The past year has witnessed a leap forward regarding DeFi and the creation of economic value through it. Hence the rise of different lending platforms and smart pools, as well as on-chain strategies that provide users with real economic value.
All of them play a role in DeFi, but there is one feature present across them, and that is yield capture. Even if its benefits are numerous, the yield is also subject to high volatility, which continues to grow as the DeFi ecosystem evolves. Here is where Pendle comes in.
What is Pendle?
Pendle is the first protocol developed to make it possible to trade tokenized future yield on an Automated Market Maker (AMM) system. It was created to solve the problems related to yield volatility, as well as to enable users to better manage yield based on individual risk appetite.
The Pendle team aims to provide the holders of yield-generating assets with the opportunity to produce additional yield, as well as to lock in future yield upfront.
Pendle aims to achieve this all while giving traders the possibility to have direct exposure to future yield streams without needing an underlying collateral. It currently supports Aave and Compound, with plans to integrate more platforms in the future.
How Pendle Works
Pendle’s system consists of three components:
- Yield tokenization
- Governance (yet to be released)
A key feature of Pendle is yield tokenization. It’s this component that makes it possible for yield-generating asset owners to give up right to their yield for a specific time. This also makes it possible for users to yield tokens into a smart contract. Two tokens are then issued: Ownership Token (OT) and Future-Yield Token (XYT).
If you’re a holder of yield-generating assets, you can deposit your yield-bearing tokens into Pendle to mint an OT and XYT. While the OT represents the ownership of the underlying aToken, the XYT is the future yield of the underlying aToken.
Minting & Trading
The XYT can be used in two ways, as follows:
- The XYT can be deposited into Pendle’s AMM in order to provide liquidity. In turn, liquidity providers receive fees and various other incentives.
- The XYT can be sold for cash upfront, which makes it possible for users to “fix the interest rates and lock in their returns immediately.”
Traders have the possibility to buy the XYTs directly, without having to lock up the underlying asset, which makes it possible for them to get gain exposure to future yield and do so in a capital-efficient fashion.
XYT is tradeable on existing Uniswap type AMMs. For tokens with a time value, Pendle’s AMMs will be used.
Redeeming Underlying Assets
Redeeming the underlying aToken from Pendle can be executed only by the wallets that hold the OT and the corresponding XYT token. XYTs have an expiry date, and once they expire, they no longer have any value. However, an OT holder has the possibility to opt for rolling their position into a new XYT and thus repeat the process, or they can redeem the underlying asset.
Pendle Basic Features & Their Roles
To make all that possible, Pendle comes packed with a variety of different features that have well-defined roles.
- The mint function
The fundamental entry point to Pendle is the mint function. What this feature does is allow the tokenization of yield-bearing assets. Users select an underlying asset as well as the desired expiry date to mint OT and XYT. While the OT they mint stands for ownership of the underlying asset for a specific time, the XYT represents the future yield for the same time.
In order to make it possible to maximize your yield and capital efficiency, Pendle features the “Swap” function which uses the Pendle’s AMM. This feature allows you to swap XYT and baseTokens. By swapping XYT for baseToken, the user locks in the current yield and receives cash upfront, while by swapping baseToken for XYT, the user gains exposure to future yields without having to lock in a capital-heavy asset.
- Claiming accrued yield
XYT holders benefit from the right to future yield for as long as they own the XYT. The yield accumulates as time goes by, and it is typically awarded in the underlying token, which depends on the underlying protocol. What’s worth noting is that you can claim the accrued yield through Pendle at any moment. Keep in mind, though, that this incurs gas fees on the Ethereum blockchain.
- Liquidity provision
Thanks to the AMM on Pendle, you can also deposit your token assets into the liquidity pools and thus benefit from liquidity incentives and swap fees.
As mentioned above, holders of OT can redeem the locked underlying asset at their convenience as long as certain conditions are met.
The user groups that can best utilize Pendle and benefit from it include the following:
- Sellers – through Pendle, a user can lock in yield at the current interest rate and receive cash upfront.
- Buyers gain yield exposure in a capital-efficient fashion.
- Arbitrageurs gain exposure to more opportunities to produce profit and do so with reduced risk.
As probably expected, Pendle Finance will have an ERC-20 native token, which is set to launch soon and have the ticker PENDLE. According to the information available on the project’s official website, this token will be a pure utility token. Once the protocol reaches maturity sufficiently, $PENDLE will have governance functions.
As far as the token emission schedule and allocation are concerned, Pendle has adopted a hybrid inflationary model. The chart below shows the breakdown of the protocol’s native token allocation at the end of year 2:
By that time, the maximum number of PENDLE tokens in circulation is set to be 251,061,124.
While the project still has a few development milestones to touch, the team’s goals cannot go unnoticed. Pendle aims to support various protocols and assets and enable users to manage their yield on a single platform and do so effortlessly and holistically.
What’s more, flexibility is also among the project’s promises, as on Pendle, users can deposit and withdraw at any given time since they don’t have to wait for contract maturation. Last but not least, since smart contracts handle transactions and transactions are verifiable, users also get to benefit from transparency.
Accessibility, flexibility, and transparency are thus a part of the Pendle team’s promises, and therefore, one can only get hopeful regarding the development, applications, and advantages of this project.