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Pendle's Total Domination

The DeFi protocol is catching fire. Here are the basics of how it works.
William M. Peaster William M. Peaster Apr 8, 20244 min read
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Pendle's Total Domination

There’s a new DeFi major on the block – Pendle. With $4B in total value locked (TVL) and deposits on the rise, the protocol is now among the largest projects in crypto.  

In short, Pendle stands out for allowing users to tokenize and trade future yields on their DeFi assets. 

Under the hood, the system splits yield-bearing assets into two separate tokens: one representing the principal and the other the future yield. This separation unlocks innovative strategies for earning fixed income or speculating on yield fluctuations.

Core Components of Pendle

  • Principal Tokens (PT) — These tokens represent the original capital of an investment sans the future yield. Holding a PT means you expect to claim back your principal at a future date without the yields it generates over time.
  • Yield Tokens (YT) — YTs embody the future yields of the underlying asset until its maturity. Buying a YT is a bet on the increase in yield rates, offering a way to earn potentially higher returns.
  • Vote-Escrowed $PENDLE — By locking PENDLE tokens, participants receive vePENDLE, which confers voting rights in governance decisions, a share of the protocol's fees, and potentially higher yields on liquidity provision.

For users, these pillars lead to a handful of different investment avenues. 

For example, investing in PTs is akin to locking in a fixed yield on your assets – ideal for conservative strategies focused on principal protection and predictable returns.

Conversely, for those with a bullish outlook on yield rates, YTs offer a route to leverage such expectations for potentially higher gains, though with higher risk.

Beyond individual tokens, providing liquidity in Pendle’s liquidity pools can further boost your returns via transaction fees and PENDLE rewards. You can also hold vePENDLE to earn a cut of the protocol’s earnings and boost your LP yields. 

Trying Pendle Earn and Pendle Trade

Pendle Earn is a user-friendly interface, accessible by toggling a switch in the upper-right side of app.pendle.finance, for interacting with Pendle’s smart contracts. 

Through this UI,  you can lock in fixed yield returns on select assets until their maturity, or contribute to liquidity pools to earn variable yields determined by the allocation of PENDLE rewards and the pool’s total deposits. 

To get started:

  • For fixed yields, navigate to the “Fixed Yield” tab on the left side of the Pendle app, choose an asset and its maturity, and input the amount you wish to invest. Your input converts into a PT position, securing the fixed yield advertised at the time of transaction.
  • For LP’ing, visit the “Liquidity” section, select an asset and maturity, then specify your investment amount. This asset will automatically be converted to provide liquidity, subject to potentially variable yields.

On the flip side, Pendle Trade is a platform for trading yield via Pendle’s PT and YT offerings. To dive in here, toggle the “Trade” button on in the app’s top right corner. 

Here you can click into markets of interest, after which you’ll have a series of core actions to choose from: minting (create PT and YT with your assets for different strategies), swapping (trade PT for fixed yield or YT for leveraged yield exposure), and claiming (retrieve accrued yield and rewards from your positions). 

For instance, you can buy PT to hedge against falling yields by locking in your APY at the current rate, or you can buy YT to bet on rising yields with capital-efficient exposure, potentially multiplying returns. 

Whatever you decide to do, you’ll use the Dashboard to manage your portfolio, with detailed analytics on your positions, transactions, and the ability to claim yields and rewards. 

Note that you can also lean on the Pendle Calculator to help you target the best yield opps and the Points Trading UI to manage your points exposure to other DeFi protocols. 

What to Watch Going Forward

Not only is tokenizing and trading future yields useful in its own right, but Pendle is also seeing its assets integrated into a growing range of DeFi projects.

For example, protocols like Dolomite, Silo, and Timeswap have enabled Pendle assets to be used for lending and borrowing, broadening their utility beyond simple yield farming and allowing users to engage in more complex financial strategies. 

Look for more integrations like this to arrive, and also for more new experiments to be built around Pendle. One such experiment on my radar is Michi, a novel points trading platform that lets users swap points generated from Pendle YT and LP positions. 

Pendle's emergence as the latest DeFi heavyweight showcases the growing demand for flexible and innovative financial instruments in crypto. As it continues to carve out a space for tokenizing and trading yields, its infra and assets can become that much more influential.

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William M. Peaster

Written by William M. Peaster

642 Articles View all      

William M. Peaster, Senior Writer, has been with Bankless since January 2021. Immersed in Ethereum since 2017, he writes the Metaversal newsletter on the onchain frontier, covering everything from AI projects to crypto games, as the team’s lead NFT analyst. With a background in creative writing, he writes fiction and publishes art on Ethereum in his free time. He lives in Washington.

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