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CryptoEconomic Research

Pendle: A Yield Derivatives Layer for DeFi

Pendle is a yield trading protocol enabling users to generate additional yield and lock future yield
by James ChungFebruary 25, 2022
PENDLE A Yield Derivatives Layer for DeFi

Pendle allows users to tokenize and trade future yields by leveraging top yield generating protocols such as Aave, Compound and Wonderland.  Similar to stripped bonds in traditional finance, Pendle splits yield bearing assets into tokenized ownership (zero coupon bonds) and yield components (coupons), allowing for innovative yield trading opportunities.

What’s wrong with the DeFi ecosystem today?

DeFi continues to be one of the most attractive areas for crypto investors and traders offering asymmetrical opportunities as a result.  However, DeFi is still a very nascent market that hasn’t seen a major adoption from mainstream investors. In order for the ecosystem to mature, there needs to be more market depth with greater selection of strategies for traders to express their view on the market.

Pendle Solution

Pendle offers the lending market greater visibility and maturity by enabling tradeable on-chain information on yields. Not only are investors and traders able to trade and hedge future yields but the tokenization of future yield may also allow for it to be used as collateral.  Pendle’s solution will support interest rate trading as the DeFi ecosystem expands across multiple chains.

How does it all work?

In order to tokenize future yields from yield bearing assets (eg. aUSDT), users need to deposit their yield token into a smart contract on Pendle to mint both future yield token (YT) and the ownership token (OT). OT represents the underlying staked asset while YT represents the future yield of the staked asset.  New holders of YT will receive/claim yields as they are distributed by the base lending platform until expiry where it will have a value of zero.  Additionally, they may sell or add it to the liquidity pool to earn additional incentives without the need to stake and vest.  If the YT expires, holders of the OT may roll forward to a new expiry and repeat or redeem for the underlying asset which requires possession of both tokens.


Both tokens are tradeable and can be traded on existing AMMs, however most them are not suitable for YT as the constant formula (x*y=k) does not take into consideration the time element (eg. YT reaching value of zero at expiry). Therefore, Pendle created a native AMM and incorporated a time decaying factor for users to trade asset yields by swapping YT.

There are two fees associated with using Pendle. 1) 3% of the interest accrued from YT will be directed to the treasury and 2) its native AMM charges a 1% fee on trades where 0.85% are distributed to LPs and 0.15% to the treasury.


Mechanism design and tokenomics

Pendle’s native token ($PENDLE) is a utility token with plans for governance functions in the future.  Such functions include allocation of liquidity incentives, usage of treasury funds and creation of new market pairs. There are three types of liquidity incentives 1) liquidity provision to the YT/base token pools on Pendle 2) liquidity provision to the PENDLE/ETH pool on Uniswap and 3) PENDLE token staking on Pendle.  The maximum number of tokens in circulation by the end of year 2 is expected to be 251M. The following chart shows a breakdown of the projected token allocation at the end of year 2.


In order to align incentives for all investors and team members, the following vesting schedule was established:

Macro view

Since mainnet (June 2021), the total value locked has reached $19M and its market value has been range bound between $20M to $50M.  The fluctuation in market value on the backdrop of growing TVL has pushed Pendle’s trading volume to be over $100M in less than one year.  As one of the first protocol’s to enable yield trading of LP tokens, Pendle has proven to bring value to users who wish to speculate on swap fees, temporary IL hedging and fixed yield on LP tokens. Rates, as we’ve all experienced, will continue to fluctuate during market turmoils, allowing traders to speculate on yield.  Therefore, it should not be surprising to see Pendle capture more trade volume in the near future.  Volatile rates are here to stay due to the cyclical nature of the DeFi asset class. Pendle will allow traders and investors to benefit by allowing them to control and express certain views on where rates goes.  This will especially be true as the DeFi ecosystem grows and when more assets on emerging chains are added to the platform (Pendle is already cross-chain on Ethereum and Avalanche).

Further Reading

Cryptofunds, market makers, and trading desks can interact with these DeFi protocols with MetaMask Institutional

MetaMask Institutional offers unrivaled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance requirements. We enable funds to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.

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