Pendle: A Game-Changer in DeFi?

By Andy Wang | Crescent City Capital Market Analyst Intern

What Is Pendle?

Pendle is a tokenized yield protocol that allows investors access to an asset’s future yield. While there are other tokenized yield protocols in operation, Pendle is unique through its time-decaying automated market maker (AMM) feature and other yield components.

Pendle has been designed as a permissionless yield trading protocol. This DeFi protocol is built on the Ethereum blockchain. Its users can adopt various strategies. When a user deposits assets in Pendle, the underlying asset is represented through a principal token (PT). The anticipated yield is represented by a yield token (YT). Because the principal and yield can be split through these tokens, users have greater flexibility to manage their assets.

Users can trade these tokens on Pendle’s AMM, and cash them in before the expiration date to secure gains. Additionally, you can adopt yield strategies such as long yield, discounted long assets, fixed yield, or a mix of these strategies. The platform also supports Arbitrum.

What Does Pendle Aim to Achieve?

Pendle was established to improve the yield trading experience for crypto users. By doing so, its founders have focused on making crypto yield trading more mainstream. Furthermore, they recognized the challenge associated with time decay. The platform has been designed with specific features that enable traders to create separate tokens for their original asset and their future yield asset to optimize flexibility and profitability. At the same time, Pendle uses an evolved AMM that specifically overcomes the challenge of time decay in yield trading.

Pendle has already launched its second version, and additional updates are planned in the near future. Pendle V2 introduced an updated AMM that allows for fixed rate trading. It also optimizes liquidity provisions and provides greater opportunities for profits.

Understanding Pendle’s Mechanism

Pendle operates as a permissionless yield trading protocol on the Ethereum blockchain. When users deposit assets, Pendle mints Principal Tokens (PT) representing the underlying asset and Yield Tokens (YT) representing its future yield. This approach reportedly allows users greater flexibility to manage their assets and engage in various yield strategies.

Further, in contrast to traditional AMMs, Pendle’s AMM accounts for time decay, preventing potential financial losses due to mispriced assets. The model optimizes capital while increasing exposure to future yields through incremental adjustments that accurately price assets, ensuring liquidity pools remain robust.

How Does Pendle Work?

Those who own yield-generating assets deposit their tokens into their Pendle account. Once that’s done, a PT is minted by Pendle, representing the underlying asset that was deposited. In addition, a yield token, or YT, is minted, which represents the token holder’s claim on that asset’s future yield. It’s important to note that PTs and YTs are valid for a limited time, and their associated assets must be claimed before their expiration dates.

Yield Tokenization

Yield tokenization is Pendle’s fundamental mechanism. While the PT represents the original asset, the YT represents the expected interest earned on the underlying asset. Splitting the yield components maximizes the user’s control of those assets. A YT can be used to provide liquidity to an AMM. By doing so, a YT can generate protocol rewards and earn transaction fees. Another way to use a YT is to simulate an interest rate swap. This is done by locking in a return at a fixed rate by selling the YT immediately.

An AMM, or automated market maker, supports individual trades of crypto assets. Specifically, it’s a type of decentralized exchange (DEX) that algorithmically completes buy and sell orders, as compared to making direct trades with individual traders. However, a traditional AMM is flawed since it doesn’t account for time decay. Without taking time decay into account, an investor may suffer financial loss because of mispriced assets.

Pendle resolves this issue through its unique AMM. It uses a time-decaying AMM model to optimize capital, while increasing exposure to future yields. Specifically, Pendle’s AMM makes incremental adjustments that more accurately price assets. At the same time, it prevents liquidity pools from being depleted.

Governance

PENDLE token holders can participate in the platform’s governance. Specifically, they do this by using vePENDLE, or vote-escrowed PENDLE tokens. The vePENDLE tokens are obtained by staking PENDLE. The specific amount of vePENDLE received is based on the staking period, which can be as long as two years. Over the course of the staking period, the value of vePENDLE in a user’s wallet decays. It will reach no value at the end of the staking period, which is when the staked tokens are unlocked.

Pendle collects a fee of 3% from all yield accrued via YT. This fee is collected as revenue and distributed pro rata to all vePENDLE holders, based on vePENDLE weight.

Adding to these opportunities for gains, vePENDLE holders have access to liquidity incentives. They vote for the allocation of liquidity incentives to different pools. Those who have voted for a pool collectively earn 80% of that pool’s swap fees.

The PENDLE Token

The PENDLE token is the native utility token of the Pendle protocol. It plays a crucial role in governance, allowing token holders to vote on key decisions, such as protocol upgrades and parameter settings. Moreover, PENDLE is used to incentivise various activities within the ecosystem, promoting user engagement and protocol growth.

Tokenomics of PENDLE

The native token of Pendle is PENDLE. It’s an ERC-20 utility token with a total and maximum supply of 231,725,335 tokens. The circulating supply is approximately 97 million tokens. Its purpose is to manage governance at the completion of the protocol. Specifically, it will support protocol management and the mechanics of value accrual. PENDLE is a hybrid inflationary token, with a 2% perpetual inflation rate.

Its initial distribution allocated 37% to liquidity incentives, 22% of the supply to the team and 15% to investors. In addition, the ecosystem fund received an allocation of 18%, and 7% was applied to liquidity bootstrapping. The remaining 1% of the supply was reserved for advisors.

However, as of October 2022, PENDLE has revised its token distribution. It now has 65.1% allocated to its circulation, 19.2% to the ecosystem fund, 10% to incentives and 5.7% to the team. Tokens allocated for the team were vested until April 2023, and weekly emissions are 667,705, with a 1.1% decrease each week until April 2026.

Use Cases and Advantages

The main use cases of Pendle are centered around yield management and risk mitigation:

Advanced Yield Management: Investors can optimize their income by trading future yields based on their market outlook and risk appetite.
Hedging against Yield Volatility: Yield token sellers can lock in rates, protecting themselves against future decreases in yield rates.
Speculation: Traders can speculate on the future value of yields by buying and selling yield tokens to capitalize on price movements.

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Team and Funding

Pendle was conceived by anonymous individuals known as TN Lee, GT, YK, and Vu. It maintains its headquarters in South Korea, and raised $3.7 million in funding from investors such as Bitscale Capital, Crypto.com Capital, Fisher8 Capital, Strategic Round Capital and others. After considerable development, the project officially launched in June 2021. According to Pendle’s official website, its trading volume has reached $350 million to date. Its total value locked (TVL) has also recently exceeded $130 million. The Pendle team has grown substantially since launch to meet the platform’s continued growth and development.

Pendle’s Roadmap

Pendle stands out with its three components – yield tokenization, AMM, and governance. Within a year of launch, over $350 million in yield trades were settled. Pendle V2, released in late 2022, introduces fixed-rate trading, enhanced efficiency, and greater capital flexibility.

Future plans include permissionless integration with all yield-bearing assets, and aligning incentives for increased fees and liquidity

Market Recap

Pendle price as of May 28, 2024 is $6.81 USD with a 24-hour trading volume of $151,731,723 USD. Pendle is down 2.25% in the last 24 hours. The current CoinMarketCap ranking is #85, with a live market cap of $1,047,745,166 USD. It has a circulating supply of 153,942,817 PENDLE coins and the max.

Further Analysis

PENDLE was launched on Apr 28, 2021 at the price of $2.11. It quickly dropped to a low of $1.08 by Apr 30, 2021 before it rose to its all-time high of $2.45 on May 5, 2021. PENDLE’s price continued to fluctuate over the following months, remaining between $0.30 and $1. There was a spike in price in the middle of August 2021, from $0.44 to $1.27, possibly due to the integration of Pendle’s price page on Crypto.com.

PENDLE’s price then fell once again, before rising again in the middle of October 2021 to $0.98. This is likely attributed to the announcement of the Pendle and Olympus Pro partnership, whereby users can obtain PENDLE tokens at a discount through the exchange of PENDLE/ETH LP tokens on Olympus.

As the entire crypto market entered a downturn at the end of 2021, PENDLE’s price also fell. When the Terra LUNA crash occurred in May 2022, PENDLE dropped to a low of $0.04 and remained there throughout most of 2022. However, PENDLE’s price experienced an uptrend beginning in January 2023, as it rose from $0.04 to $0.64 in April. Despite faltering briefly, PENDLE’s price continued to climb to a peak of $0.96 on Jul 3, 2023.

Starting from November 2023, PENDLE’s price rebounded back up to 1$ threshold and since then, never came down.

For the last 7 days, PENDLE has been in a good upward trend, thus increasing by 51.21%. Pendle has shown very strong potential lately, and this could be a good opportunity to dig right in and invest.

During the last month, the price of PENDLE has increased by 2.02%, adding a colossal average amount of $0.13 to its current value. This sudden growth means that the coin can become a solid asset now if it continues to grow.

In the chart I attached above, I set several support lines at $0.984, $3.824 and with a resilience at $7.551. Further, by employing fib retracement, we can see it suggests that the gold-entry would be around $4.210 to $4.793. Besides, it seems the price has been getting down to that range and bounced back, meaning we can put some PENDLE into our portfolio and the first target will be $9.154, following up with $10.321 and $15.266.

Two more things to mention is the crypto fear and greed index points to a bullish market with a score at 72. And the RSI value is at 65.85, which indicates that the PENDLE market is in a neutral position.

With SEC approved ETH ETF, meaning more volume will come into the ETH ecosystem, and PENDLE is built on ETH blockchain, so I have no doubt that PENDLE will soar in the coming months.

Conclusion:

Pendle introduces a novel concept in decentralized finance, providing a marketplace for trading future yields. This adds a layer of flexibility in managing yield income and broadens the scope of strategic investment in the DeFi sector. By offering innovative tools for yield management and trading, Pendle stands out as a pioneering protocol that enhances the functionality and accessibility of financial services in the blockchain space.

PENDLE token holders can now effortlessly buy, sell, and exchange PENDLE with 16 fiat currencies , including widely used ones such as EUR, CHF, and GBP, directly within the SwissBorg app. SwissBorg’s commitment to simplifying the crypto-finance landscape makes managing both cryptocurrencies more straightforward and accessible than ever before, enhancing the overall user experience for PENDLE token holders.

Reference:

https://messari.io/project/pendle/profile

https://docs.pendle.finance/Introduction

https://coinmarketcap.com/currencies/pendle

https://alternative.me/crypto/fear-and-greed-index