An in-depth analysis of the rise, fall and future of Pendle

Author: charlotte_zhao Source: X, @charlotte_zqh

1 Pendle 101: How to separate principal from yield

1.1 Separation of interest-bearing assets

Pendle is a decentralized financial protocol that allows users to tokenize and sell future earnings. In terms of specific business processes, the protocol will first package the interest-bearing tokens into SY tokens (Standardized Yield Tokens), which are tokens under the ERC-5115 standard and can encapsulate most of the interest-bearing assets; afterwards, the SY token is divided into two parts, namely PT (Principal Token) and YT (Yield Token), representing the principal and yield of the interest-bearing assets respectively.

PT is similar to a zero-interest bond, allowing users to purchase it at a certain discount and redeem it at par on the maturity date. Its income is implicit in the difference between the purchase price and the redemption price. Therefore, if you hold PT until maturity, you will get a fixed income. For example, if you buy PT-cDAI at a price of $0.9, you will get 1DAI at maturity, with a yield of (1-0.9)/0.9=11.1%. The act of buying PT is a short yield act, that is, it is believed that the future yield of the asset will decline, which is lower than the current yield of buying PT. At the same time, the yield is fixed, which is suitable for users with low risk preferences. However, this behavior is different from real short selling, and it is more of a hedging behavior.

YT holders can obtain all the income of the interest-bearing asset during the holding period, corresponding to the income rights of the principal. If the income is settled in real time, then the holder of YT can receive the settled income at any time. If the income is settled after maturity, the user can only receive the income with YT after maturity. After the income corresponding to YT is received, the YT asset will become invalid. The act of buying YT is a long yield act, that is, it is believed that the future yield of the interest-bearing asset will rise, and the total income obtained will be higher than the current purchase price of YT. YT provides users with an income leverage. They can directly purchase the income right without purchasing the complete interest-bearing asset. However, if the yield drops sharply, the YT asset faces the problem of loss. Therefore, compared with PT assets, YT is a high-risk, high-yield asset.

Pendle provides tools for long and short yields. Users choose corresponding investment strategies based on their predictions and judgments of yields. Therefore, yield is an important indicator for participating in the protocol. Pendle also provides a variety of APYs to reflect the current market situation:

• Underlying APY: It is the actual yield of the asset, taking the 7-day moving average yield to help users estimate the future yield trend of the asset.

• Implied APY: It is the market's consensus on the future APY of the asset, which is reflected in the prices of YT and PT assets. The calculation formula is:

• Fixed APY: Specifically for PT assets, the fixed rate of return that can be obtained by holding PT, this value is equal to the Implied APY value

• Long Yield APY: Specifically for YT assets, buying YT at the current price The annual yield is 100%, but this yield is constantly changing because the yield of the interest-bearing asset itself is changing (this value may be negative, that is, the current YT price is too high, resulting in a higher than future return of the project). It is worth noting that the potential returns of many YT assets of Pendle are airdrops and points, and the value cannot be estimated. Therefore, the Long Yield APY of many YT assets is -100%.

These four yields will be given at the same time in the Pendle Market interface. When Underlying APY>Implied APY, it means that the return of holding the asset will be greater than the return of holding PT. At this time, you can adopt a long yield strategy, that is, buy YT and sell PT. When Underlying APY<Implied APY, consider adopting the opposite strategy. However, it should be pointed out again that the measurement of these yields does not take into account the future airdrop expectations, so the above strategy is only applicable to pure interest rate swap assets.

1.2 Pendle AMM: Realizing transactions of different types of assets

Pendle AMM is used to realize transactions between SY, PT and YT tokens. According to the Pendle white paper, in the V2 version, Pendle improved the AMM mechanism, borrowed the AMM model of Notonial Finance, improved capital efficiency, and reduced slippage. The following is a diagram of the three AMM models of fixed-income protocols on the market, where the X-axis refers to the proportion of PT assets in the pool, and the vertical axis is the Implied Interest Rate. Currently, Pendle uses the AMM model corresponding to the red curve, the black curve is the V1 model, and the blue curve is the AMM model of other fixed-income protocols.

In the specific pool, Pendle V2 uses PT-SY trading pairs, such as PT-stETH and SY-stETH, which can greatly reduce the impermanent loss of LP (detailed analysis will be conducted later). Since SY=PT+YT, the exchange of YT can be achieved through Flash Swap. The specific process is as follows. If a user needs to purchase YT-stETH worth 1ETH, then the exchange of ETH to YT-stETH needs to be realized. Assuming 1ETH=N YT-stETH, the contract will borrow N-1 SY-stETH from the pool and convert the user's ETH into SY-stETH (the specific process is to first convert ETH into stETH through Kyberswap, and then encapsulate it as SY-stETH in the protocol), and then split all SY-stETH (N) into PT and YT, give the appropriate amount (N in this case) of YT to the user, and then return PT (N) to the pool. What is actually completed in the pool is the exchange of SY-PT (N-1 SY converted into N PT).

The process of selling YT is the opposite. If the user wants to sell N YT (assuming that N YT is worth 1 SY at this time), the contract will borrow N PTs from the pool, merge them into N SYs, and give one SY to the user, and return N-1 SYs to the pool. At this time, what is actually completed in the pool is the PT-SY (N PTs are exchanged for N-1 SYs) exchange.

Like other AMMs, Pendle AMM also requires LP to provide liquidity for the pool, but since one PT must be equal to one SY on the expiration date, there is no impermanent loss for LP on the expiration date. When users provide liquidity, the assets they provide are SY and PT assets, so the native income of these assets will be automatically captured, in addition to transaction fees and PENDLE's liquidity mining rewards, that is, there are four sources of income:

• PT fixed yield: the income from purchasing PT itself

• Underlying yield: the income from SY assets

• Swap fees: 20% of transaction fees

• PENDLE token incentives

2 Token Economics: How does business revenue drive the price of the currency?

2.1 Token Economic Mechanism: How to achieve the economic flywheel?

PENDLE's token economic mechanism mainly lies in the protocol sharing and decision-making governance that can be participated in after locking up vePENDLE. Similar to Curve's veCRV model, users can lock PENDLE in exchange for vePENDLE. The longer the lock-up time, the more vePENDLE is obtained. The lock-up time ranges from 1 week to 2 years.

The benefits of holding vePENDLE include:

• Boost income: You can boost your income as an LP, up to 2.5 times

• Voting rights: Vote on the allocation of PENDLE incentives in different pools

• Revenue sharing: vePENDLE holders can obtain the following benefits:

• 80% of the voted pool

Transaction fee sharing: vePENDLE holders vote on the direction of PENDLE incentives, and only after completing the vote can they obtain the reward of the selected trading pool

In terms of yield calculation, Total APY of vePENDLE holders=Base APY+Voter’s APY, of which Base APY comes from the income of YT and PT, and Voter’s APY comes from the transaction fee sharing of the designated pool, which is also the main part of APY - currently Base APY is only about 2%, while Voter’s APY can be as high as 30% or more.

Pendle's ve model also promoted the birth of vote-buying platforms. Penpie and Equilibria are both engaged in related businesses, similar to the business process between Convex and Curve. However, compared to Curve, the core project parties of the assets traded on Pendle do not have the need for vote bribery. As the main trading platform for stablecoins and other anchored assets, Curve ensures that the depth of the pool is of great significance to maintaining the anchoring of the currency price, which prompts the project parties to have a great demand to participate in vote bribery to guide liquidity, but maintaining the trading depth of Pendle AMM does not seem to have much meaning for related project parties such as LSD and LRT. Therefore, the main motivation for participating in vote bribery will come from LP on Pendle. The establishment of the vote bribery platform mainly optimizes two aspects of the problem: 1) Pendle LP can obtain higher returns without purchasing and locking PENDLE; 2) PENDLE holders can obtain liquid ePEDNLE/mPENDLE to obtain vePENDLE incentives. Since this article only analyzes Pendle, the vote bribery ecosystem will not be expanded too much here.

2.2 Token distribution and supply: no major subsequent unlocking events

The PENDLE token was launched in April 2021, using a hybrid inflation model with no upper limit on token supply. It provided a stable incentive of 1.2 million PENDLE per week in the first 26 weeks. After that (weeks 27-260), the liquidity incentive will decay by 1% per week until the 260th week. Thereafter (after week 261), the inflation rate will be 2% per year for incentives.

According to Token Unlock data, the initial token allocation was given to the team, ecosystem, investors, consultants, etc. At present, all tokens have been unlocked. If OTC transactions are not considered and only the initial allocation is considered, PENDLE will not face large-scale centralized unlocking in the future. At present, daily inflation only comes from liquidity mining incentives. The daily emission amount of PEDNLE is about 34.1k. According to the coin price on August 5 ($2), the daily unlocking selling pressure is $68.2k, which is relatively small.

3 Application scenario development: stable financial management, interest rate trading and point leverage

The development of Pendle can be roughly divided into three stages:

• Pendle was founded in 2021. Although it was the DeFi Summer at that time, DeFi was in the infrastructure period. The main projects revolved around DEX, stablecoins and lending. As an interest rate exchange product, it did not receive much attention.

• Until the end of 2022, as Ethereum completed its transition to PoS, the Ethereum staking rate became the native interest rate in the cryptocurrency circle, and a number of LSD assets emerged rapidly, resulting in: (1) interest rates becoming one of the focuses of the cryptocurrency circle; (2) a large number of interest-bearing assets were born, and Pendle found its own PMF; (3) Pendle became a small-cap target in the LSD track, and there were few competitors in the subdivided track. The listing on Binance during this period further increased Pendle's valuation ceiling.

• From the end of 2023 to the beginning of 2024, Eigenlayer started the re-staking narrative of Ethereum, and a number of liquidity re-staking (LRT) projects were born. Both Eigenlayer and LRT projects announced points and airdrop plans, and the points war was about to start. This led to: (1) the birth of more interest-bearing assets, which effectively broadened Pendle's path to increase TVL; (2) Most importantly, Pendle captured the intersection of principal and interest transactions and point leverage and found a new PMF. The following will introduce more about how Pendle plays a role in the points war and how to empower PENDLE tokens.

In summary, in addition to becoming an LP and a vePENDLE holder, Pendle's main usage scenarios currently include three: stable financial management, interest rate trading, and point leverage.

3.1 Steady Financial Management

It is mainly a function corresponding to PT assets. By holding PT assets, you can obtain a fixed amount of corresponding assets at maturity. This fixed interest rate is determined on the day of purchase, and users do not have to pay attention to the changes in APR. This function has a stable yield, and both risk and return are low. This function has increased the user's yield after the point transaction is enabled: taking eETH as an example, the user chose to give up the point income of holding eETH in exchange for a higher fixed yield. Therefore, the current yield of PT assets (7.189%) is much higher than (2.597%), which provides financial management tools for users who want to obtain higher Ethereum-based fixed income. Some users are not optimistic about the subsequent token performance of the LRT project. When the market FOMO pushes up the YT price, they can buy PT assets at a low price, which is actually a short-selling transaction on the LRT token.

3.2 Interest rate/yield expectation trading

Through swing trading of YT assets, long and short positions on interest rates can be achieved. When it is believed that future yields will increase significantly, buy YT assets and sell them when the price of YT assets rises. This strategy is suitable for trading assets with high volatility in yields, such as sUSDe, which is a pledge certificate for the stablecoin issued by Ethena. The pledge income mainly comes from the funding rate of ETH. The higher the funding rate, the higher the pledge income. The funding rate depends on changes in market sentiment. Therefore, the pledge yield also has a certain volatility with the funding rate. By trading YT-sUSDe, you can quickly make a profit in swing trading. In addition, after the introduction of the right to point income, the transaction of YT assets also includes pricing changes for airdrop expectations. For example, before ENA is issued, by buying YT-USDe early and selling tokens after the market starts FOMO on the ENA airdrop, you can get a higher return. This kind of swing trading faces high returns and risks. For example, the price of YT-sUSDE has been falling repeatedly recently. On the one hand, as the holding period shortens, the points brought by holding YT assets are decreasing. On the other hand, it may be due to the continuous decline in ENA prices. The market's expectations for the value of airdrops are declining, and early buyers may face large losses.

3.3 Points leverage and trading

The biggest impact on Pendle in this cycle comes from the points trading function, which provides users with high leverage of points and airdrops. This article will focus on this function and hope to answer the following questions:

(1) What projects are suitable for Pendle's points trading?

Points have become the main form of airdrop distribution in this cycle. The ways to obtain points include interaction, volume brushing and deposit, among which deposit has become the most important way. With the emergence of various LRT protocols, BTC second layer and pledge protocols, the TVL war has become a main theme this year. Among them, some protocols directly lock related assets, such as BTC second layer directly locks BTC and inscription assets, Blast directly deposits ETH, etc., and some protocols return the corresponding liquid assets as deposit certificates after deposit, and obtain points by holding. Pendle's principal-income separation mechanism is more suitable for the second category, that is, an underlying asset is needed as a medium for point accumulation.

(2) In what aspects does Pendle's point transaction realize PMF?

Pendle mainly realizes PMF in two aspects, one is to realize the leverage of points, and the other is to realize early pricing and expected trading of airdrops. The TVL war is a game for whales. Ordinary retail investors cannot have enough ETH to deposit. Pendle supports the purchase of YT assets to obtain the right to earn points. You can get corresponding points without the principal. It has achieved dozens of times the point leverage in projects such as LRT and Ethena. Secondly, Pendle essentially provides the earliest market pricing for points. The transaction of YT assets is also a transaction of project airdrops and coin price expectations. It can be further divided into two situations: ① For tokens that have not yet TGE, most of the airdrop rules are not clear, so it contains both the market expectations of the tokens that may be obtained and the early pricing of these tokens; ② For tokens that have already TGE, the coin price has a clear market pricing. The unknown information may be how many tokens are airdropped for one point. If the airdrop rules are also relatively clear, it is already known how many tokens this underlying asset can get when it expires. Then this YT asset is equivalent to an option, and the current price contains the pricing expectations of the token price on the expiration date.

（3）How does point trading affect Pendle's business income and coin price?

According to the previous analysis, the introduction of point trading has brought about transactions in anticipation of future airdrops. Compared with the rate of return, this expectation changes and fluctuates rapidly, thus bringing about higher speculation and trading demand. Most directly, this has rapidly expanded Pendle's trading volume and transaction fee income. In addition, the enrichment of asset categories has also increased Pendle's TVL.

The empowerment of PENDLE is more obvious. The income of vePENDLE holders mainly comes from the share of transaction fees. If there is not enough volatility and speculative demand, there will not be enough transactions. The yield of vePENDLE is extremely low. In July 2023, the total APY of vePENDLE was only about 2%. Therefore, although Pendle followed the hot speculation of the LSD track at that time, the currency price still could not benefit from the business. The introduction of point trading has changed this dilemma. At present, the APY of vePENDLE in multiple pools exceeds 15%, and the related asset pools of multiple LST assets are as high as more than 30%.

(4) How does the performance of related projects affect Pendle?

The two core negative impacts surrounding Pendle include: the airdrop of the main assets (LRT and Ethena); and the continued decline in the price of the main project currency. The airdrop has reduced speculative demand. Although the points plan will continue for multiple periods, coupled with the decline in currency prices, the market's confidence and expectations for the project have been greatly reduced. The number of users who continue to choose to deposit is decreasing, and the related trading volume has also shrunk significantly. At present, Pendle's TVL and trading volume have both fallen sharply, and the same dilemma is also reflected in the currency price.

4 Data Analysis: TVL and Trading Volume are Pendle's KPI

This article believes that the business data surrounding Pendle is mainly divided into two parts: stock and flow. The stock is mainly represented by TVL. In addition, it is necessary to pay close attention to indicators that affect the health and sustainability of TVL, such as the composition structure of TVL, the expiration time of the asset pool, and the rollover ratio; the flow is mainly represented by trading volume, including trading volume, trading fees, trading volume composition, etc. Changes in trading volume will directly affect token empowerment.

4.1 TVL and related indicators

The TVL denominated in ETH has grown rapidly since mid-January 2024, and has maintained a high correlation with the PENDLE coin price. The highest TVL exceeded 1.8M ETH. On June 28 and July 25, TVL experienced a rapid decline. The main reason was that a large number of asset pools expired, and there was insufficient demand for a new round of investment after expiration, resulting in a rapid loss of TVL. At present, Pendle's TVL is about 1M ETH, which is close to a 50% drop from the peak, and the downward trend has not been effectively alleviated.

Specifically, on June 27, 2024, multiple LRT asset pools including Ether.Fi's eETH, Renzo's ezETH, Puffer's pufETH, Kelp's rsETH and Swell's rswETH expired, and users redeemed their principal investments. Although there are still asset pools with other expiration dates for related assets, the user extension ratio is low, and TVL has not shown any recovery trend so far. This also confirms the previous analysis, that is, as the issuance and price performance of LRT projects decline, users' demand for further participation in related asset management and investment has decreased. In this cycle, the Ethereum ecosystem is not innovative enough, and the market is not optimistic about the price of ETH. If the market's investment demand for ETH weakens, it will directly affect Pendle's business income level, so Pendle and Ethereum are strongly bound.

In terms of Pendle's TVL composition, Pendle's total TVL is currently $2.43B, of which there are 11 asset pools with TVL exceeding $10M. The pool with the highest TVL is SolvBTC.BBN, accounting for about 3.51% of the total TVL. The TVL composition structure is relatively healthy, and there is no situation where a few asset pools occupy a large amount of TVL. Judging from the maturity of the asset pool, the next large maturity date will be December 26, 2024. Pendle's TVL may show a relatively stable trend in the near future.

After the wave of Ethereum re-staking ended, Pendle smoothly switched to stablecoin assets such as BTCfi and USDe/USD0. Although the business data and market sentiment were not as good as in April, the TVL data was basically maintained without a sharp decline. However, with the issuance of coins by a number of Ethereum LRT protocols and the entry of EIGEN into transactions, the imagination of the re-staking track is decreasing, and to a certain extent, the speculative enthusiasm for the BTC staking track has been compressed, which is reflected in the decline in Pendle's transaction volume data. The next event that may impact Pendle will be the issuance of coins by Babylon and the BTC staking track. After the BTC re-staking ends, can Pendle still find new application scenarios?

4.2 Trading volume and composition

The trading volume of Pendle AMM also rose rapidly after January 2024 and reached a peak around April. After Eigenlayer announced the issuance of coins at the end of April, and with the expected landing of LRT projects such as Ether.fi, the trading volume showed a significant decline. The current trading volume has further declined and is at a low level since 2024.

From the composition of trading volume, in the first half of 2024, the trading volume was mainly composed of transactions of Renzo and Ether.fi related assets. At present, the trading volume of Pendle AMM mainly comes from the two protocols of Ethena and USD0. The trading volume brought by BTCfi assets is relatively limited. The trading volume is directly related to the transaction fees and the annualized income of vePENDLE holders, which is a more direct transmission factor compared to TVL.

4.3 Token Locking Ratio

The token locking ratio directly affects the supply and demand of tokens. When the number of tokens released daily is relatively stable, the more PENDLE is locked as vePENDLE, the more positive the stimulus effect on the currency price. The changes in the number of PENDLE locked up show a similar trend to the changes in its business data and coin price. Since November 2023, the amount of PENDLE locked up has begun to rise rapidly, from 38M to a peak of 55M. After reaching 54M in April 2024, the growth rate of PENDLE locked up has begun to slow down, and there has even been a net outflow of vePENDLE. This is consistent with the previous analysis of the business - as TVL and trading volume decrease, the yield of vePENDLE begins to decline, so the attractiveness of locking PENDLE begins to decline. At present, no significant loss of vePENDLE has been seen. On the one hand, due to the restrictions on the lock-up period, this indicator lags behind TVL, trading volume and coin price, and cannot change significantly in the short term. On the other hand, the top asset pool still has a good yield, which slows down the outflow of vePENDLE. However, it should be pointed out that both the business data and vePENDLE's growth data reflect that Pendle is facing short-term business pains. Pendle has not yet found a new growth point after the cooling of Restaking and points to continue its previous legend.

5 Conclusion: Pendle urgently needs to find new scenarios after re-staking

To sum up the above analysis, Pendle's success lies in its accurate identification of PMF. What is even more rare is that business income directly empowers tokens and finds the direct factor of currency price transmission - packaging YT products into points trading targets, increasing AMM's trading volume, and increasing vePENDLE's revenue.

After falling from $7.5, Pendle has not reversed its downward trend. It has to be denied that Pendle is a very good DeFi product, which has both financial management and speculative attributes, meeting the needs of investors with different risk preferences. However, there is no sign of recovery after the decline of Ethereum-based TVL. The poor performance of re-staking projects and Ethena has reduced the market's expectations for subsequent airdrops. The demand for Pendle's use is declining. Therefore, the price of PENDLE is also looking for a new position. Pendle needs to find a new product packaging, or expand to new ecosystems such as Solana, increase its TVL and transaction volume, and it is possible to find a new round of growth space.

Pendle's other positioning is Ethereum Beta, but it is changing recently: In the era of Ethereum re-staking, Pendle is an important financial product for Ethereum and derivative assets. Even Ethena, although a stablecoin, but the USDe staking yield is directly related to the funding rate of ETH. If the market temporarily loses information about the Ethereum ecosystem and ETH is weak in rising, then Pendle will be powerless to turn the tide. It is also important to point out that Pendle is different from MEME-type Ethereum Beta such as PEPE. The price of ETH has a direct transmission effect on the price of PENDLE: ETH is weak in rising → the demand for ETH-based financial management decreases / the performance of the re-staking track cools down → the demand for Pendle usage decreases → Pendle's business income decreases → PENDLE's price decreases. However, Bitcoin pledge assets have replaced Ethereum on Pendle, and this layer of transmission may be weakened.

Finally, this article gives the key points of attention in terms of fundamentals:

• Pay attention to the progress of the points plan of LRT projects and stablecoin projects such as Ethena and USD0. The end of the points season may reduce Pendle's business income again.

• Pay attention to the changes in Pendle's TVL and trading volume. If multiple asset pools expire again, it may cause a sharp drop in TVL. At that time, you can sell some PENDLE positions in advance to hedge risks.

• Continue to pay attention to Pendle's product progress, including but not limited to: the launch of Pendle V3; the launch of new asset pools and trading strategies; the possibility of expanding to a new public chain ecosystem.