Every once in a while, a DeFi project is released that innovates with a new primitive or captures an area of the market that was previously untouched. As expected, many obvious primitives, such as exchanges and money markets, have become heavily saturated with many protocols. Pendle Finance could be the latest DeFi protocol to find a new niche worth $400 trillion in traditional finance: trading yield and interest derivatives. Let’s explore Pendle Finance’s mission, the PENDLE token, and if this market has a future.
Pendle was conceived in October 2020 and launched on mainnet in June 2021. As the first live yield tokenization platform, users can take yield-generating assets, such as staked Ethereum, or tokens representing liquidity provision on an exchange, and separate the future yield from the principal. The process begins by wrapping yield-bearing tokens into standardized yield tokens (SY), which are compatible with the Pendle exchange. These SY tokens are then split into their principal and yield components, termed PT (principal token) and YT (yield token), respectively. PT and YT can be traded via Pendle’s exchange, allowing users to maximize their yield, increase yield exposure in bull markets, and hedge against yield downturns during bear markets.
As a yield derivative protocol, Pendle also allows for advanced trades to help users mimic the advanced strategies seen in the traditional finance interest derivative market. These strategies include fixed yield, longing or shorting yield, and earning more yield with reduced risk. For example, if someone believes that Ethereum staking rewards will increase over time, possibly due to increased fees and less staking activity, they could buy stETH yield on Pendle without holding the underlying asset, giving them much more exposure to the yield and potential fluctuations. For those who want to lock in profits upfront and do not like the potential volatility concerns surrounding the future of yield, they can do so and only hold the PT token and sell the YT. They could even buy more PT at a discount to the value of Ethereum since it does not include the future yield.
The PENDLE token is the protocol’s native governance and utility token. Currently, it is rewarded as an incentive for providing liquidity on Pendle, and these emissions will decrease every week until 2026. PENDLE can be locked for a variable amount of time to receive vePENDLE, the vote-escrowed version of the token, in return. vePENDLE is the token used for voting on which trading pairs and assets should receive the PENDLE emissions and for receiving staking rewards. vePENDLE holders receive 80% of the swap fees from pools they vote for, along with 3% of the yield accrued by yield tokens.
Like Curve and Balancer, vePENDLE provides a boosted yield for holders providing liquidity on the platform. This creates the opportunity to build market aggregators, like Convex, on top of Pendle. Equilibria is the first project to attempt this and launches on June 6th. They currently have around 28% of the vePENDLE supply, giving them an immense amount of voting power, but it remains to be seen whether or not the protocol can capture Convex-level influence.
If Pendle Finance can garner enough attention and liquidity, it could become the blue-chip yield derivative DeFi platform. Given that this industry sees hundreds of trillions of dollars in speculation in traditional finance, it could quickly become one of the main primitives of decentralized finance as well. Whether or not Pendle is the protocol to capture the majority of this market remains to be seen, but they certainly have strong tokenomics and a clean track record that could suggest they are well on their way to blue-chip status.
By Lincoln Murr