What is Pendle Finance? To answer that, let’s start by addressing the problem. The past year has been one of true creation of economic value through DeFi. Various lending platforms, smart pools, and on-chain strategies are on the rise providing users with real-economic value. All these platforms have their own role in the DeFi ecosystem, however, there is a common thread that binds it all together which is yield capture. Despite there being numerous benefits, the yield is extremely volatile and becoming more so with the evolving DeFi ecosystem.
To solve the issue with volatile yields and manage yield according to individual risk appetites, Pendle was born. Pendle Finance is a protocol that enables the trading of tokenized future yield on an AMM system. The team behind Pendle aims to give the holders of yield-generating assets, the ability to sell the future yield, essentially lock-in yield rates and earn future yield upfront. However, on the flip side, buyers of future yield will have direct exposure to future yield streams without the need for an underlying collateral.
Let's talk about the Technical Design of Pendle Finance…
Pendle’s various features provide more opportunities for DeFi users in the yield space. . Yield tokenization is one feature which allows owners to give up rights to their yield for a fixed period of time, and then allows users to deposit their yield token into a smart contract. By doing so, they will issue two tokens which are XYT and OT.
Future Yield Token (XYT)
The XYT token represents the ownership of the future yield of the locked aLINK for a present number of blocks. XYT can trade in Pendle’s AMM and the holder of the token can receive aLINK yield as it distributes by the base lending platform. Once expired, XYT tokens will have zero value. The holders of OT can roll their position into a new XYT expiry date or then redeem the underlying asset. XYT tokens are different from one another depending on the underlying asset and expiry date. Furthermore tokens that have the same underlying asset and expiry are fungible.
Ownership Token (OT)
The OT token represents the underlying staked asset and is transferable. Only the wallets holding OT and the corresponding XYT token can redeem the underlying assets deposited.
Automated Market Maker for Tokens with Time-Decay
XYT will be tradeable on existing Uniswap type AMMs. However, AMMs on Pendle will be utilized for tokens with time value.
Chaining Liquidity Pool
A set of new pools per token will be created after each expiry. It will chain new expires as old expires become irrelevant. Furthermore, the overlapping of liquidity pools will enable a constant yield curve for the underlying. See image below to see how it will work!
How exactly does Pendle work?
The holders of yield-generating assets can deposit their yield-bearing tokens into Pendle to then mint an Ownership Token (OT) and a Future-Yield Token (XYT). The users can then utilize their XYT in two different ways which include:
- Users deposit their XYT into Pendle’s AMMs to then provide liquidity to Pendle. In return, the fees and other incentives are then given to these liquidity providers.
- Users can sell their XYT for cash upfront which will allow them to fix the interest rates and then lock in their returns immediately.
The traders will then be able to buy these XYTs directly without any need to lock up their underlying assets. This would be a more capital-efficient way in gaining exposure for future yield.
What are some features onboard?
There’s a wide variety of features that are available on Pendle. This includes tokenizing, swapping, claiming accrued yield, liquidity provision, and redemption. We will dive deep into what each one those:
The mint function will allow the tokenization of the future yield from yield-bearing assets. It will act as the fundamental entry point to Pendle. The users can mint OT and XYT through selecting an underlying asset and a desired expiry date. So the OT will represent ownership of the underlying asset for a fixed period of time. In addition, the XYT will represent the future yield for the same period of time.
Pendle will allow for the swapping of XYT and baseTokens to then maximize yield and capital efficiency. The swap function will utilize the Pendle AMM. By swapping XYT for baseTokens (selling XYT), it will allow users to lock the current yield and receive cash upfront. Swapping for the baseToken for XYT (purchasing XYT) will allow users to gain exposure to future yield without needing to lock in a capital-heavy asset.
Claiming Accrued Yield
The holders of XYT have the rights to future yield as long as they own it. The yield is based upon interest rates of the underlying. The yield will accumulate as time passes and will be awarded in the form of the underlying token depending on the underlying protocol. The user will then be able to claim the accrued yield through Pendle at any time. *Note that claiming accrued yield will result in gas fees
Pendle’s AMM will allow users to deposit token assets into the liquidity pools in exchange for swap fees and liquidity incentives. The LPs will receive PendleLP which will represent a proportional share of the pooled assets. This will also allow the users to reclaim the corresponding assets at any time.
The OT holders are able to redeem the locked underlying asset at any given time, as long as the following conditions are met:
- To redeem the underlying after the contract expiry, only OT is required. A 1:1 proportion of underlying will be redeemed with OT.
- To redeem the underlying before the contract expiry, equal amounts of OT and XYT are required. The amount of underlying that can be redeemed will be equal to the amount of OT and XYT.
Pendle will also have a renew function which will roll expired contracts forward.
Let's talk $PENDLE
$PENDLE will be a pure utility token with governance functions after the protocol has matured sufficiently. It will act as the key to the value accrual mechanics and management of the protocol. In addition it’s an ERC-20 token and will adopt a hybrid inflationary model. The team behind $PENDLE is also committing to enabling the following for token governance:
- Allocation for liquidity incentives
- Usage of treasury funds
- Creation of new market pairs
If you would like to take a deeper look at the tokenomics of $PENDLE, feel free to check them out here!
Who exactly is Pendle for?
There are three groups of users that can best utilize Pendle. This includes the seller, the buyers, and the arbitrageurs.
Pendle allows the sellers to lock in yield at the current interest rate and then receive cash upfront.
Pendle will allow buyers to gain yield exposure in a more capital efficient way.
Pendle offers arbitrageurs more opportunities to generate profit with reduced risk.
All these three groups can benefit greatly from using Pendle!
What are some applications of Pendle?
There are quite a few applications for Pendle. This includes increased exposure in which traders can gain exposure in a more capital efficient manner as compared to buying and depositing an underlying asset. Apart from increased exposure, Pendle will also have a yield lock. This means that if a lender anticipates that a demand for a token will fall, they can lock in their yields with Pendle. The users can then repeat the process to lock in more yield or deploy his funds elsewhere.
Another aspect of Pendle is the interest rate oracles. By using the price of XYT trading and the time left to maturity, we can imply the yield that the market is attributing to the underlying asset and derive it. The implied yield may then be utilized in various forms which includes on-chain settlement of interest rate derivatives, input as part of an oracle service or an indication of the expected path of interest rates. Spread trading is another application of Pendle. In addition, with the forward yield curve created, the traders can express their views on the market through trading XYT tokens with various maturities and various underlying assets.
So are there any fees I should know about?
As for the fees, there will be a default 0.35% liquidity provider fee for all trades against liquidity pools on the Pendle’s AMM. The fees will be adjustable via governance proposals and voting as it goes live. So the Pendle AMM’s design is in a way to support a protocol-level exit fee which will support the continual work on the Pendle platform. As of right now, it is set to 0% and it will be changeable via governance proposals if necessary.
Check out more about Pendle Finance!
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