I. Introduction

With the advancement of technology and market adaptation, DeFi is expected to further change the structure of traditional financial markets, providing market participants with more efficient, secure, and transparent trading options. This Bing Ventures research explores the potential ongoing impact of DeFi technology in the future, particularly its contributions to enhancing market inclusivity, reducing transaction costs, and improving market efficiency, with a specific focus on cases related to Pendle and premarket trading.

Pendle introduces traditional interest rate trading and financial derivatives to the blockchain through tokenization, innovating financial products that separate principal and yield, such as PT and YT. In this way, Pendle not only offers flexible interest rate trading options but also enhances liquidity and efficiency in the DeFi market. Pendle's technical practice separates the handling of principal tokens and yield tokens, allowing investors to manage assets independently based on their risk preferences and market forecasts.

In traditional stock markets, premarket trading is typically limited to large institutional investors and high-net-worth individuals. However, in the context of Web3, premarket trading has transformed this model, enabling a broader range of investors to participate in premarket trading through decentralized trading platforms like AEVO and Whales Market, facilitated by smart contracts. This reform not only increases market transparency and security but also improves capital utilization efficiency and overall market liquidity.

II. Pendle's Innovative Practice: The Transformation of Interest Rate Trading

In traditional financial markets, interest rate trading has always been one of the important financial tools, affecting money supply and market liquidity, and directly influencing the formation of the interest rate curve. In Web3, with the development of blockchain technology and the rise of the DeFi ecosystem, interest rate trading is undergoing a profound transformation. DeFi interest rate trading will no longer be constrained by the cumbersome procedures and geographical limitations of traditional financial institutions, but will be conducted on decentralized platforms through smart contracts, providing users with more efficient and flexible financial services.

In 2024, Pendle is undoubtedly one of the pioneers leading the trend in this emerging DeFi interest rate trading field. Pendle tokenizes yield-bearing assets into SY tokens, such as wrapping stETH into SY-stETH, after which SY is divided into principal and yield components, namely PT (Principal Token) and YT (Yield Token), enabling flexible management and optimization of interest rate yields.

With the rise of the Restaking concept and the growing scale of synthetic stablecoins, the interest rate swap market has also welcomed more new play styles, expanding the growth potential of the interest rate swap market. We will take Pendle as an example to explore these derived PT/YT new play styles and their impact on the DeFi interest rate trading ecosystem and future development prospects.

The Space of the Interest Rate Market

Taking Pendle, the largest interest rate market currently, as an example, Pendle gained brief popularity in 2021 due to the short-lived interest rate market, at a time when many did not understand how Pendle's interest rate swaps could be applied in the blockchain market. Today, in 2024, with the flourishing of LRT and the emergence of ETHENA, Pendle seems to have found the path that suits it best.

According to data from Defillama, Pendle's TVL currently reaches $86.884B, ranking 7th among DeFi protocols, with Pendle's TVL increasing by 91.62% in the past month.

Source: defillama

From the products within the protocol, most of the TVL growth comes from the LRT protocol's tokens and Ethena's synthetic dollars, with Pendle effectively connecting with them to amplify user yields. Behind the TVL growth is the top narrative of this bull market, the Restaking track's Eigenlayer's point bonuses + PT/YT play styles + Ethena's high returns.

Source: Pendle

From the above content, it can be observed that the key factor for Pendle's interest rate market to continue to grow is whether LRT and ETHENA can attract more market funds in the future, thereby driving Pendle's growth.

New Play Styles of YT/PT

In the past, Pendle's main business was to serve users with yield-bearing assets, such as users who staked ETH on Lido to obtain stETH, allowing them to achieve satisfactory yields through the characteristics of PT/YT.

Now, Pendle can generate new play styles for PT/YT through Eigenlayer Points + yields and the high yields of the synthetic dollar protocol Ethena:

1. Point Swaps: Both Eigenlayer and the synthetic dollar protocol Ethena have high return airdrop expectations. Staking assets (like ETH) to earn points is a core criterion for airdrops. Through various projects that issue points in Pendle, point swaps can be realized, allowing large funds to see reliable PT to provide liquidity, while smaller funds can bet on larger returns. This point swap mechanism has also allowed Pendle to gain significant TVL in this bull market.
   a) For example, staking ETH on Eigenlayer can earn eETH + point rewards, and Pendle splits eETH into PT (Principal Token) and YT (Yield Token). Buying YT means purchasing all point rewards to gain potential future airdrops.
   b) Taking Ethena's current interest rate on Pendle as an example: when using sUSDe to participate in Pendle,
   i) If you swap sUSDe for YT sUSDe, you can earn 466x Pendle points.
   ii) If you swap sUSDe for LP sUSDe, you can earn an APY of 46.15% (floating rate) and hold points for sUSDe.
   iii) If you swap sUSDe for PT sUSDe, you can earn an APY of 54.09%.
   c) Large funds see reliable PT to provide liquidity, while smaller funds can bet on larger returns. As Ethena scales, it will drive Pendle's growth.
   d) The combination of Ethena and Pendle can also be used for the LRT protocol, giving users more options to increase yields, while the development of the Restaking ecosystem will also promote Pendle's growth.
2. Funding Fee Swap: Suppose the future funding scale of the synthetic stablecoin protocol can continue to expand in the context of a bull market, for example, with a continuous increase in users of ETHENA, there will be a large amount of sUSDe in the market, which can then be split into YT sUSDe and PT sUSDe through the interest rate swap protocol. When judging the market's general direction, users can predict the future trend of funding fees to profit. For example, if the market is expected to shift from bearish to bullish, during a bear market, one can buy YT-sUSDe at a lower APY (bear market stablecoins usually have lower APY), and in a bull market, sell at a premium to realize profits, increasing the opportunities for speculation.
3. Rich Strategies: In the PT/YT exchange, investors with different risk preferences can use different investment strategies. You can achieve bullish yields, risk hedging, and discounted long positions through Pendle.
   a) If speculating that market yields will increase, traders can buy YT to gain yield exposure. When yields rise, traders long on YT will benefit.
   b) On the other hand, if the market speculates that yields will decrease, traders can hedge risks by selling YT and collecting prepayments.

III. On-Chain Premarket Trading Platforms

Premarket generally refers to "premarket trading" in the stock market, which involves trading activities that begin before the official market opens. This trading mainly occurs in electronic trading systems rather than traditional stock exchanges. In premarket trading, investors can buy and sell stocks, but the trading volume is relatively small, and price fluctuations can be significant. The purpose of this trading includes taking advantage of the impact of important news or events released by companies to obtain better trading prices before formal trading begins.

When the premarket method is applied to Web3, it is used by investors to seek investment opportunities in high-heat projects before the token TGE through over-the-counter trading. The main targets of these trades are mostly airdrop tokens confirmed by the project party, traded in the form of shares or points.

Source: https://edition.cnn.com/markets/premarkets

The Iteration of Premarket Trading Methods in Web3

Source: https://www.racent.com/blog/man-in-the-middle-attack

1. In the earliest over-the-counter trading, mainstream social platforms such as Discord, Telegram, and WeChat served as common venues for trading, with a large number of matched trades occurring. At this time, the trading method mainly involved a "middleman" role to match orders while finding buyers and sellers, conducting trades on a margin basis, and ensuring both parties completed the transaction at delivery, with the "middleman" taking varying fees.
2. However, this method clearly had numerous issues, the most common being the potential malfeasance of the "middleman." Since all trades were matched by the "middleman," the actual buy and sell prices were conducted in a black box, making it possible for transaction prices to deviate significantly from the actual seller, and there were instances of the middleman collecting margin and then rug-pulling.
3. In the second phase, after the potential for "middleman" malfeasance became known, KOLs and bloggers with a certain fan base began to use their credibility to continue acting as "middlemen" to facilitate trades, bringing buyers, sellers, and middlemen into the same group chat to ensure price transparency. This phase was also the most common method of over-the-counter trading before the emergence of on-chain pre-marketplaces.
4. The second phase of trading lasted a long time, but many issues persisted, such as low trading efficiency, potential problems with pure manual processes, and the inherent risks of the "middleman" role. Thus, two representative on-chain pre-marketplaces emerged: AEVO and Whales Market.

Web3 Pre-Marketplace Product Introduction

1. AEVO: AEVO is a decentralized options platform focused on options and perpetual trading, currently supporting three chains: Optimism, Arbitrum, and Ethereum. AEVO has often been used for on-chain perpetual trading, and recently launched a section for Pre-Launch Tokens, allowing users to trade before the token TGE.
   a) Trading Process: Users can select relevant tokens for perpetual trading in the Pre-Launch Tokens section, with most tokens supporting 1-2X leverage. The actual operation process is similar to normal perpetual trading, allowing for various strategies such as shorting or going long.
   b) Platform Data: As shown in the chart, the token $SWELL of the Restake protocol Swell is currently priced at $2.1 on AEVO, with a 24-hour trading volume of $973,762, making it the highest in the Pre-Launch Tokens section for 24h volume.
   c) Platform Features:
   i) Compared to traditional social platform over-the-counter trading methods, AEVO's trading process is more formal, transparent, and secure.
   ii) It allows users to perform short or long operations with 1-2X leverage to gain profits.
2. Whales.Market: Whales.Market is an over-the-counter trading platform built within the Solana ecosystem, utilizing smart contract technology to provide a secure, trustless environment for trading allocations, tokens, and NFTs before TGE. Unlike AEVO, Whales.Market can trade not only tokens but also Points and NFTs, with plans to open NFT whitelist trading in the future.
   a) Trading Process: Users can select different assets for trading in Whales Market, clearly seeing purchase quantities, unit prices, total prices, and other relevant data on the purchase page. During the process, buyers and sellers execute on-chain peer-to-peer trades, with margins locked in smart contracts, released to both parties after successful settlement. The process of determining whether a trade has been completed often requires manual review. This simplifies the trading process, clarifies pricing, and significantly reduces the risk of financial losses due to fraud.
   b) Platform Data: Similarly, taking $SWELL as an example, on the same day, the Total Volume in Whales Market was $242,394. However, the number of assets supported for over-the-counter trading in Whales Market far exceeds that of AEVO.
   c) Platform Features:
   i) Security: Orders are matched transparently through smart contracts to ensure the safety of user funds.
   ii) Asset Diversity: Supports trading of various assets, such as NFTs and protocol Points.
   iii) Better Experience: When a large order cannot be purchased by one user, they can choose to buy a certain amount of shares and share the order with other buyers.

Current Dilemmas

The evolution from high-risk over-the-counter trading methods backed by middlemen to transactions completed by platforms through smart contracts is a crucial step for the entire premarket. However, we still cannot ignore the current dilemmas.

Source: People Matters

1. Liquidity Crisis: Currently, most Pre-Launch Tokens face the risk of insufficient liquidity. Even for Swell, which has the highest trading volume on AEVO, the 24H trading volume is less than $1M, and low liquidity leads to significant price fluctuations, posing high risks. On the other hand, this also prevents well-funded whales from participating in trading the token with large positions. Theoretically, the higher the total trading volume, the closer the price is to a reasonable value.
2. Risks from Partial Centralized Mechanisms: Taking Whales Market as an example, a recent transaction of a popular BTC NFT "RuneStone" highlighted the risks brought by centralization. Due to the huge trading volume of this NFT and the transfer occurring on the BTC chain, verifying whether the NFT has been received and whether the GAS fees for the transfer are sufficient requires a significant amount of manual review. Additionally, the varying airdrop receipt times for this NFT led to multiple users reporting issues during delivery. The combination of these factors made the order completion process more complicated, and centralized reviews still pose problems.
3. High Risks of Premarket: The trading process in the premarket involves many uncertainties, which may come from sellers, the platform, or changes in the protocol's airdrop standards, all of which can lead to losses. Investors must face challenges that exceed those of secondary market trading, requiring high expertise in token pricing, which carries significant risks.
4. Low Capital Utilization Efficiency: In over-the-counter trading, margins often need to be locked to secure orders, while the actual delivery date of most projects is still some time away from the order lock date. During this period, the margin remains locked, significantly affecting capital utilization efficiency.

IV. Technological Integration: The Interactive Impact of DeFi and Traditional Markets

Despite the countless doubts DeFi faced during the past bear market, we believe that this sector still holds infinite possibilities and opportunities for the future. With the continuous emergence and innovation of new play styles from protocols like Pendle, Ethena, and Eigenlayer, DeFi will further expand its boundaries, providing users with more diversified services and more flexible asset management tools. At the same time, with ongoing innovations, we will see more PT/YT-based play styles, and the successful collaboration with LRT has opened a higher ceiling for the interest rate swap market.

We look forward to seeing the increasing applications of interest rate swaps, reaching a future where everything can be interest rate swapped, bringing more innovative products and services to users. However, risks must still be noted, as behind the continuous profit-seeking through LRT lies inherent risks. The liquidity connections between most protocols are extremely strong and substantial, and the impacts of hacker attacks or protocol malfeasance can be quite severe. The continuous innovation in DeFi's segmented tracks is fertile ground, and interest rate swaps are precious seeds in this fertile soil, full of possibilities.

Pendle's Innovative Practice

Pendle's model, through the separation of principal and yield financial products (PT and YT), provides investors with new ways to flexibly manage and optimize interest rate yields during bull markets. This innovative practice not only enhances market liquidity but also introduces a new method of capital turnover, allowing for automated asset management and trading through smart contracts. Although it offers a highly efficient trading mechanism, this model also places higher demands on market participants' expertise and risk management capabilities. For example, the separation of PT and YT may lead investors to invest without fully understanding their structure, increasing market speculation and instability.

On-Chain Trading Platforms for Premarket

Through decentralized platforms like AEVO and Whales Market, premarket trading has brought traditional stock market premarket trading into the Web3 world, allowing a broader range of investors to participate in token trading for high-heat projects. This trading method improves accessibility and transparency while reducing intermediary risks in traditional over-the-counter trading. Although on-chain platforms reduce the risk of middleman malfeasance, new technological challenges and the potential for operational errors still exist. For instance, vulnerabilities in smart contracts or operational mistakes could lead to financial losses, especially in complex trading logic and high-value transactions.

In this bull market, we have seen many projects issuing tokens while market liquidity is abundant, and this phenomenon is expected to continue. The trading process before TGE is also indispensable, and the play styles of premarket trading will become more widely known. We can also anticipate positive developments in future premarket trading:

source:RISMedia

1. Higher Degree of Decentralization: As platforms continuously improve their rules, future premarketplaces may emphasize decentralization even more. This means that premarketplaces will continually reduce the need for human involvement, increasing trading speed while becoming more decentralized.
2. Broader Asset Coverage: Future premarkets may support a wider variety of asset trading, creating more diverse asset trading opportunities, just as Whales Market has begun supporting trading of protocol Points, NFTs, and other assets. This will provide investors with more diversified investment choices and promote greater asset liquidity and trading activity.
3. Smarter Trading Experience: Future premarketplaces may leverage smart contracts and AI to provide a more intelligent trading experience. For example, AI functions could be used to estimate price ranges for projects, lower user participation thresholds, and provide personalized trading advice, thereby improving trading efficiency and user experience.

Based on the current innovative trends of Pendle and premarket, several interesting and innovative play styles can be derived, closely tied to existing trading mechanisms and market structures:

1. Dynamic Interest Rate Swap Protocols

Pendle's PT and YT mechanism can further develop into dynamic interest rate swap protocols, allowing users to dynamically adjust their interest rate swap contracts based on market conditions. This protocol can combine real-time market data and AI predictive models to automatically adjust interest rates, enabling users to achieve optimal interest rate yields amid market fluctuations.

• Core Mechanism: Combining smart contracts and AI models to monitor market changes in real-time and automatically adjust interest rates.
• Advantages: Increases flexibility in investment yields, reducing the cumbersome manual adjustment of interest rates.
• Risk Management: Requires high-precision market prediction models and robust smart contract code to avoid prediction errors and contract vulnerabilities.

2. Decentralized Cross-Platform Arbitrage Tools

Utilizing on-chain trading platforms in the premarket, decentralized cross-platform arbitrage tools can be developed. These tools allow users to conduct arbitrage trading between different DeFi platforms, automatically identifying and executing trades based on price differences through smart contracts, thus achieving risk-free arbitrage.

• Core Mechanism: Using smart contracts to monitor price differences across multiple trading platforms and automatically execute arbitrage trades.
• Advantages: Enhances market efficiency, reduces price discrepancies, and provides risk-free profit opportunities.
• Risk Management: Requires real-time data synchronization and low-latency trade execution to prevent arbitrage trade failures.

3. Smart Contract Insurance Mechanisms

Introducing smart contract insurance mechanisms in Pendle and premarket trading to provide users with trading insurance services. When a smart contract fails or the market experiences abnormal fluctuations, the insurance mechanism can automatically compensate users for losses, ensuring the safety of user funds.

• Core Mechanism: Setting insurance conditions through smart contracts, automatically executing compensation when specific events are triggered.
• Advantages: Increases user confidence and encourages more users to participate in DeFi trading.
• Risk Management: Requires sufficient insurance fund pools and clear compensation conditions to prevent abuse and fund shortages.

4. Multi-Layer Staking of Synthetic Assets

Based on Pendle's PT and YT mechanism, a multi-layer staking mechanism can be developed, allowing users to stake yield-bearing assets across multiple layers to obtain different levels of yields and rewards. This mechanism can attract more funds to participate in staking, enhancing overall market liquidity.

• Core Mechanism: Users can stake assets at different layers, each corresponding to different yields and rewards.
• Advantages: Provides diverse investment options, attracting investors with varying risk preferences.
• Risk Management: Requires clear layer definitions and yield calculation methods to prevent management difficulties arising from complex staking layers.

These cases reveal how new trading mechanisms in the cryptocurrency bull market can improve efficiency and transparency while also introducing new risks and challenges. The Pendle and premarket cases demonstrate that the integration of DeFi technology with traditional markets is driving financial product innovation, such as AI-powered smart trading systems, which can offer more personalized and efficient trading strategies.