Partnered With:

Why did we invest in Pendle?

Read this article in 16 Minutes

Whether you think it's going up, down, or sideways, Pendle has a strategy for you to profit from.

Original title: Bixin Ventures: Why We Invest in Pendle

Original source: Bixin Venture

Investment logic

The complete Revenue Strategy toolkit

In traditional financial markets, trillions of dollars are traded daily in interest rate derivatives, which are used by market participants to speculate or hedge against interest rate fluctuations. As decentralized finance (DeFi) matures, the opportunities for such gains will increase. Whether it's providing liquidity for trades on the GMX/Gains Network or participating in a liquidity pledge like Lido, yield-seeking investors have plenty of options. But how can users trade yield in today's market? For example, what if I believe the yield currently offered by GLPS is undervalued and is expected to rise in the next few days? What if I believe that the current Stargate yield does not accurately reflect stablecoin volume and could fall rapidly? What if I just want to stay neutral and make extra money?

Vu Gaba Vineb has succinct overview of ETH and LSD yield changes with the emergence of short-term yield speculation opportunities such as the Ethereum Shapella upgradeVarious possibilities Whether you think it's going up, down, or sideways, Pendle has a strategy for you to profit from.

Pendle provides users with a complete suite of tools that allow them to enjoy fixed income through discounted asset purchases, speculate on income via YT (more on that below), or participate in their pool of funds to earn additional income through exchange fees and rewards. likeEquilibriaSuch agreements are already leveraging Pendle to build more revenue enhancement strategies, and we foresee more agreements to build products based on Pendle in the future. For individual investors, Pendle has simplified its user interface to optimize the user experience and make it easier for users to participate in various revenue strategies.

We are excited that Pendle is opening up a new paradigm for yield traders, as they can now manage the risk of their holdings based on the volatility of the market.

Product highlights

Founded in 2021, Pendle Finance is a decentralized finance (DeFi) agreement that allows users to purchase assets at discounted prices, participate in various income strategies, or earn income by providing liquidity to a pool of funds. Pendle is currently deployed on Ethereum and Arbitrum. TVL has grown from $7.8 million in December 2022 to $60.5 million today, an increase of nearly 775% in just five months.

DeFi

SY, PT and YT

Pendle is a yield trading protocol where we can label the income of interest-bearing assets (such as GLP, stETH, aUSDC, etc.) as YT and PT, where holding YT will earn income and PT stands for principal. Because YT's earnings are partially spun off, users will be able to buy PT at a discounted price. For example, buying PT-GLP is equivalent to receiving GLP at a discounted price, and 1 PT-GLP is redeemable for 1 GLP at maturity. How is the PT-GLP discount determined? Fundamentally, the discount rate is determined by market demand for PT-GLP. If there is a high demand for PT-GLP, the discount will naturally decrease, and vice versa.

What is SY? It is a token standard, and SY implements a standardized API for interest-bearing assets in the form of Wrap in smart contracts.

The principal and income from these interest-bearing assets can then be stripped down into PT and YT tokens. Looking at the chart below, SY refers to the underlying earning asset (aUSDC in this example), which is then divided into PT-aUSDC and YT-aUSDC. This provides users with a number of policies.

DeFi

For users who wish to avoid volatility, PT tokens can be purchased today at a discounted price and held to maturity. For example, if PT-GLP is trading at a 22.5% discount, this means that if you buy 1 PT-GLP today, the trader essentially locks in a 22.5% gain and receives a fixed return. If the trader also believes that the future yield will be less than 22.5%, this gives you the opportunity to sell PT-GLP at a profit or earn a higher yield than if you just held GLP. On the other hand, users who want to speculate on future earnings can buy YT tokens to increase their exposure to yield. In this case, you may think that the 22.5% yield is undervalued, so you can buy 1 YT-GLP today and sell it when the yield rises above 22.5%, or earn additional yield before maturity. In summary, buying PT is equivalent to shorting yield, while buying YT is equivalent to going long yield.

LP pool

For users looking for a more passive strategy, Pendle's liquidity pool is an easy way out. The pool's annualized rate of return (APY) consists of four income sources: (a) the fixed rate of return from holding PT to maturity; (b) underlying token agreement awards from earning assets (e.g. GLPS); © Fees from SY, PT and YT transactions; (d) Pendle Award; Additional income from vePendle by mortgaging Pendle. As you can see, these gains are very attractive, and due to the high correlation between the pool assets, coupled with Pendle's unique automated market maker (AMM) design, users face almost no fickle losses. Over time, we should see an increase in interest-bearing assets.

DeFi

Unique AMM design

In Pendle v2, the main innovation is the AMM trading platform designed and built for yield trading. Since the assets in the pool are highly correlated, this reduces the volatile loss (IL) from volatility. More importantly, if the asset stays in the pool until maturity, then the impermanent loss will be zero. Because at maturity, the PT in the pool is going to equal the underlying asset. In short, users will be able to trade between SY, PT, and YT with almost no erratic losses.

Another feature of the Pendle v2 AMM is greater capital efficiency. With the introduction of flash trading, users can now easily purchase YT from a simple user interface and start participating in various revenue strategies. This means that LPS can earn fees from PT and YT conversions in a single liquidity offer, while traders enjoy greater liquidity and thus lower slip points.

With the emergence of various interest-bearing assets, whether generated through lending platforms (such as Aave, Compound, etc.) or by mortgaging on LSD platforms, Pendle has a huge market to expand.

vePENDLE

Pendle borrods from the veCurve and Solidly models, where existing token holders can mortgage $Pendle to obtain $vePendle, thereby reducing the circulating supply of $Pendle in the market. A major attraction of $vePendle is earning a share of the agreed revenue. Today, there are two sources of agreed revenue in Pendle V2:

a) YT expense: Pendle takes 3% of all income generated by YT

b) Swap fee: Pendle takes 0.1% of the value of the transaction, which decreases as the maturity period decreases, and vice versa. Twenty per cent of the above fee goes to the liquidity provider and the remainder will be distributed to the $vePendle holder. In addition, due PT proceeds will also be prorated

c) $vePendle token holders can also reinvest their $Pendle reward into the liquidity pool each week, depending on their vote weight, and receive an increased reward (up to 2.5 times) in any Pendle pool where they provide liquidity.

d) $vePendle decreases linearly over 2 years, after which, $Vependle will be released. Therefore, users who wish to maintain their vote weight / $vePendle token value will need to extend the duration of their mortgage or the amount of the mortgage

DeFi

Contributing factors to recent growth

LSDs will explode

After the Shapella upgrade, users will be able to extract Ethereum. In this way, liquid mortgage derivatives will be better able to maintain their anchor prices, making them better collateral for borrowing, which will increase the utilization rate of DeFi protocols. As of April 6, 2023, Defillama figures show that TVL in the LSD industry has grown to $16.6 billion, ranking second among all DeFi segments.

DeFi

Pendle is positioned to support the infrastructure of these LSD assets in an ecosystem that is booming. For now, Pendle has shown traction, having already been backed by high-profile projects like Lido, Frax, Rocketpool, Aura, GMX, and Stargate. We think TVL will continue to climb as the agreement gains more partners and other projects in the ecosystem begin to appreciate Pendle's excellent design in terms of liquidity provision. Rather than trying to select a header LSD project, we prefer Pendle as a support protocol for unique positioning. Users looking for a more aggressive hedge or yield boost on their LSDs can focus on Pendle's discounted assets.

DeFi

The gap in fixed income products in the market

Fixed income products are commonplace in traditional finance, but less so in cryptocurrencies. Yield volatility has been a theme in cryptocurrencies, with stETH's yield typically fluctuating between 4 and 5 percent in the last 30 days, peaking at 7.1 percent, and even reaching 10.2 percent in November 2022.

DeFi

Volatile yields create uncertainty, especially for investors with leveraged positions. This requires them to manage earnings more actively and investors need to weigh the opportunity cost and risk of their position relative to other DeFi projects. So for investors, fixed rates offer a more efficient and less stressful strategy.

DeFi

As we can see, users can get gDAI and USDT at a discount of 9.09% and 5.12%, respectively, just to hold them to maturity, which is much higher than today's traditional fixed income products (T-bills, for example, are about 4.5%).

conclusion

In summary, we believe that Pendle now provides users with multiple tools to manage a variety of revenue strategies. The fixed income and interest rate derivatives market in traditional finance is large, and we believe Pendle will be able to attract more institutional capital attention and interest over time.

Pendle uses a standardized form to tokenize interest-bearing assets, which makes it easier to integrate other interest-bearing assets in the future and unlocks more composability for other DeFi protocols to integrate with Pendle or build more and richer applications on top of Pendle.