Pendle Finance - It takes two (tokens) to tango
You've likely read a lot of threads highlighting how wonderful Pendle Finance is, but have you read any with proper criticisms? You may not like it but you should know it👇
UPDATE: May 27 ~ Been informed the team is not actually from the US; Crunchbase incorrectly states the team is based in Denver, Col. Thus the bearish comment I had prior about US regulations no longer exists. Thanks to for setting it straight.
THE DIRTY SCORE: Beside each section / important metric I place a (score in brackets). Ranked from 1 - 5 ~ the higher the better. At the end of the report I display the scorecard with an overall average from each of the sections. No weighting to any specific sections.
In crypto everything is a meme, so don’t get too caught up on one section.
NARRATIVES: LSDfi, Real Yield, Interest Rate Swaps (4)
CHAINS: Arbitrum + Ethereum
PREFACE:
Pendle is a venue for the tokenization and the trading of yield. Cause everyone wants to hedge & speculate on their yield bearing assets… right? RIGHT??? no, no they don’t ~ don’t lie to yourself, what they do want is a place to earn EXTRA yield on the assets they already hold.
And if it happens that the protocol they choose to use appreciates in value then BONUS!
So yeah, Pendle is as simple as 1 yield asset = 2 components. What you do with those components is what makes it complex…
So keep reading to understand & to learn what’s good… and what’s bad 👇
TOKENOMICS: [ as of 05/15/23 ] (3.5)
First the tokenomics ~ not too bad:
Relatively low MCAP with an okay FDV/TVl
Alright circulating % with atleast some of their native token staked.. would like to see this much higher.
We don’t love inflationary tokens though.
We do like Pendle’s distribution, as a lot exists in the communities hands. Though it appears to be undergoing a similar curve war affect, with many protocols rushing to acquire as much PENDLE as possible. The Dirt also likes Ponzi-flywheels.
Pendle however is by itself is a useless gov token, though ‘ve’ brings in gauge voting, boosted LPs, & protocol revenue ~ so that makes things a little more exciting.
MECHANICS: (5)
Composability: Pendle employs EIP-5115 which will allow permissionless yield token splitting and market creation in the future.
End Game: Tap into $40T interest rate swaps market.
listen i know the details dont matter to most and most only care about number go up, but this will help you. plus i took the time to make it as easy as possible, so just fucking read it.
What it do? =
Wrap a yield-bearing token into a Standardized Yield Token (SY)
SY is then split into a Principal (PT) and a Yield Token (YT)
Then strategize via trading & providing liquidity on Pendle’s V2 AMM
Simple … sort of.
ALPHA: example ~ depositing Stargate USDT into Pendle will still entitle you to Stargate & Pendle rewards
Glossary =
PT: [ are Zero coupon bonds ]
the principal portion of your deposit and can be redeemed for the principal amount after maturity
Can also be sold at any time as a discount token
YT: [ are Coupon Payments ]
is the continuous yield (ie APY gain), that can be recovered at any time during lock-up.
YT is also tradable, and if a buyer speculates that APY will be better in the future then the change in APY will also be gained by the buyer
EXAMPLE: take 1 stETH and mint 1 PTstETH + 1 YTstETH. At anytime you can redeem both PT + YT to redeem the 1 stETH. BUT if hold to maturity you only need the PT token to redeem your original stETH.
This is where advanced speculation and strategies are formed.
Once you understand how it works then you can start to observe their markets and look for opportunities between the posted interest rates.
Underlying APY
7 day moving average of underlying asset. ie avg GLP APY over 7 days,
NOTE: This means the apy will differ from base protocol at times
Implied APY
Is what the market perceives of the future yield of an asset.
Is calculated from a ratio between the price of YT to PT
Discount Tokens:
By separating yield bearing tokens the protocol is able to sell certain principle assets at a discount ~ bear in mind these PT tokens must wait until maturity to claim 1:1.
Usually around a 5% discount
Advanced Strategies:
Long assets at a discount
Fixed yield for low-risk, stable growth
Long yield
A mix of any of the above strategies
Options strategies (eventually)
Vaults (soonish)
Want to know in greater detail? Read the docs here!
FINANCIALS: (3)
I am very disappointed with how little financial information is provided for Pendle. I would have assumed, given all the pent up hype, that this protocol would be on top of their game. But the honest truth is that they are not:
Team treasury is not public & no approximation can be given
Fee reporting UI has not been created, even with a 20 person team
Reluctance to expose POL assets & any concrete estimations
Team runway is reported to be 2+ years
Emissions are high and unsustainable
Fees:
Collects a 3% fee from all yield accrued from YT tokens and also earns from swaps
All fees go to vePENDLE stakers and LPs
Yields are distributed in USDC every 4-6 weeks.
GROWTH: (4)
Hmm. If you would have judged this category solely from twitter sentiment then you would say that Pendle has had tremendous growth. And you wouldn’t be entirely wrong. They’ve had a $4m volume day and are consistently doing $800-900k per day. That’s impressive. Their new pool on Camelot has also garnished $1M TVL in fairly short order. But that pool is pure token speculation.
But the fact remains, the financials are unclear and so this tractor refuses to acknowledge the large growth. Inflating away your token to a product most users don’t understand isn’t sustainable. Tell me I’m wrong.
Even though fees & revenues are a meme
ROADMAP: (4)
UI improvements in my experience lead to a much easier user onboarding, coupled that with increased marketing efforts and its sure to have an impact.
The permissionless listings will also provide for a TVL boom… give the protocols what they want.
Any finally the vaults, these could be a game changer. Make interest rate swaps for dummies please.
TEAM / COMMUNITY: (4)
Doxxed and fairly large with 20+ employees. Which is pretty large for a protocol that has not turned on their fee switch yet. The community is robust and I will refrain from saying negative things about the moderators ~ this is because it’s not their fault that the information is either unavailable or gate kept. This hopefully changes over time.
ECOSYSTEM / PARTNERSHIPS: (5)
Pendle is a partnering machine and as you can see below, they’re choosing to partner with some real quality and up-n-comers. We like to see this. More legos, more circle jerk, more price appreciation in future… hopefully (NFA).
Infrastructure: Layer Zero & Chainlink
Camelot Dex: Hosting inaugural ETH pool on Arbitrum
Equilibria: boosted LP yield for PENDLE stakers (irreversible ~ think CVX → CRV)
Penpie by Magpie (yield/ve boosting): Revolutionizing Pendle
Interport: Cross chain trading
Pendle x [Redacted] OG partnership for interest bearing token splits
Ankr Partnership for increased yield & utility on their LSD ankrETH
0xAcid: Leveraging Pendle as part of their core asset mgmt strat
COMPETITION: (5)
As you can see, Pendle does not have much in the way of competition. This alone has the opportunity to benefit them greatly.
SAFETY: (3)
Chose to give Pendle Finance a 3 because it has a lot of room for smart contract errors. They have advanced strategies, wrapped tokens and vaults incoming ~ due diligence has to be very high. Thankfully they do have bug bounties in place and a large team.
BULLISH: (5)
Since V2, Pendle has attracted $36M in LSD liquidity.
Moving towards permissionless listings (EIP-5115) for q4 🫡
Camelot PENDLE/ETH pool launch has seen impressive growth and volume in short period of time
Potential to tap $400T Tradfi interest rate derivatives market
This is extremely speculative but possible if crypto reaches full scale adoption
Could use Pendle with an Options strat in the future
Customer Acquisition Strategy is very smart (blocmates podcast) ~ via creating the simpler trading vaults, creating a new UI and then testing customer groups before running extra marketing to the masses
Average ‘ve' tokens locked = 381 Days
Team Tokens are fully unlocked this past Apr 2023
LSD and LSDfi narrative has been rather hot lately and will likely to continue being so
BEARISH: (4)
Impermanent Loss
If staking to maturity then there is no IL. Having both tokens inside the same pool also makes IL less impactfulÂ
The finances do not paint a pretty picture ~ well they in-fact don’ paint any picture at all
Smart contract risk via advanced strategies and wrapped tokens
CONCLUSION: (4.25)
Pendle is good … but it could be great.
As it stands, most defi users are not savvy enough to use Pendle properly. Thankfully the team is aware of this and is going to develop specific vaults for different strategies ~ this Dirt thinks this will lead to impressive inflows of TVL. In addition to the vault strats, the addition of permissionless listings will also increase product popularity. Not only from plebs like you and me but from other protocols partnering and vulturing.
BUT, how much is smoke & mirrors when it comes to Pendle? And how much risk are you willing to take with your already staked assets? These are very important questions…
And the answers are different from person to person. Pendle is safe until it’s not and the smoke will only dissipate once the financials are reported. So until that time this tractor will continue to sit on his bucket.
Nothing in this report should be misconstrued as financial advice. Any investments should be taken at the sole discretion of the reader and/or counter party.Â
As always, dig deep and DYOR.Â
DISCLAIMER: The following tools are used to conduct much of my research: Block Explorer, Protocol Analytics, Dune, Github, Defi Llama, Token Terminal, Debank, Nansen, Messari, DApp Radar, Flipside, & Token Unlocks.
Need research assistance? Twitter DM’s are open
Thank you for your deep analysis.
Can you give more insight about various strategies with Pendle?
Where did you find information regarding their Volume and Users figures?