The Optimist Podcast - Latest Developments From Pendle Finance

In Optimist’s Twitter Spaces which took place on August 17th, 2023, Charlie is joined by Ken and Dan to discuss Pendle Finance, its features, latest developments, RWAs, and LSDfi. Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist
Ken (Guest) – Head of institutional business at Pendle
Dan (Guest) – Growth Lead at Pendle
Pendle Finance – a yield tokenization protocol

Introduction to Pendle Finance

Ken describes Pendle as a yield tokenization protocol that allows the separation of a yield-bearing asset into principal and yield components, which trade separately.
He compares Pendle’s function to the swaps markets, particularly the interest swaps markets, and emphasizes the protocol’s solution to the challenge of fluctuating yields in DeFi.
He talks about the types of assets Pendle supports and highlights the focus on LSDFi and LP tokens of revenue-generating trading protocols.
He addresses the constraints of yield stripping in DeFi, noting challenges with assets that have negative yields and the difficulty of supporting permissioned assets.

Fixed-Rates

Ken addresses the significance of interest rate swaps in traditional finance, explaining how they are used by banks and large institutions to hedge positions. He drew parallels to the current phase in DeFi, emphasizing the growing demand for a fixed-rate market.
He highlights the importance of a fixed rates market for any financial ecosystem to mature. He pointed out that with $ETH‘s staking yields being inherently floating, there’s no native yield curve. Therefore, a yield curve implied by swaps markets, like Pendle’s, becomes a crucial DeFi reference rate.
He stresses the goal of Pendle to establish this reference rate, especially in the context of LSDFi.

Yield Risk Management in DeFi

Charlie highlights the importance of managing yield risk, especially given the fluctuating nature of yields in DeFi.
He points out that some protocols in the DeFi space can be hard to determine if they are necessary or just adding complexity.
Ken emphasizes the significance of what Pendle is doing, suggesting that Pendle’s approach helps mature the industry and provides a solution to the yield risk challenges.

Pendle’s Token System and Vote Escrow Model

Ken explains that the purpose of having a token is to align the protocol with its users and token holders.
He says that the ve model, which was pioneered by Curve, is designed to involve everyone in the ecosystem.
He highlights the benefits of holding $vePENDLE, which include: voting rights to influence the direction of the protocol, boosting yield rewards for users, and sharing revenue from the protocol’s operations.

Governance and Transitioning to a DAO

Ken says that Pendle is not currently a DAO but has plans to potentially transition to a DAO in the future.
He expresses that the challenge lies in determining the right time to release decision-making power to the community.
He highlights the importance of ensuring that decisions are made quickly and effectively, even as the protocol becomes more decentralized.
Dan adds that transitioning to a DAO is a significant decision for any protocol.
He points out the benefits and drawbacks of such a move, emphasizing the potential challenges of community members not being as tuned in as the core team.
He stresses the importance of picking the right moment in the growth trajectory of the protocol to transition to a DAO.

Pendle’s Launch on Optimism

Charlie talks about the complexity and sophistication of the Optimism ecosystem and suggests that it’s a space where advanced DeFi tools and protocols can thrive.
He expresses interest in the value Pendle aims to bring to the Optimism ecosystem, especially in terms of offering something new and unique.
Ken shares that the launch of Optimism has seen decent liquidity and more votes than they had anticipated.
He says that the timing felt right for Pendle to launch on Optimism, especially since the platform already has a user base familiar with sophisticated DeFi tools.
He emphasizes that Pendle aims to bring a different kind of value to the already vibrant ecosystem of Optimism, offering a unique approach compared to other derivatives.
He highlights that transitioning to Pendle should be easy for these users, and Pendle’s addition would complement the existing tools and protocols on Optimism.

Real World Assets (RWAs) in DeFi

Charlie expresses interest in the types of real-world assets that would make sense to be integrated into DeFi in the near term, mentioning T-bills and Real Estate Investment Trust (REITs) as examples.
Ken shares that, at a high level, Pendle is considering various types of assets in DeFi, with RWAs being a particularly interesting narrative.
He says that it makes sense to have reference rates from traditional finance to be on-chain in the crypto space.
He highlights potential use cases for different portfolios, such as treasury DAOs or institutional DeFi, wanting to transition risk from crypto to traditional assets like T-bills.
He notes that they are in the early stages of exploration due to regulatory uncertainties and are proceeding with caution.
Dan emphasizes that T-bills probably make the most sense to be integrated into DeFi first due to their risk-free nature and the dominance of stablecoins in crypto trading.
He talks about other types of RWAs like private credit, referencing protocols like Maple and Centrifuge that have grown significantly in recent years.

LSDFi Evolution

Charlie says that the $ETH staking rate has become the risk-free rate in DeFi and how products like Pendle provide insights into market behavior.
Ken says that the next stage for LSDFi would be to expand its use cases and adoption.
He points out that currently, Collateralized Debt Positions (CDP) and money markets are the primary use cases that come to mind, but this is just scratching the surface.
He drew parallels to traditional markets, suggesting that just as entire markets can be built on reference rates like T-bills, an entire DeFi ecosystem can be built on $ETH staking rates or LSDFi staking rates at different maturities.
He expresses optimism about the opportunities for innovation in the space, especially innovations unique to DeFi.
He shares observations from Pendle’s pools, noting that longer-term pools tend to have lower yields, implying that long-term $ETH holders might be trying to lock in high $ETH staking yields for as long as possible.
Dan adds that one of the surprising findings is that longer-maturity LSDFi pools have been among the bigger volume contributors to the protocol.
He says that people in crypto are looking to leverage or fix their yields for the longer term.
He says that as Pendle’s liquidity grows, they expect to see more rational behavior in the Pendle markets.

Important links

Information

Medium: Twitter Spaces
Show: The Optimist
Show Title: Pendle <> The Optimist
Show Date: August 17th, 2023