be seen that after adopting the vePendle model, its value capture capabilities have become more attractive and in demand for liquidity providers and long-term investors who are bullish on Pendle.
Currently, the Pendle protocol adopts the veToken and Gauge voting model for liquidity mining incentives. Therefore, there are multiple projects that strive for the voting rights of vePendle through similar approaches to Convex to guide the liquidity incentives of Pendle, as shown below:
The above projects attract a large number of ordinary users to provide liquidity through mechanisms that allow them to obtain Boost rewards without the need for staking by collecting vePendle.
Currently, the construction of these protocols around Pendle is helpful for the long-term development of the Pendle protocol, both in terms of increasing influence and attracting funds.
(Note that the liquidity of the exchange between $mPENDLE, $ePENDLE, and $PENDLE is currently poor, with significant discounts.)
Pendle Data Analysis
As of July 18th, the total TVL of Pendle is 143.76M. According to the data from Defillama, Pendle has maintained significant growth in TVL since 2023, increasing nearly 10 times from around 15M at the beginning of the year. Among them, nearly 70% of TVL comes from the LSD sector.
(Source: https://defillama.com/protocol/pendle)
(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?from=”-6M”&to=”now”)
In order to better understand the current adoption rate of Pendle in the cryptocurrency market, we have selected the staking rate and the number of Twitter posts as indicators to observe.
From the chart below, we can see that the social media influence of Pendle has been increasing since the beginning of the year. The number of Twitter posts has gone from 0 for consecutive months to almost 20-40 tweets per week.
Twitter is one of the most influential platforms in cryptocurrency adoption. The continuous growth of Twitter influence can provide a solid foundation for Pendle’s widespread adoption.
Looking at the staking situation of users, the amount of staked assets on Pendle is also constantly increasing.
Furthermore, the number of Pendle holders can indirectly reflect the confidence of users in the future of Pendle. The growth is shown below:
(Source: https://dune.com/yulesa/Pendle)
Looking at the current trading volume of Pendle’s protocol, it is mainly concentrated in the LSD sector, accounting for 55.58%. This shows a close correlation between Pendle’s protocol development and the LSD track.
In the future, as the LSD track further develops, if Pendle can continue to maintain this growth trend, there is a high possibility that its TVL and various data will grow in sync with the LSD track.
At the same time, the second largest asset in terms of trading volume on the protocol is GLP, which is an interest-bearing token within GMX. GMX is currently the largest perpetual exchange on ARB and is also in a relatively good development state.
It can be seen that the main traded assets on Pendle are those with stable development and guaranteed returns, indicating a high attractiveness to users.
(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?from=”-6M”&to=”now”)
Pendle’s Multi-chain Development
In Pendle’s development history, it first deployed on the Ethereum mainnet, and then successively launched on Avalanche and Arbitrum. Recently, it has also launched on BSC.
It can be seen that Pendle has been maintaining a good development plan and has been expanding towards multi-chain integration. It can be said that it is one of the protocols that supports the largest number of chains in the LSDFI track.
From the TVL distribution in the chart below, it can be seen that due to the short time since BSC’s launch, its TVL is mainly concentrated on ETH and Arbitrum.
(Avalanche has seen a significant decrease in TVL and adoption rate in 2023, so Pendle has shifted its focus away from this chain.)
With BSC being online for just over a week, its TVL is currently $4.6M, which can be considered a good cold start performance. Currently, there are only 2 pools on BSC, both of which are for ETH. With the increase in pools in the future, the TVL on this chain is expected to further increase.
(Source: https://app.sentio.xyz/share/lv18u9fyu1b558xf?from=”-2w”&to=”now”)
Summary
Pendle is a relatively well-established DeFi protocol that has recently seen rapid development. On one hand, it has kept up with the development of the LSD track and timely launched related products;
On the other hand, it has kept up with the current trend of multi-chain ecosystems in the blockchain industry and actively deployed its products on multiple chains.
At the same time, the protocol has made significant changes to its token model this year, introducing the vePendle model in version 2, which greatly enhances the token’s value capture capability and attracts more users and investors to participate in and build the ecosystem around the protocol.
If Pendle can continue to maintain a leading position in LSDFi and follow the development of the LSD track, it is highly likely to have great growth potential in the future.
