Project Analysis of DeFi’s LP Yield Trading Protocol, Pendle (PENDLE)
1. Pendle divides LP principal and yield into OT and YT tokens, making them tradable.
2. Pendle adds time variables into the AMM algorithm to avoid YT turning to zero when the maturity date is approaching.
1. Project Introduction
Pendle built the first protocol to tokenize and trade the yield of the AMM system.
At present, Pendle has cooperated with AAVE, Compound, SushiSwap and Rari. As a result, users can deposit aUSDC from Aave V2 and cDAI from Compound into Pendle, mint all ownership of token OT and yield token YT, and conduct liquidity mining or trading.
Pendle allows yielded assets such as LP token or cToken to generate additional income or lock up future income in advance. At the same time, other traders can purchase the ownership of future income without paying collateral.
Users can also use OT as collaterals and use them in Rari’s interest rate protocol, Fuse. Pendle will integrate more platforms in the future.
How to earn profits on Pendle？
Users can collateralize their initial assets in Compound to obtain cToken, and then deposit cToken and other yield-generating tokens into Pendle to mint ownership token OT and yield token YT. Essentially, this separates the principal from the future income.
For example, when users deposit 100 Yuan from the bank into Pendle, they can obtain OT tokens representing the ownership of the 100 Yuan principal and YT tokens that represent their future interest income.
After obtaining YT tokens, users can deposit their YT tokens into Pendle’s AMM to provide liquidity and receive income; YT can also be sold to obtain interest income in advance, which is equivalent to locking up their income.
There are three ways to gain income within Pendle:
1. Provide YT/base token liquidity to receive mining rewards that will be
released 20% every week;
2. Provide PENDLE/wETH liquidity on SushiSwap to receive SUSHI mining rewards;
3. Stake PENDLE tokens.
Therefore, the user’s initial assets can generate income in Compound and Pendle at the same time.
On the other hand, YT token purchasers will gain ownership of future earnings without paying off collaterals. 3% of YT tokens’ interest income will be deposited in Pendle’s Treasury. AMM transaction fee will be charged at 0.35%, of which 0.3% as LP reward, 0.05% will be deposited into the Treasury.
After the YT token income matures, it will not bear interest, and the value reduces to 0. OT holders can redeem the subject matter.
OT tokens can be traded on SushiSwap.
Pendle currently supports Aave’s aUSDC and Compound’s cDAI. After the original assets are deposited in Pendle, aUSDC is divided into OT-aUSDC and YT-aUSDC, and cDAI will be split accordingly.
When redeeming cTokens, users need to own OT tokens and YT tokens at the same time. If YT tokens have been sold at this time, they would need to buy YT tokens in Pendle.
Using Pendle’s Arbitrage
Assuming that the interest rate of Aave USDC loan is 5%, the user needs to pay an annualized interest rate of 5% when borrowing from Aave. However, the current interest rate of USDC loan is 7%, which means staked USDC can obtain an annualized yield of 7% on another platform and 2% of arbitrage space will appear.
However, the problem is that the interest rate charged by DeFi is floating. With the influx of funds, the interest rate may be lower than 5% at any time, resulting in losses.
Therefore, users can borrow at a 5% interest rate in Aave, then lend on another platform to obtain LP token, convert LP token into OT token that represents principal and YT representing interest in Pendle, and then sell YT tokens to lock up their income and arbitrage.
Pendle’s AMM Design
Pendle comes with an AMM-based DEX in which users can trade YT tokens. However, when YT matures, the actual value will become 0.
Therefore, Pendle AMM aims to offset the gratuitous losses caused by the upcoming YT maturity date. Based on this, Pendle introduces the time variable based on Uniswap k = x * y, as shown in the figure below:
The Pendle AMM curve changes over time so that YT always maintains a stable value and will not return to zero as the maturity date approaches.
On April 29, Pendle raised more than $10 million USD on Balance LDB (Liquidity Drop Bootstrapping).
On April 16, a finance round of $3.5 million USD was completed, led by Mechanism Capital, followed by HashKey Capital, CMS, DeFi Alliance, imToken, Crypto.com Capital, Spartan group, Lemniscap and other institutions.
2. The Tokenomics Model
Pendle token is known as PENDLE, ERC20 token, and the contract address is 0x808507121b80c02388fad14726482e061b8da827.
Pendle issues a mixed inflation mode that is similar to SNX:
In the first 26 weeks, 1.2 million tokens were issued in the form of liquidity rewards every week;
In the 26 weeks, the liquidity rewards decreased by 1% every week until the 260th week;
For the next 260 weeks, the annual inflation rate is fixed at 2%.
It is estimated that by the end of the second year, the maximum circulation of tokens will be 251 million tokens (251,061,124 tokens). When the amount reaches this number, the distribution is as follows:
Liquidity rewards 37%；
18% for Ecosystem Funds, directly release 50%, release 50% after a year；
22% for the Team, one year lock-up period, and then release 25% once every quarter.
15% for the investors, the liquidity mining will start unlocking after three months and will be unlocked once every quarter within one year;
Balancer LDB liquidity bootstrapping 7%;
According to CoinMarketCap, as of 12:00 pm on July 23, Singapore time, the circulation volume of Pendle was 23.89 million tokens, the unit price was $0.33 USD, and the market value was $7.88 million USD, ranked at 867.
3. Project Value Analysis
Buy Order and Practical Value
The practical value of the PENDLE token is all derived from its governance. The holders can vote on the distribution of liquidity incentives, the use of the financial treasury and the creation of new liquidity transaction pairs.
PENDLE buying pressure mainly comes from：
1. Good expectations for the future of Pendle
2. Protocol governance needs
Selling pressure mainly comes from：
1. Team, consultant and investor cash out
2. Bad expectations for Pendle in the future
Project Value Analysis
1. As stated by Pendle officials, a healthy and mature capital market can carry out yield trading, whether they are bonds, coupons, forwards or other financial instruments. Risk hedging is not only the original intention of derivatives but also the most fundamental demand. Pendle is a needed for LP to lock up revenue.
2. Supporting Uniswap LP is a positive thing that Pendle is looking forward to in the future.
3. Personally, the market value of Pendle is undervalued. The market value of Pendle is closely related to the development of DeFi, especially bounded to Aave and Compound actively at present.
4. The drawback is that the PENDLE token itself is not highly related to the development of the Pendle Protocol.
In addition, due to YT’s maturity limit, YT can only trade based on Pendle’s own AMM algorithm and cannot be added to other DEX assets such as Uniswap. Therefore, Pendle’s popularity will affect the trading volume, thus affecting YT’s liquidity and the effectiveness of risk hedging.
5. Furthermore, due to the existence of a unique mixed inflation issue mode, when the market revolves and the activity of DeFi decreases, Pendle will become a complete sell-off. But on the other hand, it has also become a good opportunity to buy at the bottom.
Note: This article does not constitute any investment advice, nor is it responsible for any investment outcomes.