An exploration into Pendle, a project offering upfront yield to investors

Greythorn Asset Management
5 min readMay 26, 2023

Pendle is a permissionless DeFi yield-trading protocol built on Ethereum and launched in 2020. Similar to the TradFi interest derivatives market, it allows users to speculate on the future earnings of yield-bearing assets, or purchase future assets at a discount, which is equivalent to enabling users to tokenise and sell the future earnings of certain assets. It aims to maximise returns for its users by increasing their revenue exposure in bull markets and hedging against yield downturns during bear markets.

Pendle wraps the yield-bearing tokens into SY (standardised income token) and then divides SY into PT (principal tokens) and YT (yield tokens).

YT can be considered as the “coupon payment” of the “zero-coupon bond” PT within a certain period. PT can be exchanged 1:1 for SY after maturity. PT and YT can be traded anytime, and PT is eligible for a manual claim on the Pendle Dashboard.

What Pendle Finance does can be summarised as follows;

  1. Original token (e.g. ETH) → Yield-bearing token (e.g. stETH)

→ SY = PT + YT

2. PT/YT is priced by their built-in AMM. The algorithm’s parameters determine the liquidity curve of the AMM, and the free market conducts the final pricing.

3. The conversion of SY to PT can lock the interest rate within a certain period, while YT provides an opportunity to gain increased leverage and bet on the rise of interest rates.

Token: $PENDLE

TVL: ~$72.6m

Market Cap: ~$39.6m

FDV: ~$94.6m

Circulating Supply: ~97.0m

Tokenomics (Initial)

Dual token model: $PENDLE & $vePENDLE

  • $PENDLE — Utility token
  1. Token Distribution & Vesting Schedule
Figure 1:Pendle Finance Tokenomics, Source: Greythorn Research Team, Data: Pendle Finance

2. Inflation & Emission:

  • Token issuance: 17/06/2021
  • Stable incentives of 1.2M PENDLE per week for the first 26 weeks, 12/2021.
  • Liquidity incentives will decay by 1% a week until week 260.
  • Terminal inflation rate of 2% per annum.

$vePENDLE — Governance Token

  1. Max lockup: 2 years
  2. Use cases:
  • Directs the flow of rewards to different pools.
  • Reduces the supply of $PENDLE.

Value Capture

  1. Swap fees of 10bps (on 1 year-to-maturity products) are dynamically adjusted over time, 80% belongs to $vePENDLE, and 20% to LPs.
  2. 3% fees from the yield accrued by YT, all directed to $vePENDLE.
  3. The yield from matured, unredeemed PTs will be collected by the protocol in stablecoins as its revenue stream. A portion will be further distributed pro rata to $vePENDLE holders.
  4. $vePENDLE holders vote for reward boosting (i.e. greater $PENDLE incentives up to 250%).

Bullish Fundamentals

  1. Potentially large addressable market: Pendle serves both sides — users pursuing certainty as well those after speculation. LSDs & Perp DEXs have brought about many yield-bearing assets, and Pendle seized the opportunity to capitalise on this market.
  2. Reputable Integrations: GMX, LayerZero Labs, Balancer and Rocket Pool.
  3. Unique Innovation: The logic behind token splitting, yield generation, AMM & ve-model are tenable.
  4. Early Mover Advantage: Pendle is the only interest rate swap market currently available on the market.

Bearish Fundamentals

  1. Ambiguous Tokenomics: Various pockets of information are missing or need to be derived from other sources, such as initial token distribution, total supply, specific vesting details etc.
  2. Relatively low liquidity & sharply decreasing trend in trading volume.
  3. Although yield-generating assets display considerable demand and $PENDLE has increased more than 3x over the past months, the crypto interest rate swap market is relatively early. Interest rate swaps are also a complex topic for standard retail users.
  4. Low Revenue: Impacts the sustainability of the ve-model.

Closing Remarks

Pendle is an emerging crypto derivatives platform. Its flexible trading methods can help investors better manage risks and grasp opportunities when the market changes. After centralised staking services were cracked down on by the US SEC at the beginning of the year, decentralised staking has captured a significant portion of the market, with Lido, SSV, Rocket Pool, etc. entering the scene. Understanding Pendle as a notable participant in the LSD ecosystem and its evolution is necessary as this market begins to mature.

References

  • CoinGecko. 2023. Cryptocurrency Prices, Charts, and Crypto Market Cap | CoinGecko. [online] Available at: <https://www.coingecko.com/> [Accessed 25 May 2023].
  • CoinMarketCap. 2023. Cryptocurrency Prices, Charts And Market Capitalizations | CoinMarketCap. [online] Available at: <https://coinmarketcap.com/> [Accessed 25 May 2023].
  • DefiLlama. 2023. DefiLlama. [online] Available at: <https://defillama.com/> [Accessed 24 May 2023].
  • Home: Pendle documentation (no date) Home | Pendle Documentation. Available at: https://docs.pendle.finance/Home?utm_source=app&utm_medium=app (Accessed: 20 May 2023).

Important notice and disclaimer

This presentation has been prepared by Greythorn Asset Management Pty Ltd (ABN 96 621 995 659) (Greythorn). The information in this presentation should be regarded as general information only rather than investment advice and financial advice. It is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. In preparing this document Greythorn did not take into account the investment objectives, financial circumstance or particular needs of any recipient who receives or reads it. Before making any investment decisions, recipients of this presentation should consider their own personal circumstances and seek professional advice from their accountant, lawyer or other professional adviser. This presentation contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Greythorn is not obliged to update the information. Those assumptions may or may not prove to be correct. None of Greythorn, its officers, employees, agents, advisers or any other person named in this presentation makes any representation as to the accuracy or likelihood of fulfilment of any forward looking statements or any of the assumptions upon which they are based. Greythorn and its officers, employees, agents and advisers give no warranty, representation or guarantee as to the accuracy, completeness or reliability of the information contained in this presentation. None of Greythorn and its officers, employees, agents and advisers accept, to the extent permitted by law, responsibility for any loss, claim, damages, costs or expenses arising out of, or in connection with, the information contained in this presentation. This presentation is the property of Greythorn. By receiving this presentation, the recipient agrees to keep its content confidential and agrees not to copy, supply, disseminate or disclose any information in relation to its content without written consent.

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