Pendle is a DeFi protocol designed for the fixed income/interest rate swap market. Interest rate swaps are a significant sector in traditional finance, involving the exchange of fixed and floating income on the same principal. For example, user Y exchanges fixed income for floating income, while user X exchanges floating income for fixed income.
Project Team
TN Lee: Founder and former founding team member and business lead at Kyber Network. Founded Dana Labs in 2019, specializing in FPGA custom semiconductors.
Vu Nguyen: Co-founder, previously CTO at Digix DAO, focusing on real-world asset (RWA) tokenization. Co-founded Pendle with TN Lee.
Long Vuong Hoang: Engineering Lead with a Bachelor's degree in Computer Science from the National University of Singapore. Joined Jump Trading as a software engineering intern in May 2021, joined Pendle as a smart contract engineer in January 2021, and promoted to Engineering Lead in December 2022.
Ken Chia: Institutional Relations Lead, holds a bachelor's degree from Monash University. Former investment banking intern at CIMB (Malaysia's second-largest bank) and asset planning specialist at JPMorgan Private Bank. Entered Web3 in 2018, served as COO at an exchange, and joined Pendle as Institutional Lead in April 2023, overseeing institutional markets including proprietary trading firms, crypto funds, DAOs/protocol treasuries, and family offices.
Funding
In April 2021, Pendle raised $3.7 million in a funding round led by Mechanism Capital, with participation from HashKey Capital, Crypto.com Capital, CMS Holdings, imToken Ventures, Spartan Group, Alliance DAO, Lemniscap, LedgerPrime, Parataxis Capital, Signum Capital, Harvest Finance, Youbi Capital, Sora Ventures, D1 Ventures, Origin Capital, Bitscale Capital, Fisher 8 Capital, and Taiyang Zhang. Bixin Ventures and Binance Labs also announced investments in Pendle, though the amounts were undisclosed.
Operating Model
Pendle packages yield-generating tokens into SY (Standardized Yield Tokens), which are then split into principal (PT) and yield (YT) components, tradable via a custom V2 AMM. Users can purchase assets at a discount, long/short yield rates, and achieve low-risk fixed income.
In Pendle, SY owners decide to split yield and principal, creating PT and YT. Since YT represents future yield rights, PT is priced lower than the original bond (ST). PT’s value represents the bond's principal recovery value at maturity, with its market value increasing as maturity approaches. For example, if a bond’s face value is $100, PT's price should gradually rise to $100 by maturity. PT holders can redeem PT for the equivalent value of the underlying asset at maturity. Thus, even if PT trades at a discount initially (e.g., $95), its value will eventually rise to the full value of the underlying asset.
Participants trade or hedge future yields; selling YT means smoothing future yield curves or expecting lower future yields, while buying YT means betting on higher future yields. Buying PT implies purchasing at a discount and anticipating lower yields in the interim.
User Scenarios
PT Buyers: Similar to zero-coupon bonds, users seeking fixed income can buy PT and wait until maturity to receive equivalent underlying assets. The discount at purchase represents the fixed yield rate for that period. Suitable for users wanting simple, stable financial products and institutions aiming to reduce risk or construct stable market-neutral strategies.
PT/YT Traders: PT and YT prices reflect implied rates under different duration risks. Traders with varying views on rates can trade PT/YT to express their opinions and profit. Compared to holding PT until maturity, trading PT/YT or holding YT involves principal risk. Trading PT and YT are essentially the same, but YT trading has higher leverage, using smaller funds to leverage the underlying asset's implied returns.
Liquidity Providers: Due to PT’s characteristics—price correlating with the underlying asset and fluctuating within a certain negative premium range—the impermanent loss for providing liquidity to the PT-SY pool is relatively low. Pendle’s team has shared backtests showing IL as low as 0.85% in the worst case. Low IL pools are highly attractive to DeFi liquidity providers, who measure returns in crypto terms and accept floating rates and in-depth protocol use.
Liquidity Procurers: DeFi protocols needing capital, such as LSD or RWA protocols, find incentivizing liquidity on Pendle more efficient. Pendle’s token design, similar to Curve’s, allows these protocols to attract capital more effectively, adding fixed income utility to their yield-generating assets.
Other DeFi Protocols: Due to Pendle’s unique token design and PT/YT assets, several DeFi protocols have integrated or built on Pendle, such as StakeDAO, Penpie, Dolomite, Stella, Teller, and Archi.
AMM Curve Design
Pendle’s V2 AMM, the core of Pendle Finance, facilitates the exchange of SY, PT, and YT. Designed for yield trading, the AMM curve changes to reflect yield over time, narrowing PT's price range as maturity approaches. This concentrates liquidity within a meaningful range, enhancing capital efficiency as PT nears maturity. The AMM also facilitates PT and YT swaps using a single liquidity pool. The design ensures minimal IL by moving the AMM curve to push PT prices toward their intrinsic value, mitigating time-related IL and unlocking PT’s natural appreciation.
Interest rates typically fluctuate within a range (e.g., wstETH’s rate between 3% and 5%, GLP’s yield between 5% and 20%). The AMM needs to concentrate liquidity within this range.
As maturity approaches, volatility decreases. The AMM should reflect this by concentrating liquidity over time, narrowing PT and YT prices to their final values (PT = underlying asset, YT = 0 or accrued yield).
Principal and Interest Separation Concept
Pendle’s mechanism of separating principal and interest allows users to create flexible yield management strategies based on their needs.
Higher Capital Efficiency
Pendle employs an automated market maker (AMM) specifically designed for the yield market. This results in lower slippage during trades, with the AMM curve adjusting over time to reflect yield changes. As PT nears maturity, the AMM narrows its price range, concentrating liquidity and improving capital efficiency.
Simpler Operation and Choices
Despite Pendle’s complex economic model involving SY, PT, and YT, the user experience is straightforward. Users can mint SY and select PT and YT quantities easily. With 42 LP pools and a simplified staking interface for PENDLE, the platform is user-friendly. Unlike other projects that bundle principal and interest into a single token (e.g., stETH), Pendle’s separation of principal and yield allows users to make strategies based on their future yield expectations without compromising on holding the principal asset.
Token Distribution
$PENDLE holders can stake to receive vePENDLE, enabling them to vote, govern, and earn protocol revenue. Pendle protocol revenues come from:
Trading Fees: Fees generated from all trades on Pendle AMM.
YT Fees: A 3% fee on all YT yields and unredeemed PT yields at maturity.
Pendle distributes all YT fee revenue to vePENDLE holders, while trading fee revenue goes to vePENDLE voters for the corresponding pools. Currently, all protocol revenue is distributed to vePENDLE holders, with none allocated to the Pendle treasury. In the future, a portion of the revenue may be allocated to the Pendle treasury.
Token Unlocking
PENDLE’s token release phases:
Initial 26 Weeks: 1.2 million PENDLE released weekly.
Week 27 to 260: Weekly release decreases by 1%.
From Week 261: Annual inflation rate of 2% to incentivize users.
Current circulating supply: 155,807,014.67 PENDLE. Team tokens (13.75 million) are fully unlocked. Supply decreases by 1.1% weekly until April 2026, when the 2% annual issuance begins.
Conclusion
Pendle brings traditional finance’s principal-interest separation to crypto, allowing crypto asset holders to lock in future yields and access returns early, enhancing liquidity and flexibility in the interest rate market. This innovative mechanism provides new income sources for crypto holders and injects vitality and opportunities into the market.
Pendle offers various tools for users to manage yield strategies. Its standardized form facilitates the integration of other yield-generating assets, enhancing composability. Over time, Pendle is expected to attract more institutional capital and become a leader in DeFi’s fixed income products.
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