Bixin Ventures: Why do we invest in Pendle?
What are the highlights of the product? What recent factors have contributed to growth?Investment Logic
Complete Yield Strategy Toolkit
In traditional financial markets, the daily trading volume of interest rate derivatives reaches trillions, allowing market participants to speculate or hedge against interest rate fluctuations using these financial products. As decentralized finance (DeFi) continues to mature, opportunities for such yields will gradually increase. Whether providing liquidity for trades on GMX/Gains Network or participating in liquid staking like Lido, investors seeking yield have many options. But how can users engage in yield trading in today's market? For example, what should I do if I believe the yield currently offered by GLP is undervalued and is expected to rise in the coming days? What if I think the current Stargate yield does not accurately reflect stablecoin trading volume and may drop quickly? What if I just want to maintain a market-neutral position and earn extra yield?
With the emergence of short-term yield speculation opportunities like the Ethereum Shapella upgrade, Vu Gaba Vineb succinctly outlines the various possibilities for ETH and LSD yield fluctuations—whether you think it will rise, fall, or remain flat, Pendle has corresponding strategies for you to profit.
Pendle provides users with a complete set of tools to enjoy fixed income through discounted asset purchases, speculate on yields via YT (which will be detailed below), or participate in their liquidity pools to earn additional income through fee and reward exchanges. Protocols like Equilibria are already leveraging Pendle to build more yield-enhancing strategies, and we foresee that more protocols will develop products based on Pendle in the future. For individual investors, Pendle simplifies the user interface to optimize the user experience, making it easier for users to engage in various yield strategies.
We are excited about Pendle opening up a new paradigm for yield traders, as they can now manage the risks of their held assets based on market fluctuations.
Product Highlights
Pendle Finance, founded in 2021, is a decentralized finance (DeFi) protocol that allows users to purchase assets at discounted prices, participate in various yield strategies, or earn income by providing liquidity to liquidity pools. Currently, Pendle is deployed on Ethereum and Arbitrum. The TVL has grown from $7.8 million in December 2022 to $60.5 million today, an increase of nearly 775% in just five months.
SY, PT, and YT
Pendle is a yield trading protocol where we can label the yields of interest-bearing assets (such as GLP, stETH, aUSDC, etc.) as YT and PT, where holding YT earns yields, and PT represents the principal. Since the yield portion of YT is stripped away, users will be able to purchase PT at a discounted price. For example, buying PT-GLP is equivalent to acquiring GLP at a discount; 1 PT-GLP can be redeemed for 1 GLP at maturity. How is the discount for PT-GLP determined? Fundamentally, the discount rate is determined by market demand for PT-GLP. If there is high demand for PT-GLP, the discount will naturally decrease, and vice versa.
What is SY? It is a token standard that implements a standardized API for wrapping interest-bearing assets in smart contracts.
Afterward, the principal and yield of these interest-bearing assets can be stripped into PT and YT tokens. Observe the chart below; SY refers to the underlying yield asset (in this case, aUSDC), which is then divided into PT-aUSDC and YT-aUSDC. This provides users with a plethora of strategies.
For users wishing to avoid volatility, they can currently purchase PT tokens at a discount and hold them until maturity. For example, if PT-GLP is trading at a 22.5% discount, it means that if you buy 1 PT-GLP today, the trader effectively locks in a 22.5% yield and receives a fixed return. If the trader also believes future yields will be below 22.5%, this gives you the opportunity to sell PT-GLP at a profitable price or earn higher yields compared to simply holding GLP. On the other hand, users looking to speculate on future yields can purchase YT tokens to increase their exposure to yields. In this case, you might believe that a 22.5% yield is undervalued, so you can buy 1 YT-GLP today and sell when the yield rises above 22.5%, or earn additional yield before maturity. In summary, buying PT is akin to shorting yields, while buying YT is akin to going long on yields.
LP Pools
For users seeking a more passive strategy, liquidity pools on Pendle provide a straightforward approach. The annual percentage yield (APY) of the pools consists of four sources of income:
(a) Fixed yield from holding PT until maturity;
(b) Underlying token protocol rewards from yield assets (e.g., GLP);
(c) Fees from SY, PT, and YT trades;
(d) Pendle rewards; additional income from staking Pendle to earn vePendle.
As you can see, these yields are quite attractive, and due to the high correlation between pool assets, combined with Pendle's unique automated market maker (AMM) design, users will face minimal impermanent loss. Over time, we should see an increase in interest-bearing assets.
Unique AMM Design
In Pendle v2, the main innovation lies in the AMM trading platform designed and built for yield trading. Since the assets in the pool are highly correlated, this will reduce the impermanent loss (IL) caused by volatility. More importantly, if assets remain in the pool until maturity, the impermanent loss will be zero. Because at maturity, the PT in the pool will equal the underlying asset. In summary, users will be able to trade between SY, PT, and YT with almost no impermanent loss.
Another feature of the Pendle v2 AMM is higher capital efficiency. By introducing flash swaps, users can now easily purchase YT through a simple user interface and start participating in various yield strategies. This means LPs can earn fees from PT and YT exchanges within a single liquidity provision, while traders can enjoy greater liquidity, thus reducing slippage.
With the emergence of various interest-bearing assets, whether through lending platforms (like Aave, Compound, etc.) or through staking on LSD platforms, Pendle has a vast market to expand into.
vePENDLE
Pendle draws on the veCurve and Solidly models, allowing existing token holders to stake $Pendle to earn $vePendle, thereby reducing the circulating supply of $Pendle in the market. One of the main attractions of $vePendle is earning a portion of the protocol's revenue. Currently, Pendle V2 has two sources of protocol revenue:
YT Fees: Pendle extracts 3% from all yields generated from YT.
Swap Fees: Pendle extracts 0.1% from the transaction value, decreasing as the maturity time shortens, and vice versa.
20% of the above fees belong to liquidity providers, with the remainder allocated to $vePendle holders. Additionally, matured PT yields will also be distributed proportionally.
$vePendle token holders can also reallocate $Pendle rewards to liquidity pools weekly based on their voting weight, earning increased rewards (up to 2.5 times) in any Pendle pool where they provide liquidity.
$vePendle will linearly decrease over two years, after which $Pendle will be released. Therefore, users wishing to maintain their voting weight/$vePendle token value will need to extend their staking duration or amount.
Recent Growth Catalysts
LSDs Will Experience Explosive Growth
After the Shapella upgrade, users will be able to withdraw Ethereum. This will allow liquidity staking derivatives to better maintain their pegged prices, making them better collateral for borrowing, which will enhance the utilization of DeFi protocols. As of April 6, 2023, Defillama data shows that the TVL in the LSD industry has grown to $16.6 billion, ranking second among all DeFi sub-industries.
Source: Defillama
In a thriving ecosystem, Pendle's positioning is to support the infrastructure for these LSD assets. Currently, Pendle has already shown attractiveness and has received support from well-known projects like Lido, Frax, Rocketpool, Aura, GMX, and Stargate. We believe that as the protocol gains more partners and other projects in the ecosystem begin to appreciate Pendle's excellent design in liquidity provision, the TVL will continue to rise. Rather than trying to pick top LSD projects, we prefer Pendle's unique positioning as a supporting protocol. Users looking to hedge or enhance yields on their LSDs can pay attention to Pendle's discounted assets.
Gap in Fixed Income Products in the Market
Fixed income products are commonplace in traditional finance but are relatively rare in the cryptocurrency space. Yield volatility has been one of the themes in cryptocurrency; for instance, the yield of stETH has fluctuated between 4-5% over the past 30 days, peaking at 7.1%, and even reaching 10.2% in November 2022.
Source: DeFiLlama
Volatile yields bring uncertainty, especially for investors holding leveraged positions. This requires them to manage yields more actively, as investors need to weigh the opportunity costs and risks of their positions relative to other DeFi projects. Therefore, for investors, fixed yields provide a more efficient and hassle-free strategy.
As we can see, users can obtain gDAI and USDT at discounts of 9.09% and 5.12%, respectively, as long as they hold them until maturity, which is significantly higher than today's traditional fixed income products (e.g., T-bills at about 4.5%).
Conclusion
In summary, we believe Pendle now offers users a variety of tools to manage various yield strategies. The fixed income and interest rate derivatives market in traditional finance is vast, and we believe that over time, Pendle will be able to attract more institutional capital's attention and favor.
Pendle uses a standardized form to tokenize interest-bearing assets, making it easier to integrate other interest-bearing assets in the future and unlocking more composability for other DeFi protocols, allowing them to integrate Pendle or build more and richer applications on top of Pendle.
