If you stake $GLP to earn 5% APY today, you're losing money. If you simply hold $stETH until December 26, 2024, you're losing money.
Stop losing money and maximize your yield with Pendle.
Introduction
Pendle is a yield-trading protocol. It allows you to separate a yield-bearing token by dissociating the yield component from the principal. In this alpha report we’ll cover everything you need to know to understand what Pendle is, and how it works.
Lets start by going over all of the different tokens you’ll see on Pendle.
YBT - Yield Bearing Tokens
Yield-Bearing Tokens (YBT) are tokens that generate yield.
You obtain them when you provide, lend, or stake assets in a protocol.
Examples: $stETH, $GLP, rETH-WETH LP.
SY - Standardized Yield Token
To facilitate implementation, usage, and composability of YBT, Pendle employs a common standard, EIP-5115.
When you deposit a YBT into Pendle, it is wrapped and becomes a Standardized Yield Token (SY).
Yield Tokenization
The YBT, once transformed into an SY, can be divided into two components:
- Principal Token (PT)
- Yield Token (YT)
PT - Principal Token
The Principal Token represents the right to redeem the underlying YBT at the maturity, at a 1:1 ratio.
YT - Yield Token
The Yield Token represents the right to collect all the yields from the underlying YBT until the maturity.
Maturity
This is the date at which a PT can be redeemed for its underlying asset and at which a YT stops accumulating yield.
An asset can have multiple expiration dates, and there are separate markets for each date.
PT & YT Prices
PT & YT are tradable on Pendle's internal AMM.
Their prices vary based on:
- Supply and demand
- Price and yield of the underlying asset
- Maturity
The value of both assets is correlated because at any time, 1 PT + 1 YT can be redeemed for the underlying asset.
Price of PT + Price of YT = Price of underlying asset
The PT is detached from yield. It will initially trade at a price lower than its underlying asset.
It will tend to reach the value of its underlying asset as we approach the expiration date (redeem 1:1).
The discount of the PT compared to the underlying asset represents the Fixed APY.
This yield is fixed and immutable. It is obtained upon maturity (guaranteed by the code).
The price of the PT is considered low when the Fixed APY is higher than that of the underlying asset and vice versa.
The price of the YT reflects the market consensus on the future yields of the underlying asset. This estimation of future yield is the Implied APY.
The price of the YT is considered low when the Implied APY is lower than that of the underlying asset and vice versa.
PT & YT Benefits
The PT is primarily used to:
- Fixed Yield → Yield predictability / No longer worry about fluctuations
- Short Yield → You anticipate a decrease of the underlying's APY.
The YT is primarily used to:
- Long Yield → You anticipate an increase of the underlying's APY.
AMM
⇒ Zero Impermanent Loss
Pools consist of PT and SY. Example: PT wstETH / SY wstETH
Due to asset correlation, this reduces IL during the LP's lifespan.
Remember, at expiration, PTs can be exchanged at a 1:1 ratio for their underlyings.
A liquidity provider who remains in the pool until that date will not experience any IL, as both pool assets will have the same value.
⇒ Curves
A pool's curve can be customized to cater to the yield volatility of an asset.
The curve takes into account the expiration date and concentrates liquidity to enhance capital efficiency.
$PENDLE
$PENDLE is the native token of the protocol. It can be locked for up to two years to obtain vePENDLE. The protocol is launched on Ethereum, Arbitrum, BSC (and soon Optimism / Mantle), but locking only takes place on Ethereum.
Holding vePENDLE allows you to:
- Vote on the direction of protocol incentives across different pools. (cross-chain)
- Voting for a pool gives voters 80% of the swap fees from that pool. This encourages directing incentives towards pools with the highest volume.
- Obtain 3% of the rewards accrued by YT.
- Receive a share of the yields from non-redeemed PTs that have reached expiration.
- Benefit from boosted incentives and rewards when providing liquidity, potentially up to x2.5. (cross-chain)
Pendle Wars
Several protocols have been built on top of Pendle, offering liquid wrapper services as well as boosted yields.
Keep a close eye on this on the @defiwars_ website.
Some Strategies
⇒ Fixed-Yield Strategy:
The APY of $GLP is 5.8%.
Pendle offers PT-GLP with an expiration date on 28/03/24 and a fixed APY of 11.3%.
Instead of staking 1000 GLP in GMX, I can purchase 1068 PT-GLP, hold them until maturity, then redeem 1068 $GLP.
My yield will be 11.3%, even if the GLP's APY continues to decrease.
⇒ Providing Liquidity:
Strategy of @tn_pendle (Thanks to @defi_dad for the interview)
Provide liquidity in the PT wstETH pool until expiration to avoid IL.
@tn_pendle earns swap fees, Pendle incentives, $wstETH yields, and fixed yields from PT-wstETH.
And, since he holds vePENDLE, his position's rewards are boosted.
He achieves a 15.3% APY instead of earning 3.8% by merely holding $wstETH.
⇒ Long-Yield
Conclusion
The predictability and flexibility offered by Pendle are major assets for the DeFi space.
It is highly likely that in the coming years, the protocol will hold a prominent position in the ecosystem. The team continues to enhance their product, and the user interface is undoubtedly one of their strong points.
The educational work undertaken is substantial, and I cannot recall a protocol that has put in such effort. I strongly recommend keeping a close eye on this protocol!
Article posted @August 14, 2023
