Opportunities in Pendle’s YT/PT
The purpose of this research is to identify potential opportunities and indicators by diving deep down into Pendle YT and PT offerings.
What is Pendle?
Pendle is a protocol initially deployed on Ethereum that provides a market for the yields of supported yield-bearing tokens. Pendle facilitates this market by splitting yield-bearing tokens into principal and yield tokens and offering liquidity pools by which these tokens can be traded. In doing so, Pendle offers a market for fixed and floating rates of supported yield-bearing tokens by which users can earn fixed yield, long yield (e.g., speculate on the yield of the underlying token increasing), and provide liquidity to the Pendle pool for the underlying token.
On Feb. 26, 2024, the Pendle team announced in a Medium post that it was interested in exploring opportunities with partner projects to develop money markets, leverage strategies, index funds, structured products, derivatives, and collateralized debt positions (CDPs) for PTs, as well as vaults and autocompounders for YT, PT, or LP positions.
Additionally, Pendle has plans to launch Pendle V3; however, based on a commercially reasonable search as of April 8, 2024, further details regarding an intended Pendle V3 launch have not been disclosed.
As of the same date, the yield-bearing tokens that Pendle supports are permissioned and fully controlled by the Pendle team. However, the project’s documentation lists a “Creating New Pools” page that states “Coming Soon.” A commercially reasonable search identified no further disclosures from the Pendle team regarding this intended mechanism.
Pendle’s main products, PT and YT both resemble a bond-like structure similar to traditional markets where PT+YT = $1. PT being the underlying bond + native yield, and YT being the underlying yield (in points). While this concept is non-novel, it is very similar to bond stripping in traditional finance.
To generate PT/YT, a user can either
Buy YT/PT off the points market
Mint through Pendle pools
a. Pendle LP earns both protocol yields/fees along with Pendle incentives and fixed yield (Pendle PT + YT tokens)
Pendle LP providers can also earn from a daily pool of PENDLE tokens, which further sweetens the deal for LP holders.
PT
APY is guaranteed in buying and holding PT until maturity.
PT markets functions very much like a corporate bond, where upon maturity a guaranteed yield is offered. As each PT inches closer to maturity, PT price will also inch closer to parity (ie, $1 for USD yields)
To illustrate, if the implied yield is 12% APY and the term is 3 months, a user can expect to redeem his PT at $1.03 for every $1 put in.
ie for crvUSD (1-.9614)/.9614/99*365 = 14.8% (this is volatile as the percentage APY given is based on the last price traded on the PT market)
If a user is uncertain on the yield generated by a platform on Pendle, they can lock in their rates by buying PT of the underlying product. Buying PT ensures that the user gets paid out based on the APY given.
Inversely, if a user thinks that yield generated via a platform would decrease, he could then short PT by minting the corresponding PT and selling it on the market.
YT
YT is a unique product offering that lets users speculate on the yield (in points) on a specific platform.
As each YT inches closer to maturity, YT price will also inch closer to $0.
YT can be obtained 3 different ways:
Users can purchase YT from the points market if they are bullish on farming points on the platforms available on Pendle as this gives them a leveraged advantage by only purchasing the yield portion of the underlying protocol, instead of staking their own capital.
By minting PT on Pendle, YT is also issued.
3. Pendle LP providers mint both the LP token and YT token upon each deposit.
The benefits of buying YT is that if value of the points increases, the price multiple of YT could be much greater given the low price of YT.
To illustrate,
If APY = 12%, and it spikes to 15%:
PT would be $0.88 → $0.85 (-3.34%)
YT would be $0.12 → $0.15 (+25%)
Inversely, if the yield drops a user could also sell YT for a higher multiple on their investment.
Points Multiplier
The perk of buying YT is that it gives a user more points instead of farming with a user’s capital. Since YT reflects the yield portion of a product, it provides leverage on the points generated during a specific period. This provides an advantage in utilizing significantly less capital to speculate on the points of pre-launch tokens.
Buying the YT product through Pendle also gives further upside on multiples generated from each of these partnered protocols, giving further advantage to point farmers.
Before we delve into strategies, the most important concept to understand here is that if you are
SHORT YIELD = BUY PT OR SELL YT
LONG YIELD = BUY YT OR SELL PT
Suggested strategies
Adopting a strategy on hedging funds and earning safe yield, minting through the LP and buying PT gives a user an advantage in locking in current rates as prices inch closer to parity. A strategy we can adopt into our fund management strategy is to buy PT while selling YT to lock in yield.
A more active strategy could also be to looking into PT yields when markets are more bullish to lock in more lucrative yields.
Buying YT is also a potential strategy if there is some indication or clarity of the price of a point. (This would be purely up to speculation/if a user is willing to purchase the token at X market cap)
To illustrate, if we work out the value of Etherfi points at $0.01, and Eigen points valued at $0.008,
and 1$ of YT could yield 79 EtherFi points + 39 Eigen points,
We could then assume, (79 * 0.01) + (39 * 0.05) = $1.102 for every $1 of YT purchased.
Opportunities tldr;
As a hedge fund:
Buy PT to lock in returns on capital when a project is overly hyped
As a degen:
Buy YT for maximum point gains on your favorite degenerate flavor of LRTs
Using PT/YT as Indicators
Large buyers of PT/Large sellers of YT = bearish
Larger sellers of PT/Large buyers of YT = bullish
Mispricing of PT/YT assets, such as when there is an overwhelming demand for either PT or YT products could signal a change in market trends.
An example here on a bearish scenario is that there are much more PT buyers (buyers that want to lock in at a higher implied yield vs sellers who would want to sell at a lower yield)
Understanding PT and YT demand is also key to understanding Pendle’s TVL. By summing all the TVL and Liquidity sums on the markets + earn page, you would notice that the sum of all TVL and Liquidity numbers fall short of the total TVL on Defillama/Nansen (or other on chain tracking tools)
Important to note is that funds that are within the SY contract does not count towards the Liquidity.
To illustrate:
Ether.fi’s 25 July contact shows 29.6M in liquidity
However, on further inspection of the SY contract from the info page:
We can find that there’s 562M in deposits on the SY weETH token.
Versus the sum of all liquidity on Etherfi pools on Pendle
Underlying risk
The risks involved for a user partaking in Pendle’s product lineup are due to the flow of funds from one protocol to another. To put it simply, ETH flows from
ETH → stETH (LST: Lido) → eETH (LRT: Etherfi) → Eigenlayer
The slashing risks involved at each stage of the flow of funds present a risk in the underlying token depegging. Should at any point, stETH, eETH or ETH within Eigenlayer get slashed, tokens along the value chain would inherit the depeg and follow suit.
Interesting notes:
Pendle is also the main driver in volume for many LRT protocols, often taking up a huge percentage of total staked ETH in each LRT protocol coming from Pendle, capturing both whales and smaller retail players alike.
Ether.fi - most of the transactions are coming from Pendle SY, with it being the largest Etherfi counterparty
Zircuit - we see a similar trend here with a majority of Zircuit counterparties flowing from Pendle SY tokens
Swell - Swell does not have as much reliance on Pendle as the above ones
1 billion TVL evaporated on 27th Jun on June expirations:
weEth → 1.75b → 1b (-750m)
susde → 803m → 807m (+4m)
other (eth) → 702m → 563m (-139m)
pendle → 583m → 549m (-34m)
ezeth → 356m →361m (+5m)
usde → 326m →330m (+4m)
ezeth (arb) → 276m → 202m (-74m)
eseth → 217m → 164m (-53m)
Total:
1050m - 13m = 1037m/5013m
Pendle TVL chart looking absolutely brutal over the last week with total TVL loss: 1.8b, 36% since 26th June
Zircuit: Unsurprisingly, Zircuit has also witnessed a sharp decline in TVL from 2.64b on 26th June to 2.15b on 1st July (-490m, -18.5%)
Etherfi: Despite a majority of the TVL losses attributed to weETH (etherfi wrapped ETH), etherfi’s deposit hasn’t declined as sharply from 8.92b on 26th June to 8.29b on 1st July (-630M, -7%)
This could likely be due to withdrawal delays set by etherfi on LST withdrawals, which is currently at 7 days should etherfi not have sufficient ETH to process immediate withdrawals
tl;dr
If you’d like to hedge a stable return on your underlying assets:
Buy PT to lock in returns on capital when a project is overly hyped
If you’d like to speculate on points:
Buy YT for max point gains on your favourite degenerate flavour of LRTs
Be warned:
Pendle PT/YT products carry inherent risk on the underlying LRT/staking layers it supports.
Past performance is nonindicative of future results. This is not financial advice. please do your own research and seek independent advice before investing.
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