Pendle has emerged as a prominent player in the DeFi space, known for its innovative approach to fixed income and yield trading. This article explores Pendle's journey, product design, operational strategies, and future prospects, providing insights for builders and enthusiasts in the crypto space.
What Is Pendle?
Product Overview
Pendle is a DeFi protocol designed for fixed income and interest rate swaps. In traditional finance, interest rate swaps are a massive market, involving the exchange of fixed and floating interest rates on the same principal amount. Pendle brings this concept on-chain by splitting yield-bearing assets into two components: Principal Tokens (PT) and Yield Tokens (YT).
- Principal Tokens (PT): Represent the principal value of the yield-bearing asset, redeemable 1:1 for the underlying asset at maturity. Holding PT provides fixed income.
- Yield Tokens (YT): Represent the right to earn floating yields from the underlying asset until maturity. Holding YT provides variable income.
Pendle uses a specialized Automated Market Maker (AMM) to facilitate swaps between PT and YT. The protocol standardizes various yield-bearing assets into a single token type (SY) and employs a FlashSwap mechanism to enable efficient trading. Different maturities have independent liquidity pools, reflecting varying implied yields based on duration risk.
For token value capture, Pendle adopts a veToken model similar to Curve. Users can stake Pendle tokens to obtain vePendle, which entitles them to protocol revenue sharing, voting rights for liquidity incentives, and enhanced LP rewards.
Team Background
Pendle was co-founded by TN, who entered the crypto space in 2014 and later served as BD lead at Kyber Network. The other co-founder, Vu Gaba Vineb, was previously a tech lead at Digix. The team consists of approximately 20 members, with 8 focused on growth, 8 on development, and 4 on product design. Notably, key team members are publicly doxxed on Twitter, enhancing transparency and trust.
Funding History
Pendle raised $3.7 million in a seed round and IDO in April 2021. Early investors have seen returns of approximately 10x. Additional investments followed from Binxin Venture, Binance Labs, and Spartan Group via OTC deals, signaling strong confidence in the protocol's potential.
User Base and Use Cases
Pendle serves multiple user groups:
- PT Buyers: Users seeking fixed income by purchasing PT at a discount to underlying assets.
- PT/YT Traders: Traders speculating on interest rate movements by swapping PT and YT.
- Liquidity Providers: LPs benefiting from low impermanent loss in PT-SY pools.
- Liquidity Procurers: DeFi protocols (e.g., LSD, RWA) using Pendle to attract capital efficiently.
- DeFi Integrators: Protocols building on Pendle's infrastructure to expand their offerings.
Product Design: Learning from Predecessors
Pendle's design incorporates lessons from earlier protocols like Element, Tempus, and Notional. Key aspects include:
PT/YT Token Design
- Collect YT: YT holders receive ongoing yields until maturity, after which YT becomes worthless. Used by Pendle, Swivel, and Sense.
- Drag YT: YT accumulates yields until maturity, when holders claim a lump sum. Used by Element, AP Wine, and Tempus.
Collect YT simplifies AMM design by ensuring YT values approach zero at maturity, reducing complexity.
Trading Mechanisms
- Dual Pools: Separate liquidity pools for PT and YT, used by Pendle v1, Element, and AP Wine. This approach increases friction and costs.
- Single Pool (FlashSwap): A single pool handles both PT and YT trades by virtualizing tokens during swaps. Adopted by Pendle v2, Swivel, and Sense, this method reduces friction and improves efficiency.
AMM Curve Design
Pendle leverages curves from Balancer, Yield Protocol, and Notional:
- Balancer v2: Allows customizable asset weights. Pendle v1 adapted it for YT-SY trading with time-based weight adjustments.
- Yield Protocol: Designed for zero-coupon bonds, ensuring PT values converge to underlying assets at maturity. Used by Element and Sense.
- Notional v2: An improved version with higher capital efficiency via a logit curve. Pendle v2 adopted this for PT-SY pools.
Pendle's iterative design process highlights the importance of learning from past innovations to create optimal solutions.
Operational Strategies: Pragmatic and Visionary
Narrative Exploration and Partnerships
Pendle actively tests narratives and assets, focusing on those with strong product-market fit. The protocol gained traction by tapping into the LSD boom, with successful pools like Aura rETH-WETH. Partnerships with established protocols (e.g., Rocket Pool, Balancer) provided credibility and amplified reach.
Asset and Chain Expansion
Pendle prioritizes assets with large yields and deep liquidity, such as GLP on Arbitrum. Chain selection is based on mature yield ecosystems, with current deployments on Ethereum, Arbitrum, BSC, and Optimism. Strategic expansion ensures efficient resource use.
Token Incentives
Despite debates over token incentives, Pendle uses them to attract early users, gather feedback, and bootstrap liquidity. This approach helped validate security and attract institutional players.
User Growth and Education
- Pendle Earn: A simplified interface offering fixed-yield products, aimed at mainstream adoption.
- Institutional Focus: BD efforts target institutions, with tailored products and strategies.
- Influencer Collaborations: Deep engagements with influencers build trust and educate users.
Current Status and Metrics
Pendle's TVL and volume have grown steadily, even during bear markets. Key metrics:
- Daily revenue: ~$1.5k
- Volume/TVL ratio: 0.79%, indicating a need for more traders.
- Comparison with Curve: Pendle has higher growth expectations (e.g., Marketcap/TVL of 0.42 vs. Curve's 0.20).
Challenges include high YT slippage and user education barriers. However, positive signs include rising TVL, institutional adoption, and a nascent bribery market with high ROI for participants.
Future Directions
Pendle plans to:
- Enhance YT trading via RFQ limit orders.
- Expand PT utility through lending integrations.
- Simplify products and improve education via Pendle Academy.
- Explore fixed-rate lending and boost bribery market activity.
Frequently Asked Questions
What is Pendle?
Pendle is a DeFi protocol for trading fixed and variable yields on yield-bearing assets. It splits assets into PT (fixed income) and YT (variable income), allowing users to swap based on interest rate views.
How does Pendle make money?
Pendle charges fees on swaps and yield transactions. Revenue is shared with vePENDLE stakers. Currently, the protocol is not profitable but aims to achieve sustainability as volume grows.
Is Pendle safe to use?
Pendle has undergone audits and has a transparent team. However, like all DeFi protocols, it carries risks such as smart contract vulnerabilities and market volatility. Users should start with small amounts and understand the mechanics.
What assets are supported on Pendle?
Pendle supports various yield-bearing assets, including LSDs (e.g., stETH), GLP, and sDAI. New assets are added based on community demand and strategic fit.
Can I lose money using Pendle?
Yes, potential losses include impermanent loss for LPs, market risks for traders, and smart contract risks. PT holders may face losses if they sell before maturity at unfavorable prices.
How does Pendle compare to other yield protocols?
Pendle uniquely combines fixed yield trading with efficient AMM design and FlashSwap technology. It offers lower IL for LPs and more flexibility for traders compared to alternatives like Element or Notional.
Conclusion
Pendle exemplifies DeFi innovation by blending rigorous protocol design with pragmatic growth strategies. While challenges remain, its focus on user needs and continuous improvement positions it for long-term success. For builders, Pendle's journey underscores the importance of iteration, community engagement, and visionary leadership in crypto.