Pendle Finance is a Decentralized Finance protocol that allows users to tokenize and sell future yields. It helps the users to generate additional yield and to lock-in future yield upfront, while offering traders direct exposure to future yield streams without the need for underlying collateral^[1][2].

Overview

Created in October 2020, Pendle has designed a protocol that lets users separate future yield from their base yield-bearing assets. It enables the tokenizing and trading of future yield by leveraging on-base lending layers created by well-known DeFi protocols such as Aave and Compound.

Pendle is powered by an AMM specifically designed to support tokens with a depreciating time value, creating a new type of DeFi derivative. Pendle focuses on developing this layer of yield derivatives - expanding the supported token pairs, creating market depth, and growing the ecosystem.

Pendle aims to leverage the volatile nature of yield and allow more options to manage yield according to individual risks. This allows for a higher level of trading in DeFi, where one party can exchange streams of yield payments for immediate cash while the other can hedge and speculate on pure yield exposure^[3][4][5].

In August 2023, Pendle announced its intends to incorporate MakerDao's enhanced Savings (sDAI) and Flux Finance's fUSDC within its inaugural real-world asset (RWA) centered offering. Tokenizing real-world assets (RWAs) involves creating a digital investment system connected to physical assets like real estate, precious metals, art, and collectibles. ^[24]

“Fixed Yield and RWA have some of the largest addressable markets that remain untapped in DeFi,” TN Lee, the co-founder and CEO of Pendle, shared in a message to CoinDesk. “I firmly believe these will play a key role in attracting huge, offchain institutional investors onchain.”

Tech

Pendle incentivizes the pooling of yield-generating assets and the creation of yield markets across DeFi platforms. Holders of yield-generating assets can sell their rights to yield for a fixed period of time, allowing them to lock in their profits and receive upfront cash.

Holders of yield-generating assets can deposit the tokens into Pendle. By doing so the user mints an Ownership Token (OT), representing the underlying principle, and a Yield Token (YT), representing the right to receive the yield.

Users can then utilize their YT in two different ways.

• Firstly, they can deposit their YT into Pendle's AMMs to provide liquidity to Pendle. In return, fees and other incentives are given to these liquidity providers (LP).
• Secondly, they can sell their YT for cash upfront, allowing them to fix the interest rates and lock in their returns immediately.

Yield Tokenization

To allow owners to give up rights to their yield for a fixed period of time, users will deposit their yield token into a smart contract. Two tokens will be issued, XYT and OT.

Future Yield Token (XYT)

Each YT token represents ownership of the future yield of the locked aLINK for a preset number of blocks. YT can be traded in the AMM, and the holder of the token receives aLINK yield as distributed by the base lending platform. YT tokens differ from each other according to the underlying asset and expiry date. Tokens with the same underlying asset and expiry are fungible.

At expiry, YT tokens have a value of zero. The holder of OT can then roll his position into a new YT expiry date or redeem the underlying asset.

Ownership Token (OT)

OT tokens represent the underlying staked asset and are transferable. Only wallets holding OT and its corresponding YT token can withdraw the underlying asset deposited.

Pendle V2

V2 AMM

The Pendle AMM(automated market maker) aims to minimize the time-dependent impermanent loss that arises from the provision of liquidity using tokens with time decay.

V2 AMM introduces multiple features focusing on friendly liquidity provision, capital efficiency and flexibility. Few key points:

• Minimal Impermanent Loss (IL) for LPs
• Up to 200x improvement on capital efficiency from V1
• Low-slippage trades
• LPs earn fees from the trading of 2 assets while only providing liquidity for 1
• AMM can be optimized any specific yield ranges to optimize liquidity.

The V2 AMM is designed specifically for trading fixed rates with PT(Principal Token) in focused ranges. In V2, PT is always traded against its underlying asset. By doing so, IL is significantly mitigated by the high correlation between both assets.

Swapping PT is a straightforward process of swapping between the 2 assets in the pool, while YT swaps utilize flash swaps in the PT pools. As PT and YT can be minted from and redeemed to 1 unit of the underlying asset, we can express the following price relationship:
P(PT) + P(YT) = P(Underlying Asset)
^[16]
While YT can be traded on existing Uniswap type AMMs, the constant product invariant formula x*y = k is not ideal for YT, where time is an additional factor. Utilizing a formula which is a pure function of reserves would cause pools to suffer from predictable losses to arbitrage as YT maturity approaches.

The fragmented yield market is EIP5115: Standardized Yield (SY). SY is a new interface standard designed by Pendle, to wrap all ybTokens (yield-bearing tokens) into a single standardized yield interface. V2 AMM supports PT-ybToken / SY-ybToken where SY is a standardized wrapped version of any ybTokens. For instance, SY-aUSDC is a simply wrapped aUSDC and is used to mint PT-aUSDC and YT-aUSDC.
^[17]
Taking inspiration from the constant product invariant and incorporating a constant decaying time factor, the team has developed a strain of AMMs that can be utilized for tokens with time value^[6].

VePENDLE is to align incentives, to generate liquidity and fees. VePENDLE lockers are to receive swap fees only for pools they voted for. This aligns where vePENDLE lockers vote, and ideally have them vote for the pools that generate the highest fees.

The benefits:

• Incentivizes fees for the protocol
• Promoting highest fee-earning pools to increase liquidity on them.
• Aligns emissions with protocol incentives, allowing participants to self-optimize the system.

^[18]

Tokenomics

Pendle token(PENDLE) was launched in April 2021^[22]. $PENDLE is an ERC-20 token that operates on the Ethereum Blockchain. $PENDLE was a pure utility token at launch, with governance functions to come after the protocol has matured sufficiently.

The maximum supply of PENDLE tokens is 251 million. The team has been allocated 22% of the tokens, while the ecosystem has 18% reserved for it.

Farming PENDLE tokens is the 35th project on Binance Launchpool, launched on July 4, 2023. The Binancians were allowed to stake their BNB and TUSD into separate pools to farm PENDLE tokens over 25 days, from the launch date.^[21]

Token Allocation

Vesting Schedule

All investors and team members are under a vesting schedule to align incentives. The table below shows the schedule for the various components:

Fees

There are two different types of fees on Pendle:

• Forge Fees: 3% of the interest accrued from YT will be directed to the Pendle Treasury.
• Swap Fees: The AMM charges a 1% swap fee on trades. 0.85% is distributed to LPs and 0.15% to the Treasury.

Pendle $APE Compounder

The ApeCoin ($APE) market is launched on Pendle. With this, both Apes and Pendies can now:

• Buy $APE at a discount
• Provide sAPE liquidity to the $APE pool and stack rewards
• Boost $APE pool incentives with vePENDLE

With the launch of the Pendle $APE pool, the user can provide liquidity to stack and earn extra yield. Impermanent Loss (IL) will be minimal without the need for $APE or sAPE, due to the embedded Pendle V2 AMM design.

With vePENDLE, Apes can band together to supercharge the $APE pool rewards by directing Pendle incentives to it.

A free-to-use $APE Compounder is launched on Pendle to make staking and compounding $APE easier. The Pendle $APE Compounder is an absolutely free-to-use public good. No fees, no charges. This also significantly boosts the earning potential with $APE, bringing the APY(annual percentage yield) of staking up from 176% to 525%.

Generally, there are 4 separate pools set up for $APE staking - $APE, BAYC, MAYC, and BAKC. Only the basic $APE pool will be supported by the Compounder for stress-free compounding needs.

The native $APE staking doesn’t compound. If the user wanted to hit the maximum potential of $APE, they need to be manually claiming and re-staking their rewards all the time. Meanwhile, when Pendle Compounder is being used, $APE holders will be able to compound rewards passively. Do less, earn more.

To stake on the PENDLE Compounder, the user needs to input the amount of $APE, approve and confirm the transaction. Similarly, to unstake, the user needs to input the amount of $APE to be unstaked, approve, confirm.
^[19][20]

Governance

Pendle's governance relies on Vote-escrowed PENDLE, also known as vePENDLE, which enables a higher degree of decentralization. By utilizing vePENDLE, PENDLE holders gain access to an array of features that increase the token's utility. vePENDLE also serves as an additional sink for reducing the supply of PENDLE tokens, thereby increasing the token's stability and the overall robustness of the protocol. In this way, vePENDLE serves as an important tool for maintaining the long-term health of the Pendle ecosystem.

Over time, the vePENDLE value gradually decays, but users can extend the lock duration to counteract this decay. vePENDLE holders can utilize their tokens to vote on incentivizing liquidity in specific pools, granting them voting power proportional to their vePENDLE holdings. Voting for a pool entitles the holder to 80% of the swap fees collected by that pool, and they also receive a portion of the protocol’s revenue generated from swap fees and YT fees.^[9]

Penpie

Penpie (PNP) is a next-generation DeFi platform designed by @magpiexyz_io to provide Pendle Finance users with yield and veTokenomics boosting services.

Integrated with Pendle Finance, Penpie focuses on locking PENDLE tokens to obtain governance rights and enhanced yield benefits within Pendle Finance.^[11]

mPENDLE

Penpie gives PENDLE holders the chance to earn high APR(annual percentage rate) by converting their tokens into mPENDLE. Penpie has created mPENDLE, a Penpie version of the PENDLE token, which allows users to earn a large share of PENDLE rewards while having the privileges of increased flexibility through Penpie. This mechanism gives PENDLE holders the chance to earn high APR% by converting their tokens into mPENDLE at a 1:1 ratio.^[12]

Penpie x Layer Zero

The structure of LayerZero is suitable for dependable message transmission throughout diverse blockchains. As per Penpie, this provides a foundation for several applications within the DeFi sector. It mentioned that the platform adopted the standard of the omnichain fungible token (OFT) from LayerZero Labs. The respective token contract enables interoperability among blockchain platforms.^[13]

PENDLE unlock

The minimum lock duration is 1 week and the maximum is 2 years. Each wallet is linked to a single unlock date. The user can decide to extend the lock duration or add more PENDLE to the lock. Then, the unlock date will be adjusted for the entire vePENDLE balance.

^[9][10]

Fundraising

Pendle Finance announced successful fundraising in April 2021 led by Mechanism Capital. They were able to raise $3.7M in their private round, with support from the following funds and individuals: Crypto.com Capital, Hashkey Capital, Spartan Group, CMS, imToken, DeFi Alliance, Lemniscap, LedgerPrime, Parataxis Capital, Strategic Round Capital, Signum Capital, Harvest Finance, Youbi, Sora Ventures, D1 Ventures, Fisher8, Origin Capital, BitLink, Bitscale Capital, Hongbo, co-founder & CEO of DeBank, and Taiyang Zhang, co-founder & CEO of Ren Protocol.

In August 2023, Binance Labs announced an undisclosed investment in Pendle Finance. The funding secured by the Pendle Finance team will be allocated towards expanding to multiple blockchain networks, with a specific emphasis on catering to both retail and institutional users. The co-founder and CEO of Pendle Finance, TN Lee, stated that they intend to leverage Binance Labs' extensive expertise and resources to expand their operations. Binance Labs highlighted that Pendle's fixed yield offering would play a crucial role in the project's development, particularly as it traditionally serves as a fundamental component for institutional hedging. ^[23]

In November 2023, Spartan Capital made an additional investment in Pendle Finance through an over-the-counter (OTC) purchase, although the size of the investment was not disclosed. Spartan Capital highlighted Pendle's growth, citing data from DefiLlama showing a more than 2,000% increase in total value locked (TVL) over the year since November 2022. They expressed confidence in Pendle’s solutions, such as Liquid Staking Derivatives and Real World Assets, to attract more off-chain capital to the industry.^[26]