Pendle Finance is a Decentralized Finance protocol that allows users to tokenize and sell future yields. The protocol aims to give holders of yield-generating assets the opportunity 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

Pendle is a protocol that liberates future yield. It enables the tokenizing and trading of future yield by leveraging on-base lending layers created by prominent DeFi protocols such as Aave and Compound, which have shown stable growth and community acceptance.

Pendle Finance: The protocol to trade and hedge future yield.

With Pendle, future yield can be separated from its underlying asset and traded independently. Pendle is powered by an AMM specifically designed to support tokens with 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 will allow 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].

Tech

System Overview

At the highest level, 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 these 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.

Traders will be able to buy these YTs directly, without the need to lock up their underlying assets. This is a more capital-efficient way for them to gain exposure to future yield.

Users can also provide liquidity with their OT in SushiSwap, or sell OT to retain exposure to yield via YT.

Yield Tokenization

To allow owners to give up rights to their yield for a fixed period of time, users will deposit their yield token (aLINK for the purposes of this paper) into a smart contract. Two tokens will be issued, YT and OT.

Future Yield Token (YT)

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.

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.

YT tokens differ from each other according to the underlying asset and expiry date. Tokens with the same underlying asset and expiry are fungible.

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.

Automated Market Maker (AMM)

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

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.

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].

Tokenomics

Pendle Tokenomics

$PENDLE is an ERC20 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. It will eventually be key to the value accrual mechanics and management of the protocol.

The emission will begin with stable incentives of 1.2M PENDLE per week for the first 26 weeks, following which, liquidity incentives will decay by 1% a week until week 260. At this point, there will be a terminal inflation rate of 2% per annum based on the circulating token supply.

The maximum number of tokens in circulation by the end of year 2 is 251,061,124. Any subsequent increments will come from liquidity incentives.

Token Allocation

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.

Pe, P Program

Pe, P program, inspired by the Olympus DAO community, is the first offering Pendle has for long-term Pendle holders to contribute to the protocol and be rewarded for it. It is an initiative that both rewards long-term PENDLE holders and contributes value to the protocol by providing liquidity for Pendle/ETH OT and YT pools.

In essence, (Pe,P) achieves 3 objectives:

• Increase PENDLE liquidity and create a stickier pool-2 incentive
• Provide liquidity to the protocol (i.e. PENDLE/ETH)
• Reward users that contribute the most to the protocol^[7].

Pendle Finance x Olympus Pro

Pendle x Olympus DAO

Pendle is the first partner to launch with Olympus Pro. A total of 3 million PENDLE tokens have been set aside for the 8-week program, and users can deposit their PENDLE/ETH SLP tokens on Olympus Pro to acquire PENDLE at a discount.

With Olympus Pro, users are able to obtain PENDLE at a discounted rate by bonding (exchanging) their PENDLE/ETH LP tokens on Olympus. These bonds have a one-week vesting period and the discounted PENDLE can be continually claimed as they vest.

This bond program also synergizes well with (Pe,P) in creating a healthy Pendle token ecosystem. Users can obtain PENDLE at a discount by purchasing bonds and redeploying them to (Pe,P) which also contributes to the Pool 2 liquidity^[8].

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).

See Also

• Olympus DAO
• OHM
• Olympus Pro
• BarnBridge (BOND)
• Compound
• Aave ($AAVE)