In-depth analysis of the LSDFi star project Pendle Achieving eating tomorrow’s food today for users through interest separation.

Author: Biteye Core Contributor Lucky

Editor: Biteye Core Contributor Crush

Pendle is a yield tokenization protocol built on multiple chains, allowing users to purchase underlying assets at a discount by separating the interest-bearing tokens.

At the same time, for yield traders, they can express their bullish or bearish views on the yield of interest-bearing assets by trading yield tokens (YT). The detailed mechanism will be explained below.

The development history of Pendle is as follows:

  • Pendle was launched on the Ethereum mainnet in June 2021;
  • In November 2021, it was launched on Avalanche, and completed two rounds of fundraising in the same year, including institutional fundraising of $3.7 million and crowdfunding fundraising of 4337 ETH;
  • In November 2022, the V2 version was officially launched, and the AMM model was rebuilt to improve trading efficiency;
  • In March 2023, Pendle was launched on Arbitrum;
  • In July 2023, Binance announced the listing of Pendle, and Pendle announced the launch of the BSC mainnet, taking another big step in the multi-chain process;


01. Earn rewards through liquidity mining

Before understanding how to earn rewards through liquidity mining, let’s briefly understand the mechanism of Pendle:

First, Pendle encapsulates interest-bearing tokens such as cDAI and stETH into SY (Standardized Yield) tokens, for example, stETH is encapsulated into SY-stETH.

Then, SY is split into principal and yield components, which are PT (Principal Token) and YT (Yield Token), respectively. This process is called yield tokenization, which separates the yield into independent tokens.

PT is the principal token, and holding PT represents ownership of the principal, which can be redeemed and withdrawn after maturity. For example, if a user owns a PT-stETH that matures in one year, it means that the user can redeem stETH worth 1 ETH after one year.

YT is the yield token, and holding YT represents ownership of the current yield generated by the underlying asset, which can be withdrawn at any time. For example, if a user owns 1 YT-stETH and the yield rate of stETH is 5%, then the YT token will accumulate 0.05 stETH at the end of one year.

Therefore, from the above process, we can conclude that YT+PT=SY.

Using this method, Pendle has designed an AMM pool that only requires providing single-sided liquidity, with the default setting of PT/SY. At the same time, by utilizing the relationship of YT+PT=SY, YT can be exchanged lightning-fast in the PT/SY pool.

In other words, Pendle achieves the effect of trading principal token PT and yield token YT through a single PT/SY pool.

Liquidity Provision:

1) In Simple Mode: After selecting the liquidity pool to provide liquidity, users can choose any single mainstream asset to provide liquidity, such as ETH, wBTC, USDT, USDC, etc.

Pendle will automatically convert the assets provided by users into interest-bearing assets in KyberSwap, and then package them into standardized tokens SY to be added to the liquidity pool.

2) In Pro Mode: Users can provide/withdraw liquidity through the Zap in/Zap out operation, and can choose whether to enable zero price impact Zap mode.

In simple terms, in Zap in mode of the mode, when adding liquidity, a portion of the underlying assets will be used to purchase PT from the PT/SY pool, and the remaining assets will be wrapped as SY. However, purchasing PT may cause price impact. When zero price impact Zap mode is enabled, the underlying assets will be completely wrapped as SY, part of which will be used to mint PT and YT. Then PT and the remaining SY will be used to provide liquidity, and YT will be returned to the user’s wallet. This eliminates the step of purchasing PT, avoiding any potential price impact.

As we mentioned earlier, when providing liquidity in Pendle, as long as it is held until expiration, impermanent loss will not occur. So, what are the main sources of income for LPs (liquidity providers) in Pendle? The following are the main sources of income for LPs in Pendle:

1. Transaction fees generated by the liquidity pool;

2. $PENDLE token rewards;

3. Income from underlying assets;

4. Incentives from token projects (not necessarily available).

02. How to engage in yield trading

When understanding yield trading, we need to understand that the underlying yield of any asset is volatile.

For example, when depositing in Compound, we deposit USDC, but the interest rate obtained will change based on market loan demand.

When we stake ETH, the staking yield will also fluctuate based on the number of miners, block activity, and income.

The following figure shows the deposit asset interest rate curve in Compound from 2020 to 2022. It can be seen that during the bull market, the interest rates of most assets rise, while during the bear market, the interest rates of most assets decline, with fluctuations ranging from 0% to 15%.

Therefore, in response to interest rate fluctuations, users can take corresponding actions in Pendle to express their views and profit when they are optimistic or pessimistic about future interest rate performance. The following will be introduced one by one:

1) When users are optimistic about future yields, they can hold/buy YT.

Because YT represents the yield from the present to the expiration date, if users are bullish on the future trend of underlying asset yields, they can take a long position in YT to express a bullish view on yields.

2) When users are not optimistic about future yields, they can hold PT/sell YT.

If users are not optimistic about the future trend, in their perception, the current interest rate is higher than the future interest rate. Therefore, locking in the current interest rate is the best way. Therefore, holding PT to lock in the current interest rate would be a better operation.

At the same time, Pendle has also introduced the numerical reference of underlying APY, which refers to the yield rate of holding assets for the convenience of users to conduct yield rate trading. (Comparing the yield rate of underlying assets with the implied yield rate, the latter is the yield rate traded in the market, which is the fixed yield rate/buying discount.)

1) When the yield rate of holding underlying assets is greater than the implied yield rate, users can consider buying YT to profit from the implied yield rate of the assets, or sell PT to obtain underlying assets while also being an LP.

2) When the yield rate of holding underlying assets is less than the implied yield rate, users can consider the opposite direction of the aforementioned operations.

To better understand the profitability of different operations, Pendle has launched a revenue calculator. Figure 1 shows the profit that various operations can bring when the future yield rate of stETH is believed to reach 6%.

It can be seen that at this time, buying YT can bring nearly 50% increase in profit if the future yield rate reaches 6%.

However, it should be noted that if the future yield rate only reaches 2%, as shown in Figure 2, the loss will also reach 53%. Therefore, for YT transactions, it is a high-risk operation with high returns.

03. vePendle and its ecological status

In version 2, the Pendle team officially introduced the Ve model into the Pendle token, giving the Pendle token value capturing ability.

Currently, users can obtain vePendle by locking Pendle, with lock-up periods ranging from 1 week to 2 years. The longer the lock-up period, the more vePendle can be obtained with the same amount of Pendle. Currently, the total locked-up Pendle has reached 38,038,735, with an average lock-up period of 429 days.

Holding vePendle can provide the following benefits:

1) Can boost rewards when providing liquidity, with a maximum boost of 2.5 times the original base APY.

2) vePendle holders will be able to receive the holding and voting income of “Base APY” + “Voter APY” = Max APY.

Base APY Source: Pendle charges a 3% fee on all yield generated from YT. Currently, 100% of this fee is allocated to vePENDLE holders. Additionally, a portion of the yield from PT that has matured but has not been redeemed by the holder will also be proportionally distributed to vePENDLE holders. The aforementioned rewards constitute the “Base APY” of vePENDLE.

Voter APY Source: veP holders can use voting to direct liquidity rewards from the Pendle token model to different pools, thereby incentivizing liquidity in the voting pool.

vePendle voters will have the right to receive 80% of the trading fees from the voted pool, which constitutes the “Voter’s APY”.

The following figure shows the historical and current APY that vePendle holders can obtain through voting.

It can be seen that after adopting the vePENDLE model, its ability to capture value has become more attractive and in demand for liquidity providers and long-term investors who are optimistic about Pendle.

Currently, the Pendle protocol adopts the veToken and Gauge voting model for liquidity mining incentives. Therefore, there are multiple projects that try to obtain voting rights for vePENDLE through a similar approach to Convex, in order to guide liquidity incentives for Pendle. They are shown below:

These projects attract a large number of ordinary users to provide liquidity by collecting vePEDNLE and offering mechanisms to earn Boost rewards without the need for staking.

Currently, the construction of these protocols around Pendle is beneficial for the long-term development of the Pendle protocol, both in terms of increasing influence and attracting capital.

04. Pendle Data Analysis

As of July 18th, the total TVL of Pendle is 143.76M. According to Defillama’s data, Pendle’s TVL has been growing significantly since 2023, increasing nearly 10 times from around 15M at the beginning of the year. Among them, nearly 70% of TVL comes from the LSD sector.

In order to better understand the current adoption of Pendle in the crypto market, we have selected the staking rate and the number of Twitter posts as indicators to observe.

From the graph below, we can see that the social media influence of Pendle has been continuously increasing since the beginning of the year. The number of tweets on Twitter has gone from 0 for several consecutive months to nearly 20-40 tweets for each week.

Twitter is one of the most influential platforms in the crypto adoption space, and the growing Twitter influence can provide a solid foundation for Pendle’s widespread adoption.

Looking at the staking situation of users, the amount staked on Pendle is also continuously increasing.

The number of Pendle holders also reflects the current users’ confidence in Pendle’s future. The growth is as shown below:

From the current protocol trading volume of Pendle, the majority of protocol transactions are concentrated in the LSD segment, accounting for 55.58%. This indicates a close correlation between Pendle’s protocol development and the LSD track.

In the future, with further development of the LSD track, if Pendle can continue to maintain this growth trend, there is a high possibility of synchronous growth in TVL and other data with the LSD track.

At the same time, the second largest asset in terms of trading volume on this protocol is GLP, which is an interest-bearing token in GMX. GMX is currently the largest perpetual exchange on ARB, and its development is also relatively good.

It can be seen that the major assets with high trading volume on Pendle are those with stable development and a certain guarantee of returns. It shows that these types of assets have a great appeal to users.

05. Multi-chain Development of Pendle

In Pendle’s development history, it first deployed on the Ethereum mainnet, and then successively launched on Avalanche and Arbitrum. Recently, it has also launched on BSC.

It can be seen that Pendle has always maintained a good development plan and has been expanding in the direction of multi-chain. It can be said that it is one of the protocols that supports the largest number of chains in the LSDFI track.

From the TVL distribution in the graph below, it can be seen that since the time of launching on BSC is not long, its TVL is mainly concentrated on ETH and Arbitrum.

With only a little over a week since its launch, the TVL on BSC is currently $4.6M, which can be considered a good start. Currently, there are only 2 pools on BSC, and the interest-bearing assets are all ETH. In the future, with the increase in pools, the TVL on this chain is expected to further increase.

06. Summary

Pendle is a relatively well-established DeFi protocol that has recently been developing rapidly. On the one hand, it has kept up with the development of the LSD track and timely launched related products. On the other hand, it has kept up with the current trend of multi-chain ecosystems in the blockchain industry and actively deployed its products across multiple chains.

At the same time, this protocol has made significant changes to its token model this year. With the introduction of the vePendle model in version 2, it greatly enhances the token’s value capture capability, attracting more users and investors to participate and build around the ecosystem of this protocol.

In the future, if Pendle can maintain its leading position in LSDFi and continue to develop in line with the development of the LSD track, it will likely have significant growth potential.

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