Published: January 16, 2024
In this report, we will comprehensively analyze the performance and key developments of Pendle, a project that has achieved a remarkable turnaround in 2023. Its growth and dominance in the yield trading sector position Pendle as the market leader and pioneer in maturing the interest rate derivatives landscape in DeFi.
Since the release of V2, Pendle has made significant strides and become a leader in the yield market sector. By building on top of other projects and not relying on a single ecosystem or source of yield, Pendle has managed to capture network effects and provide value to both projects and independent users.
It comes as no surprise that Pendle’s TVL has been in a non-stop uptrend. As Pendle continues to launch new pools, deploy on different chains, and tokenize new yield sources, the protocol is becoming a liquidity hub that can capture a portion of market share across a broad range of sectors, i.e., LSTFi, RWAs, DEX LPs, and more.
Pendle’s unique approach allows users to tokenize and trade future yields, offering a versatile platform for yield optimization in both bullish and bearish market conditions.
Through a process known as yield stripping, Pendle aims to bring the traditional Interest Rates Derivatives market (valued at over $400T in notional value) into DeFi. By democratizing access to yield markets, users can interact with Pendle to speculate, arbitrage, hedge, or execute advanced strategies to “long yield”, “fix your rates”…
To understand why the development of a yield marketplace is significant for the growth of an ecosystem, it is essential to break down the protocol into its 3 main components:
This architecture offers a great setup from which both projects and independent traders or LPs can benefit.
If two things have found product-market-fit in leverage, they are demand for leverage and yield. In DeFi, every liquidity pool has a source of yield attached to it, whether it is from staking, swap fees, or yield strategies. And if there is liquidity and yield, a Pendle pool can be built on top of it.
This is a big value proposition for any DeFi project: Pendle can capitalize and make the most out of the composability of DeFi without exposing itself to the excess dependence and risks of a single project. The protocol can build a yield pool on top of virtually any source of liquidity.
This puts Pendle in a unique position, as it can thrive in an environment where liquidity flows freely, adapting and thriving. In other words, Pendle can adapt to ever-evolving market conditions, capitalizing on whatever the latest and most trendy narrative is.
At the same time, Pendle doesn’t overshadow the TVL or adoption of the underlying projects; it enhances them by tokenizing their yield-bearing assets. Pendle’s yield-tokenization process is key for elevating the value of the assets it interacts with. This results in arbitrage and hedging opportunities, increasing the adoption of fixed rates in DeFi and opening up the doors for fixed-income investors to start deploying capital in DeFi.
Whether it’s Liquid Staking Tokens (LST), Real World Assets (RWA), or the perpetual swap season, Pendle provides a gateway to seize yield opportunities in any market trend. For instance, in 2023 Pendle capitalized on TradFi yields surpassing DeFi yields by tokenizing yield-bearing assets backed by RWAs. It also benefited from the LSTFi season after the Shapella upgrade, driving interest in Liquid Staking Tokens.
Pendle’s ace in the deck is its ability to create pools for any yield-bearing asset and split their yields into principal and underlying components. This approach eliminates the need to predict which DEX will have the most liquidity for any given asset and allows Pendle to tap into liquidity from multiple sources.
By allowing users to trade yield separately from the underlying asset, platforms like Pendle provide a new way to interact with income-generating investments. This is a huge step for onboarding institutions.
A yield marketplace like Pendle increases liquidity and efficiency in the wide range of interest-bearing instruments, ranging from $ETH LSTs to RWAs or money market rates. By creating a centralized venue for trading yield-bearing assets, Pendle makes it easier for participants to enter and exit positions. This can lead to more accurate pricing of both yield and the underlying assets.
Additionally, interest rate derivatives are hedging instruments that can foster the adoption of fixed-income opportunities on-chain. For instance, investors who anticipate changes in yield rates can hedge their portfolios accordingly, reducing potential losses from unfavorable shifts in interest rates or asset yields. One example of this was seen with the proliferation of LSTs in 2022, especially after Shapella. Interest rate protocols like Pendle allow investors to convert Ethereum’s floating staking rate to a fixed rate, which is helpful for node operators and users who expect lower staking yield over time.
At the same time, market participants can choose between fixed and variable yield options, catering to different risk appetites and investment strategies. This flexibility enhances portfolio diversification and allows for more tailored investment approaches. For instance, investors can sell future yields upfront for immediate liquidity or buy yield tokens to gain exposure to future income streams.
The yield-stripping AMM is one of the most underrated features of the protocol. Not only is it specifically designed to allow users to take advantage of the specific properties of PTs and YTs, but it also allows for the customization of the curve to optimize each pool.
Unlike other yield-stripping implementations like the constant geometric mean or constant power sum model, Pendle introduces two main parameters (scalar root and initial rate anchor) that can be set at pool creation to better fit the yield profile of the underlying asset.
This feature was not possible in the past, which might be one of the reasons why the project struggled to gain adoption. In a former version of the AMM, PTs and YTs had separate pools, which led to liquidity fragmentation and poor UX.
With V2 and the new implementation, all of this complexity is abstracted away. Thanks to the SY token standard, the Pendle AMM V2 makes it possible to use a single pool of SY-PT liquidity such that:
P(PT) + P(YT) = P(Underlying)
Note that the AMM does not hold any YTs. Instead, users trade PT against the underlying asset and all the complexity of minting YT out of SY tokens is abstracted away from the end user.
This is possible is because of the price relationship between PT and YT. This relationship enables buying YT by sending SY into the swap contract, while selling YT involves sending YT to the contract, borrowing an equivalent amount of PT from the pool, and redeeming SY.
As time passes and traders buy/sell PTs, the curve changes in response to the amount of yield that is earned over time – narrowing the price range of PT as the maturity date approaches.
Since the launch of V2, one notable characteristic has been the ruthless prioritization and emphasis on simplifying the user experience. Even though Pendle’s core users remain to be more sophisticated retail users who have an understanding of derivatives, Pendle has made multiple efforts to remove the barriers to entry. The first step in this direction was the creation of two different UIs: a pro UI and a simple UI, now renamed Trade UI and Earn UI respectively. There is also an information Telegram bot to track yield fluctuations and set notifications on target APYs.
Most users in DeFi are not familiar with the intricacies of yield trading. With Pendle Earn, the team set out to change this experience, making it simpler and more convenient for anyone to start earning yield without getting lost in the technical complexities involved (shown below for reference).
First, Pendle offers both a simple and pro UI, making DeFi accessible to users of all levels. Features like zapping simplify complex operations, and collaborations with partners like OKX wallet and Biteget wallet are a big improvement in terms of user experience.
Second, initiatives like Pendle Earn are a game-changer to increase adoption. Pendle Earn is possible thanks to all of the technical improvements that were made to the v2 AMM, unifying liquidity in a single trading pool. However, before the introduction of Pendle Earn it could have been overwhelming to participate as a fixed-rate taker or liquidity provider.
Providing investors with a familiar UX not only makes it more appealing for them to participate but also allows for easier integrations. For institutions and centralized exchanges, Pendle Earn is a plug-and-play module that paves the way for wider utilization of the protocol.
In the future, we can expect more improvements to the UI to make it even more intuitive. This would help users understand what actions to take based on the difference between the implied APY and the underlying APY at any given time.
As an example, one of those features is limit orders, which were introduced on January 12th, allowing users to place buy/sell orders for PTs and YTs at a specific implied APY. These orders have an expiry date and can be matched fully or partially against limit or market orders in the opposite direction.
For instance, a buy limit order to buy YT-wstETH can be matched against one of the following:
The order will be filled based on the most gas-optimal route for both parties, and it will be filled either at the exact implied APY that you specify or at a more favorable rate.
This feature not only improves the user experience significantly but also allows traders to swap with zero-price impact. This solves one of the main pain points of Pendle, which is high slippage due to the asymmetric distribution of yield (since YT is only a small portion of the tokenized underlying asset).
Pendle’s expansion from Avalanche and Ethereum to Arbitrum, along with grants from Optimism and investments from Binance, expanded its presence across multiple ecosystems.
Given how Pendle works, yield trading is a second-order derivative, which means that it is important for any candidate chain to have an AMM or money market that allows for the generation of yield. Once those requirements are met, the second consideration is TVL, ideally in the range of a couple hundred million to a few billion dollars.
At the forefront, tokenizing assets like GLP and gDAI further solidified its position in the DeFi space, allowing LPs on GMX and Gains to lock in a fixed rate and hedge against the possibility of decreasing yield. Next, Pendle went the extra mile and introduced LP tokens from Camelot, further showcasing the versatility of the AMM and making the Arbitrum ecosystem more capital-efficient.
An upcoming feature in 2024 is a pool factory, allowing anyone to participate in the process of creating a pool for yield trading. Right now, this process requires the core protocol team to study the nature of the yield-bearing asset, write the smart contracts, and have the contracts audited. This takes approximately 1-2 weeks and is not really scalable.
From a scalability standpoint, the ability to allow protocol teams to come up with the contracts for the assets they want to list is a strong value proposition. Those protocols are incentivized to enable yield trading for their assets and already know the nature of the assets they are using.
At the heart of Pendle’s tokenomics lies vePENDLE, a mechanism inspired by Curve’s veTokenomics that serves as both a cornerstone of governance and a catalyst for yield optimization.
Obtaining vePENDLE is a straightforward process. Users can lock their PENDLE tokens for a specified duration, and the value of vePENDLE they receive is directly proportional to the amount staked and the staking duration, with a maximum lock period of 2 years. Next, the value of vePENDLE will gradually diminish over time, ultimately reaching zero when the lock duration expires, at which point the staked PENDLE tokens are unlocked.
Over the years, many critics have claimed that veTokenomics only works for Curve due to its role as the liquidity hub for stablecoins. However, the truth is that vePENDLE has played a pivotal role in Pendle’s success, contributing significantly to both its supply dynamics and governance structure.
One of its fundamental functions is acting as a mechanism to reduce the supply of $PENDLE tokens. This reduction bolsters the overall stability of the protocol, fostering long-term health and sustainability within the Pendle ecosystem.
It is worth noting that the veTokenomics implemented by Pendle have been slightly tweaked to resemble the Solidly model: vePENDLE holders collect 80% of the swap fees of the pools they vote for (Vote APY). This is an instrumental feature for channeling incentives. It empowers vePENDLE holders to actively participate in governance by voting for and directing rewards to various pools.
Pendle relies on two primary revenue sources: swap fees from all trades conducted on the Automated Market Maker (AMM), YT fees (a 3% fee on all yield accrued by YT tokens), and a 0.1% swap fee on the “implied yield” of all PT swaps. Notably, 100% of the fee collected from YT is presently distributed to vePENDLE holders, though this distribution model may evolve in the future.
From a utility perspective, Pendle shares revenue with vePENDLE holders, which reap the benefits of a multi-faceted reward system. vePENDLE holders enjoy the vePENDLE Base APY, which encompasses interests collected from yield tokens (YT) and rewards from matured principal tokens (PT). Additionally, the protocol distributes all protocol revenue from swap fees to the vePENDLE voters of the corresponding pools.
Additionally, as an external mechanism to align the incentives of LPs and token holders, vePENDLE holders can boost their rewards by up to 2.5x.
Overall, the total rewards comprise the Base APY plus the Voter’s APY, and the highest possible combination is referred to as vePENDLE Max APY. Together, Base APY + Voter’s APY determine the total rewards you will receive. Similarly, Base APY + Highest Possible Voter’s APY is the highest amount of rewards that you can receive from vePENDLE (i.e. vePENDLE Max APY).
While vePENDLE offers an array of benefits, it’s important to acknowledge some tradeoffs. First, the gradual decay of vePENDLE value over time necessitates ongoing management to maintain optimal rewards. Second, optimizing the distribution of votes epoch after epoch requires active management as well (although this experience can be simplified with third-party integrations). Third, it is important to note that the distribution of fees and rewards is subject to change, and users should stay informed about any updates to the protocol.
The performance of the $PENDLE token over the past year has been nothing short of astounding, with a remarkable increase of 2054% Year-over-Year (YoY).
This exponential growth has not gone unnoticed, as $PENDLE has secured listings on top-tier exchanges, including Binance, BingX, MEXC, Bitget, Bybit, and Crypto.com.
In addition to that, Binance Labs, the venture capital and incubation arm of Binance, made a strategic investment in Pendle on August 23, 2023.
When it comes to token unlocks, we observe that the vesting of team tokens concluded in April 2023, marking a pivotal moment in the token’s journey. Since then, all new emissions have stemmed from token incentives and initiatives focused on building and expanding the Pendle ecosystem.
Notably, these emissions follow a decreasing pattern, reducing by 1.1% every week until April 2026. This controlled emission schedule contributes to the token’s stability and long-term sustainability.
At present, Pendle’s circulating supply is 97M $PENDLE tokens, with a total supply of 258,446,028 tokens. This puts the token’s market capitalization at $105,377,455, ranking #315 in Coingecko.
The history of $PENDLE reveals that its most recent growth is not an overnight success, but rather a story of perseverance. Some of its competitors in the yield stripping sector like Sense Finance or Yield Protocol have now sunset operations, while other competitors like Element Finance or APWine have now rebranded to DELV and Spectra respectively.
The highest price ever paid for $PENDLE was $2.45, a milestone achieved on May 05, 2021, more than two years ago. In comparison, the current price is approximately 55.55% lower than this all-time high.
Conversely, the lowest price ever recorded for $PENDLE was $0.03377729, observed on Nov 14, 2022, approximately a year ago, shortly before the deployment of the v2 Automated Market Maker (AMM). Remarkably, the current price represents a staggering 3,125.90% increase from this all-time low.
Similar to how Convex played an instrumental role in the success of Curve, Pendle has also managed to attract external protocols who have an interest in accumulating as much vePENDLE as possible. In the case of Pendle, it is not just one protocol, but three: Equilibria, Penpie, and StakeDAO.
Penpie (mPENDLE) is currently the largest vePENDLE holder (34%), followed by Equilibria (ePENDLE) with 23%. StakeDAO owns slightly less than 3%, and there is a large presence of whales and DAOs owning the remaining portions.
This is extremely beneficial for the underlying veToken issuer, in this case, Pendle. Having a large protocol to accumulate voting power offers more liquidity advantages and boosts the utility of the token.
Pendle has an exceptional advantage when it comes to composability. By design, it can seamlessly integrate with various DeFi ecosystems without being bound to a single project or protocol. This unique flexibility enables Pendle to adapt swiftly to evolving market conditions and capitalize on the latest DeFi narratives. Users can further take on extra leverage or boost their exposure to a certain yield source through the use of PT tokens or Pendle LP tokens as collateral.
Pendle’s PT tokens have emerged as a compelling collateral option on money markets, allowing for use cases such as:
Examples of money markets allowing for the use of PTs as collateral are Dolomite and Myso.
In addition to the use of PTs as collateral, Pendle LP tokens can be used as collateral as well.
Stella also allows users to lend $PENDLE and open leveraged positions on the PENDLE/ETH Uniswap v3 pool with 0% borrowing cost.
Users can choose between two options:
After reaching $300M in trading volume and $250M in TVL, Pendle is working on Pendle V3.
The TVL has been on a strong uptrend throughout the entire year of 2023, consolidating past $200M and being perceived by the market as the leading protocol when it comes to interest rate derivatives and yield trading. Even though the rate of growth might slow down due to the astonishing growth that we have already seen, we believe that Pendle can capitalize on the restaking narrative, becoming a great instrument to hedge the underlying yield and speculate or arbitrage the upcoming diversity of liquid staking tokens.
The fundamentals have been reflected in the price action of $PENDLE, positioning the token as one of the leading ecosystem projects across L2s, Ethereum Mainnet, and BNB Chain:
The Binance announcement about a Pendle listing in July further increased the trading volume during the second half of the year:
Furthermore, this outperformance can be observed against both stablecoins and $ETH:
Revelo Intel has a commercial relationship with Pendle and this report is associated with such partnership.
Members of the Revelo Intel team, including those directly involved in the analysis above, may have positions in the tokens discussed.
This content is provided for educational purposes only and does not constitute financial or investment advice. You should do your own research and only invest what you can afford to lose. Revelo Intel is a research platform and not an investment or financial advisor.
