Pendle Revolution in DeFi

editorFebruary 2, 2025

0 9 29 minutes read

Fixed Income and Asset Optimization

It is no exaggeration to say that every investor in the crypto market seeks the highest possible profit. However, volatility and lack of sufficient knowledge cause many to face losses instead of gains. Now, imagine if there were a way to achieve fixed returns and even benefit from the future yields of your assets without waiting! Pendle provides exactly this opportunity.
Pendle divides your assets into two parts: the Principal Token (PT) and the Yield Token (YT), allowing you to trade each separately. By using the Principal Token, you can achieve a fixed income, which can sometimes be significantly higher than regular staking rewards. This feature of Pendle allows you to receive your future returns in advance while reducing investment risks and maintaining greater control over your assets. In this article, we will explore the mechanisms and opportunities of Pendle and show you how this platform creates a safer and more profitable experience for investors in the crypto world.

With the rise of decentralized finance (DeFi), investors are looking for new and innovative ways to manage and generate income from their assets. One of the notable innovations in this field is yield farming, where users lock their assets in various protocols and receive rewards or interest in return. This method enables investors to earn passive income without intermediaries. However, yield farming is not without its challenges; extreme market fluctuations, liquidity risks, and asset management complexities are among the issues users face in this sector.

Pendle has emerged as an innovation to creatively address these challenges. It enables users to separate and trade the returns on their assets, giving them greater control over managing and forecasting their income. Essentially, Pendle introduces the concept of yield tokenization, empowering users not only to receive their earnings but also to sell them separately or use them for further income generation.

Pendle splits yield-generating assets into two separate parts: one representing the principal investment amount and the other representing the future earnings from that investment.

For example, suppose you have 1 ETH locked in a platform, generating a 10% annual return. Normally, you would have to wait until the end of the year to receive your 0.1 ETH profit.

However, Pendle changes this process. In Pendle, your ETH asset is divided into:
The principal asset, i.e., the 1 ETH itself
The future yield, i.e., the 0.1 ETH expected over the year

Pendle allows you to trade the future yield as a separate token. Instead of waiting a year to receive the earnings, you can sell the yield token representing 0.1 ETH to another person and immediately receive cash or another asset. This way, you can liquidate your future earnings earlier and use them for other investments or financial needs. This structure provides you with greater flexibility in managing your assets and profits.

In this article, we will provide a comprehensive introduction to Pendle and examine its functionality in DeFi. We will first explain the nature and structure of Pendle and demonstrate how this platform enables trading and management of future profits by separating assets into two parts. Next, we will explore the practical applications of Pendle in financial markets and how it can be used to enhance liquidity and flexibility in investing. Additionally, we will discuss various investment methods and profit-making strategies within Pendle, showing how users can adopt more profitable and intelligent strategies using these tools.

In the tokenomics section, we will analyze the economic structure of Pendle and the role of its tokens within the ecosystem. This part includes the supply and demand dynamics of the tokens, reward models, and distribution policies. We will also provide an analysis of Pendle’s on-chain data to give you up-to-date and accurate insights into how this platform operates.

Introduction to Profit Optimization
Entering the World of Yield Farming

In yield farming, users place their assets into specific liquidity pools and receive an annual yield in return. The rate of this yield, known as the Annual Percentage Yield (APY), is similar to bank interest but with higher volatility. For example, suppose you deposit $100 into a yield farming pool with a 20% APY. This means that after one year, your asset will grow to $120—assuming the APY remains constant. However, in reality, this rate can change, requiring you to monitor the yield constantly.

Profitability Challenges in DeFi

Bear Market (Declining Interest Rates):

In a bearish market, known for its downturns, interest rates suddenly decline. For example, suppose you have invested in a pool with an interest rate of 100%, but the next day, the rate drops to 10%. In such a situation, your expected profit has significantly diminished, and you might start wishing you could maintain that profit.

Bull Market (Increasing Interest Rates):

Conversely, in bullish conditions or a bull market, interest rates rise, and users are encouraged to increase their investments. However, managing assets in these circumstances can also be challenging, as over-investing raises the risk of losing assets. Imagine you have decided to invest more in a bull market and the interest rate has increased from 20% to 30%. If you can benefit from this profit without worrying about a sudden rate drop or loss, you could acquire more assets.

Yield-Bearing Tokens: Tools for Earning in DeFi

Yield-bearing tokens allow users to earn without selling their assets. These include:

Staked Tokens (e.g., stETH, wstETH from Lido):

By staking Ether on the Lido platform, users can not only earn interest from holding their Ether but also receive stETH tokens, which are also known as Liquid Staking Tokens (LST). These stETH tokens can be utilized within DeFi platforms

Restaked Tokens (e.g., eETH):

These tokens are created by restaking Ether on platforms like EtherFi. Restaking means that staked assets (such as stETH) are locked again in another platform to earn additional rewards. The image below illustrates the restaking process in Ether.fi; after staking Ether in Lido and receiving stETH tokens, you can further stake (restake) them in Ether.fi to earn not only a 4.37% return (currently) but also receive eETH tokens.

Liquidity Provider (LP) Tokens:

These tokens are given to users who provide their assets for liquidity in protocols like Uniswap, Balancer, or Curve. By supplying liquidity, these users receive a share of the transaction fees as rewards. Yield-generating tokens allow users to earn income from their assets without needing to sell them. Through staking or providing liquidity, users can achieve a stable return from these tokens.

Introduction to Pendle and Yield Tokenization

Introducing Pendle

Pendle is a platform in the DeFi space that allows users to convert the future yields they will earn from their assets into tokens separately, enabling them to buy and sell these tokens independently of their original assets. In Pendle, the yield and the principal asset are divided into two distinct types of tokens:

Principal Token (PT): Represents the original asset.
Yield Token (YT): Represents future earnings.

Suppose you have staked your Ethereum on Pendle. Pendle splits your asset into two tokens: the PT token, which represents your actual Ethereum, and the YT token, which represents the future yields from staking. With these two tokens, you can sell YT earlier and receive your future profits in advance, without having to wait for the end of the staking period.

To better understand, we can refer to the example of a rental property. A rental property is a type of income-generating asset that provides rental income to its owner. In fact, the value of this property can be divided into two parts:

The ownership right of the property, which can be considered the principal.
The right to receive rent, which the owner collects for a specified period.

You can combine or separate the different parts of your asset at any time. For instance, with stETH, you have access to both the principal asset, “your ownership of stETH,” and the income generated from it, “the right to receive yields from it.” This flexibility allows you to trade the tokenized yield portion separately, even before the maturity date. In this way, you can implement more diverse investment strategies and make the most of market opportunities.

Suppose the maturity date is one year from now:
By purchasing the ownership right of an asset at a price below its actual value, you can secure a bright future for your investment. After one year, this right allows you to redeem that asset. It’s like buying a house at a discounted price and selling it at market value a few years later. This means guaranteed profit and a fixed, reliable return on your investment.

By purchasing the right to receive rent from a property, you can claim part of the rental income. Imagine that with just $5,000, you buy the right to receive rent from a property for one year. If the rents increase as you expected, you will earn a good profit. This means you can invest in the rise of rental prices and profit without paying the total amount for the property.

DeFi (Decentralized Finance) has the potential to redesign the financial system, and innovations like yield tokenization and the use of smart contracts demonstrate the capability to transform the financial system for greater efficiency.
— Vitalik Buterin, founder of Ethereum.

Trading Yields on Pendle: Market Making and Quick Liquidity

Pendle features a secondary market known as the Automated Market Maker (AMM), where users can buy and sell PT and YT tokens. With this market, you can sell your YT tokens immediately without waiting to receive gradual yields, thus obtaining the liquidity you need. Imagine selling your YT token, which represents the future yields of your Ethereum. Now, with the funds you acquire, you can invest in other projects or purchase other tokens.

Different Ways to Earn Profit in Pendle

Pendle allows you to use various methods to generate profit:

Passive Income

Fixed Profit:

If you are looking for a fixed profit, you can purchase PT tokens and benefit from a fixed profit until maturity without worrying about market fluctuations.

Higher Profit from Providing Liquidity:

If you place your assets in Pendle’s liquidity pools, you will earn not only the primary profit but also transaction fees.

Trading Profit

Buying YT to Increase Profit:

You can buy YT at a low price and sell it at a profit in the future as its price increases or upon maturity.

Simultaneous Use of PT and YT:

By holding both PT and YT tokens, you can benefit from fixed and variable profit while implementing diverse strategies.

DeFi protocols have not only made financial transactions more accessible but have also enabled customization and separation of different value components.
— Hayden Adams, Founder of Uniswap

How Profit Tokenization Works in Pendle

PT and YT Tokens in Pendle

In DeFi platforms, when you stake your tokens, you receive a profit-generating position, meaning an asset that yields returns. When profit is tokenized, this process has a maturity date at which the profit ends.

The combined dollar value of PT and YT equals the value of their underlying asset because they are two parts of a whole. You can redeem the original asset by depositing an equal amount of PT and YT. Upon maturity, you can redeem PT without YT, as YT no longer generates profit or holds any value after maturity.

Price of PT + Price of YT = Price of the Underlying Asset

You can tokenize profit-bearing tokens in Pendle by selecting any asset on the Market page and choosing the “Mint” tab on the left side of the screen.

Precise Definition of PT and YT

For every profit-generating position, there is an underlying asset. The underlying asset is used as a unit for evaluating the profit position and calculating its APY. The underlying asset token is not always the same as the profit-bearing token.

For example, Liquid Restaking Tokens (LRT) such as weETH from EtherFi, ezETH from Renzo, and rsETH from KelpDAO are themselves profit-bearing tokens. However, their underlying asset is ETH, which represents the principal staked capital in the LRT contract.

With this explanation, the precise definitions of PT and YT are as follows:

A YT gives you the right to receive the profit from one unit of the underlying asset (such as 1 ETH, 1 DAI, 1 USDe, etc.) until maturity, which can be claimed at any time.
A PT gives you the right to redeem one unit of the underlying asset (such as 1 ETH, 1 DAI, 1 USDe, etc.) at maturity.

PT tokens are suitable for individuals looking for long-term investments with fixed returns and who want to receive the underlying asset at maturity. YT tokens are suitable for those seeking short- and mid-term profit from fluctuations in the underlying asset’s yield and have a higher risk tolerance.

Uses of PT and YT

Before Maturity:

PT and YT can be created from the underlying asset.

PT and YT can be redeemed back into their underlying asset.

YT holders can receive accumulated profit instantly.

After Maturity:

PT holders can redeem the underlying asset at a 1:1 ratio without needing YT.

Note: You can buy and sell PT and YT on the Pendle AMM market at any time, even before maturity, without any lock-in restrictions or penalties. These tokens are tradable 24/7.

Comparison of Principal Token (PT) and Yield Token (YT)

Feature	PT Token	YT Token
Purpose	Redeem the underlying asset at maturity	Receive yield from the underlying asset at any time
Entry Cost	Less than the underlying asset	Significantly less than the principal investment
Value Change Over Time	Gradually increases until reaching the value of the underlying asset at maturity	May fluctuate, but generally increases as the yield of the underlying asset grows
Return	Fixed profit (from the difference between entry cost and redemption value)	Profit depends on the amount of YT purchased and fluctuations in the underlying asset’s yield, without liquidation risk or oracle risk
Risk	Risk of the underlying asset not increasing in value by maturity	Risk of a decrease in the yield of the underlying asset

Comparison of PT and YT in Traditional Finance

In traditional finance (TradFi), what Pendle does is similar to bond stripping. This method separates the principal and interest of a bond. Therefore, PT tokens are similar to zero-coupon bonds, while YT tokens resemble the stripped coupons of bonds.

PT in DeFi is Like a Zero-Coupon Bond

A zero-coupon bond is a type of bond that does not pay interest until maturity. These bonds are typically sold at a discount and redeemed at full value upon maturity. The difference between the purchase price and the face value constitutes the investment’s profit.

Example: Suppose you buy a zero-coupon bond for $800, with a face value of $1,000 and a maturity period of three years. At maturity, you receive $1,000, meaning you make a $200 profit over three years. Additionally, you don’t have to hold the bond until maturity—you can sell it at market price at any time.

YT in DeFi is Like a Stripped Coupon

A stripped coupon is a part of an interest-bearing bond that has been separated from the bond’s principal and can be bought and sold independently. Bonds that pay regular interest have coupons representing these payments. When separated, these coupons can be sold to investors who want to receive the interest.

Example: Suppose you own a bond that pays $50 in interest annually over three years, totaling $150. By stripping the coupons, you can sell them to someone who wants to receive this $150 in interest. If you sell the coupons for less than $150, the buyer also profits over three years.

These examples illustrate how PT and YT in Pendle resemble income-generating assets and principal assets that can be traded separately.

“The ability to separate and tokenize yield from the principal asset has significantly increased financial complexity and investment opportunities for users.”
—Kate Allen, DeFi Analyst

Optimizing Yield with Pendle

Fixed Yield with PT Tokens

By purchasing PT, you are guaranteed to receive the displayed yield if you hold your asset until maturity.
Example: If you invest 1 stETH, you can receive approximately 1.17 stETH on December 29, 2027, earning a fixed yield of 0.17 stETH at an approximate annual rate of 4.68%.

Formula for calculating PT

Benefits of Fixed Yield

In DeFi, interest rates usually decline over time. However, with Pendle’s fixed yield, you can secure your desired return through Pendle Earn without constantly monitoring APRs or switching farms.

Fixed-yield deposits can be a safer alternative to spot purchases, as they protect your investment from declining asset value while guaranteeing returns upon redemption.

Source of Fixed Yield in Pendle

In Pendle, you swap your asset for its PT token, which is purchased at a discount. Over time, PT’s value gradually increases, aligning with the underlying asset. At maturity, you can redeem PT 1:1 for the base asset. Your profit at maturity is simply the difference between the purchase price of PT and the value of the base asset.

How to Buy PT

1. Go to the Markets Page: https://app.pendle.finance/trade/markets
2. Select an Asset and Maturity Date: You can sort assets by the highest fixed APY and choose your preferred network (top right corner).
3. Select PT – Fixed APY: Click on “PT” to proceed.

4. Choose Input Asset & Amount: Your input asset may differ from the base asset—Pendle automatically finds the best conversion path.
5. Review & Confirm: Check the redemption amount at maturity and the effective fixed APY, then confirm the transaction.
6. View Open Positions: Click “See Details” under Pendle Earn to track your positions.

Based on the diagram below, by investing one unit of weETH, you will receive 1.05 units of eETH at maturity (December 28, 2024). The blue line in the chart indicates the trend of fixed yield growth over time.

“Open, decentralized financial markets allow users to invest and trade at any moment without reliance on traditional intermediaries.”
—Robert Leshner, Founder of Compound

Trading Yield with YT

Now that we’ve covered PT and YT basics, let’s explore different strategies for trading yield using YT tokens.

Buying YT for Long-Term Profit

One of the ways to trade yield with Pndl is by buying the YT token. By holding this token until maturity, you can benefit in the long term. Additionally, you can make quick profits in the short term by buying at a low price and selling at a high price. This strategy is particularly effective when you anticipate that the APY of the asset will increase and the price of YT is below its actual value.

Note: YT holders receive only the yield from the underlying asset without needing to hold the primary asset.
The formula for YT profit is defined as follows: Accumulated Rewards−Purchase Price of YT=YT Profit
In other words, the profit earned from YT is equal to the amount of accumulated rewards or yield minus the cost you paid to purchase YT.
For example: If the accumulated reward from the underlying asset (such as annual yield or APY) is equal to 10 and the purchase price of YT is 7, your profit would be 3.
This formula shows you that to make a profit from YT, the accumulated rewards from YT must be greater than its purchase price.

Accessing yield with leverage without the risk of borrowing

Since YT is often cheaper than the underlying asset itself, buying it can be similar to using leverage under normal circumstances. For example, with a purchase cost equivalent to 1 unit of the primary asset like stETH, you might earn a yield equivalent to 11.9 units of stETH, which represents a leverage of 11.9 times in this transaction.

Since no loans are taken out, there is no risk of liquidation or oracle database errors. This leverage is simply obtained by tokenizing the yield earned, allowing you to access a portion of the yield of an asset at a lower cost than acquiring the entire asset.

Accessing yield with leverage without the risk of borrowing

“We are witnessing a battle between different blockchains, and not all will survive. Just like the early days of the internet, success depends on use cases and innovation.”
—Mark Cuban, Entrepreneur

How to Profit from YT Purchases

You can profit from purchasing YT when its price increases or when the yield received from YT exceeds its purchase cost. Generally, by buying YT, you are betting that:
The Implied APY will increase after your purchase, leading to a rise in the price of the yield token. This APY rate is influenced by the market supply and demand for the yield token and the primary token.
The Underlying APY or Long-Yield APY will rise, which means generating yield more quickly and in greater amounts.
The table below summarizes the factors that affect your profits and losses as a holder of the YT token. The direction of the arrows indicates the impact of these factors (note that the direction of the arrows will change with changing conditions).

In simple terms:
The right time to buy YT is when the price of YT is low (implied APY is low) and the long-term yield APY is positive.
The right time to sell YT is when the price of YT is high (implied APY is high) and the long-term yield APY is close to zero or negative, which indicates a mispricing of the yield token.

Formula for Calculating YT

How to Buy YT

To purchase YT tokens on the Pendle platform, follow these steps:

1. Accessing the Market:

Visit the Pendle website.
From the top menu, select the “Trade” option to access the markets page.

2. Selecting Assets and Buying YT:

Choose the underlying asset and desired maturity date.
Look for assets with a high Underlying APY and/or a low Implied APY.
Click on the “YT – Long Yield APY” option.
Select the input asset and the amount you want. Note that the input asset can differ from the underlying asset.
Check the Implied APY after considering the effects of price and fees. This yield reflects the real cost of the YT token. Also, evaluate your Long-Yield APY.

3. Confirming the Transaction:

After reviewing the information, confirm the transaction.

4. Managing Positions and Claiming Rewards:

To see your current positions, click on the “Dashboard” option in the top menu.
In this section, you can claim the yield generated by your YT by clicking the “Claim” button.

According to the image below, the price of one YT for eETH is 16, and with approximately 2,500 (equivalent to one weETH), you can purchase 147.1 units of YT.

Using the Pendle Calculator

To forecast profits in different scenarios, you can use the “Calculator” tool located in the bottom left corner of the page.

As shown in the image below, if you deposit 1 unit of wstETH for a six-month period on the Pendle platform, the following results are obtained in different PT and YT purchase scenarios:

Buying PT (Fixed Yield)

Net Profit ($): $79.2
Net Profit (%): 2.37%
Effective Annual Yield: 3.77%
In this scenario, you will earn a positive profit, which is relatively stable and predictable.

Buying YT (Variable Yield)

Net Profit/Loss ($): $1,015 loss
Net Profit/Loss (%): 30.4% loss
Annual Return Rate: 43.6% loss
In this scenario, you will experience a significant loss. This is due to higher risk and volatility in variable yields, which may lead to a sharp decline in value under certain conditions.

Note: When purchasing YT, your profit or loss depends on interest rate fluctuations and market conditions. YT has a variable return, which can yield high profits in a bullish market but cause substantial losses in a bearish market. In other words, this option carries higher risk, and its return directly depends on market volatility and interest rate fluctuations. For example, if we choose rETH, which currently has a yield of 23.9%, we can earn $61 in six months if this yield remains constant.

Holding the Original Asset Without Buying PT or YT

Net Profit ($): $63.4
Net Profit (%): 1.89%
Annual Return Rate: 3.015%
In this scenario, if you simply hold your asset without buying PT or YT, you will achieve a moderate and stable 3.015% return, which is lower than PT but carries less risk. This return can be obtained by staking the asset on platforms like Lido.

Providing Liquidity on Pendle

Like many DeFi protocols, you can deposit your assets into Pendle liquidity pools to provide liquidity. Providing liquidity on Pendle does not carry the risk of impermanent loss at maturity.
Liquidity Providers in Pendle Earn Profits in Several Ways:

Intrinsic Yield
Base Asset Rewards (e.g., earnings from stETH or ETH rewards distributed from GLP in GMX)
Fixed Yield from the PT section of the pool
Trading Fees
PENDLE Incentive Tokens

By acquiring vePENDLE (Pendle’s governance token), you can increase your rewards. Holders of vePENDLE can boost their liquidity provision returns by up to 2.5x.

Advantages of Providing Liquidity on Pendle

Additional Profits: Includes trading fees and PENDLE incentive tokens alongside the base asset’s earnings.
No Impermanent Loss: At maturity, Pendle pools are only based on the underlying asset, meaning you are only affected by the price changes of a single asset.
Free Liquidity: You can exit the pool at any time since your assets are not locked.

How to Earn from Liquidity Provision

Providing liquidity on Pendle is simple. With a single click, you can convert an asset like USDC into an LP position (e.g., LP-stETH). Additionally, you can deposit Pendle assets like PT or YT into LP pools.
Providing liquidity on Pendle can be part of your yield optimization strategies, as LP positions allow you to take bearish positions on the base asset’s yield.

Key Strategies for Profitable PT and YT Trading

Buy PT at the Beginning of the Term – The Fixed APY may be high at the start, and since it is influenced by market conditions, buying PT early can secure better rates before they stabilize.

Buy PT in a Bear Market – When prices are falling, PT offers a more stable and profitable choice with a safer return.

A Long-Term Negative APY Does Not Necessarily Mean YT is Overvalued – A negative APY does not imply overvaluation. If you expect prices to rise, buying YT can still be profitable.

Sell YT When the Expected APY is Set to Rise – If market conditions indicate APY is expected to increase, this can raise YT’s value, making it a good time to sell.

Buy YT When the Implied APY is Low and Stable, and the Base Asset’s APY is Higher – This scenario often creates a strong profit opportunity since, if the base asset’s APY remains high, YT’s value may rise.

Use YT as a Leverage-Free Yield Strategy – Since YT is generally cheaper than the base asset, buying YT can provide a leveraged yield without liquidation risk or debt, making it a lower-risk strategy.

Use YT to Profit from Expected Growth in the Base Asset’s APY – If you predict the base asset’s APY will increase, buying YT can generate profits as returns accumulate faster.

Monitor Supply and Demand Volatility for PT and YT – Supply and demand fluctuations can significantly impact prices. High demand for YT can drive prices up, while excess supply may cause a decline. Adjusting strategies based on market conditions can be beneficial.

Accurate division and distribution of future yields is one of DeFi’s most exciting innovations, potentially challenging traditional financial markets.
-Andreessen Horowitz, a leading blockchain investment firm.

Pendle History

The Pendle platform was founded in 2021 by TN Lee, Vu Nguyen, Long Vuong Hoang, and Ken Chia. The team currently has around 20 members, most of whom reside in Singapore and Vietnam.

Pendle has received financial support from prominent investors such as Mechanism Capital, HashKey, Bixin Ventures, and Binance Labs.

Currently, the Pendle platform operates on five networks: Ethereum, Arbitrum, BNB Chain, Optimism, and Mantle, enabling users to conduct trades across these networks.

The stages of Pendle’s development and growth can be seen in the table below:

Time	Event
January 2020	The Pendle team was founded.
April 2021	Initial funding was secured.
April 2021	The Pendle token was launched with a total supply of 251 million, 22% of which was allocated to the team, with most of it dedicated to liquidity provision and the ecosystem fund.
June 2021	The Pendle mainnet was launched, led by Mechanism Capital, with $3.7 million in funding.
November 2022	Pendle introduced Version 2, featuring higher capital efficiency AMM and the vePendle governance module.
July 2023	Pendle was launched on Binance LaunchPool.
August 2023	Binance announced its investment in Pendle.

Risks of the Pendle Platform

Smart Contract Risk: Despite multiple audits by auditing firms, there is still a possibility of vulnerabilities in smart contracts. This could disrupt Pendle’s functionality, leading to a loss of user trust and severe damage to the platform’s reputation.
Dependence on LRT: Pendle is currently highly dependent on LRT, and if it fails to expand its range of activities, any issues in the LRT market—such as a decline in market value or reduced demand—could negatively impact Pendle’s revenue.
Liquidity Shortage Risk: Given the diversity of tokens, there may be insufficient liquidity for lesser-known assets. This could result in arbitrage opportunities being unmet for certain entities.

Pendle Tokenomics and On-Chain Data Analysis

In the Pendle platform, there are two main types of tokens, each serving a specific role and having different applications within the ecosystem of the platform:

1. PENDLE Token

The PENDLE token is the native and primary token of the Pendle platform—an ERC-20 token built on the Ethereum network. This token has several key use cases within the platform. PENDLE holders can utilize it in various ways, including:

Liquidity Provision: Users can deposit PENDLE tokens into liquidity pools to help provide liquidity in the ecosystem and receive rewards in return.
Transaction Fee Payments: In certain cases, the PENDLE token is used to pay transaction fees on the platform.
Earning Rewards: PENDLE holders can earn various rewards by participating in the platform, incentivizing them to retain the token.

2. vePENDLE Governance Token

The vePENDLE token is a governance version of the PENDLE token. Users can receive this token by locking their PENDLE tokens for a specified period. vePENDLE holders can participate in governance decisions and platform management. The main features and use cases of vePENDLE include:

Voting Rights in Governance Decisions: vePENDLE holders can vote on critical platform decisions, such as development proposals, policy changes, and liquidity management, shaping the future of Pendle.
Earning Additional Rewards: By holding vePENDLE, users can benefit from additional rewards on the platform.
Incentivizing Long-Term Holding of PENDLE: Since obtaining vePENDLE requires locking PENDLE tokens, this mechanism encourages holders to retain their tokens for a longer period, contributing to the ecosystem’s stability.

Pendle Token Economy

Pendle’s tokenomics define the distribution and issuance of PENDLE tokens and the management of its supply over time. This structure is designed to ensure the growth and sustainability of the Pendle ecosystem through adequate rewards and supply management mechanisms.

1. PENDLE Token Distribution

As of October 2022, PENDLE tokens have been distributed across various groups. By September 2024, all team and investor tokens will be fully vested, meaning their lock-up period will be complete. Moving forward, any increase in circulating supply will be driven by rewards and ecosystem development programs.

Section	Allocation Percentage	Amount of PENDLE (Million)
Liquidity Rewards	49.2%	152
Team	17.7%	55
Ecosystem Fund	14.8%	46
Investors	12.1%	37
Liquidity Boost	5.3%	16
Advisors	0.8%	2.5

This distribution generally indicates a focus on liquidity rewards (49%), which is crucial for providing liquidity and strengthening the Pendle ecosystem’s activities.

2. Weekly Emission

As of September 2024, the weekly emission of PENDLE tokens was 216,076 tokens. This emission amount decreases by 1.1% each week, and this reduction trend will continue until April 2026. After that, the final annual inflation rate for rewards (incentives) will change to 2%.
As part of the governance process, with the maturation of the industry and changes in the best practices of the ecosystem, proposals may be made to change this structure.

3. Total Supply and Circulating Supply of Tokens

The circulating supply refers to the total PENDLE tokens that are freely circulating in the market and does not include the following:

PENDLE tokens locked in the vePendle contract
PENDLE tokens in the ecosystem fund address
PENDLE tokens in the governance multi-signature address
PENDLE tokens in the team’s multi-signature address

Therefore, the total supply of PENDLE tokens at any given moment is equal to the circulating supply plus the tokens in the four addresses mentioned above. This distribution and supply management structure allows Pendle to grow sustainably while maintaining the value of its tokens through gradual supply reduction and inflation management.
As of November 5, 2024, the total supply of PENDLE tokens was 258 million, with 162 million tokens in circulation. Pendle’s market value is $847 million, and its fully diluted market cap is $1.3 billion. This term refers to the market value of an asset (such as a token) if all tokens were to be released to the market.

Total Supply and Circulating Supply of Tokens

Liquidity rewards constitute 49.3% of the tokens and will continue until the end of 2030. The annual inflation rate is set at 2%, which gradually decreases. It is expected that by May 2025, 270 million tokens will be in circulation in the Pendle market.

Ecosystem Development

In the Pendle project ecosystem, two important protocols called Penpie and Equilibria play a key role in managing and utilizing vePENDLE tokens. These two protocols are directly competing to acquire a larger share of the vePENDLE tokens.

Penpie

Penpie is a decentralized platform launched by MagPie and acts as a side platform, offering additional services and benefits to Pendle users. These services include rewards that increase returns for users. The goal of Penpie is to offer vePENDLE incentive tokens to users so they can enjoy greater benefits.

Equilibria

Equilibria is an internal platform within the Pendle ecosystem that allows users to convert their inactive PENDLE tokens into ePENDLE tokens and directly earn rewards by staking them in the ePENDLE vault. This model focuses more on staking PENDLE tokens and earning rewards through that method.

Key Difference Between Penpie and Equilibria

The main difference between these two protocols lies in how they provide services and earn rewards. While Equilibria focuses on staking PENDLE tokens to earn rewards, Penpie focuses on providing vePENDLE incentive tokens to users.

The chart above shows the amount of locked PNP and EQB tokens on the Penpie and Equilibria platforms, as well as the amount of vePENDLE tokens held by each platform. This chart highlights the importance of vlPNP and vlEQB token holders in the Pendle protocol. Holders of these tokens play a significant role in Pendle’s governance decisions, including vePENDLE token allocations, governance proposals, and voting.
The competition between Penpie and Equilibria for acquiring vePENDLE tokens is intense. Each platform strives to attract more users by offering better rewards and more attractive incentive mechanisms. The winner of this competition will be the platform that acquires the largest amount of vePENDLE tokens and, as a result, gains greater influence in Pendle governance.

As of March 2024, Penpie holds approximately 12 million vePENDLE tokens, and Equilibria holds 7.7 million tokens. Currently, the total amount of vePENDLE tokens is 32.7 million, so Penpie holds about 36.7% of Pendle’s governance power, and Equilibria holds about 23.5% of it. It is expected that Penpie will play a more active role in increasing liquidity and demand for interest rate derivatives.

DeFi has the potential to democratize the world and reduce inequality. — Cathie Wood, CEO of ARK Invest

On-chain Data Analysis

Transaction Volume

According to the following charts, the number of transactions and trading volume in the Pendle protocol has been steadily increasing, indicating rising demand for interest rate derivatives in the market. This demand is influenced by the development of projects like LSD, LSDFI, LRT, Restaking, and other DeFi initiatives. By November 7, 2024, the cumulative transaction volume surpassed $4.6 billion, and this trend is gradually increasing.

Pendle Users

The number of active Pendle users has gradually increased, peaking in March and April 2024, due to more activity on Arbitrum and Ethereum.
The number of new users reached its peak in mid-2023, likely due to marketing campaigns or new opportunities on Arbitrum that boosted user acquisition.
Arbitrum, with 55.8%, and Ethereum, with 37.8%, have the largest shares of Pendle users, reflecting the primary focus of user activity on these two chains.
By November 2024, the cumulative number of Pendle users had surpassed 400,000, with Arbitrum and Ethereum accounting for the largest share, indicating significant platform adoption.

Total Value Locked (TVL)

Regarding Total Value Locked (TVL), the project has its own automated market maker (AMM) pools that facilitate the exchange of various SY, PT, and YT tokens. Currently, the TVL is steadily increasing in both regular coins and stablecoins. With the development of staking capabilities, the demand for this project is expected to grow, especially with the potential entry of large financial institutions. Many financial institutions have been discussing Ethereum staking rewards and believe that with the approval of spot ETFs, traditional financial companies (TradeFi) will be able to generate on-chain revenue through Ethereum staking while collecting maintenance fees from depositors.

Therefore, there will likely be significant demand for products like Pendle’s interest rate swap contracts, and due to Pendle’s leading position in the interest rate space, there will naturally be the possibility of introducing traditional interest rates to the blockchain in the future. This will allow institutions to conduct interest rate derivative trades on-chain, potentially generating trillions of dollars in trading volume.

Currently, liquidity in Pendle’s pools is also gradually increasing. Among all liquidity pools, LRT pools (64% of total volume) are of high importance on the Pendle platform, and the growth of TVL in this section has a direct impact on the Pendle token. This TVL includes two main tokens: eETH from ether.fi and sUSD from Ethena.

If the total TVL in Pendle’s LRT project increases fivefold, the Pendle TVL will also have the potential to increase fivefold. With the entry of the traditional interest rate market in 2024 and the entrance of TradeFi, demand for Pendle will increase to smooth yield curves and hedge risks. This could lead to even greater potential profitability for this project.

Market Scale and Potential

In this section, we explain how financial institutions can use Pendle tools to improve their investment returns in the blockchain world. Simply put, Pendle enables institutions to benefit from the interest rate fluctuations of staked assets like stETH or lock them.

In traditional financial markets, interest rate derivatives (IRDs) make up the largest segment of derivatives trading, with a market value reaching $714.7 trillion by June 2023, where interest rate derivatives account for 80.2% of the market share. These tools allow institutions and investors to leverage interest rate fluctuations or hedge against them. Key instruments include interest rate swaps, which account for approximately 81.2% of the interest rate derivatives market.

In the blockchain world, Pendle is a leading project in providing on-chain interest rate swaps for Ethereum. This platform supports tokenizing the yield of staked Ethereum assets like (wstETH) and lending positions, allowing users to optimize their fixed or variable yields.

With the entry of traditional financial institutions and their interest in the Ethereum staking market, the demand for Pendle products, especially on-chain interest rate swaps, will increase. This will allow institutions to lock staking yields or benefit from future interest rate changes, potentially bringing trillions of dollars in transaction volume into this ecosystem.

Currently, the assets that Pendle supports include the following:

Staked Ethereum tokens like (wstETH): Currently, about 26% of staked Ethereum is available for tokenization. The total TVL in the liquid staking token (LST) space is approximately $597 billion.
Tokens representing lending protocol positions like Compound or Aave: Tokens like cDAI, which represent DAI staked in Compound, have their own annual yield rates. This section provides a broad and stable market space for generating yield. The total TVL in lending protocols is around $343 billion.
LP tokens like GLP in GMX: LP tokens in various DeFi projects yield interest rates when staked. Almost all DeFi projects offer LP token rewards.
Liquid restaking (LRT) and restaking tokens: For example, projects like EigenLayer and Renzo Finance, with a combined TVL of around $170 billion.

Overall, the potential in this sector is high, and with the gradual entry of traditional financial institutions, demand for Pendle is expected to increase.

Potential Use Cases for Institutions

Fixed income: Earning fixed returns from staked assets like stETH.
Enhanced returns: Investing based on expected increases in staking asset yields.
Earning higher returns with low risk: Providing liquidity with staked assets like stETH to earn additional profits.

For example, in the EigenLayer restaking market, as the number of EigenLayer depositors increases, the yield rate might decrease in the future. Therefore, in high-yield conditions, YT could be sold to take advantage of the high APY. For institutions, the ability to lock staking yields like stETH helps protect against potential yield rate drops due to decreased on-chain activity.

Cryptocurrencies are an alternative form of money in an environment where the real value of money has significantly decreased. — Ray Dalio, Entrepreneur, Financial Expert, and Investor

Final Words

Pendle, by offering the ability to tokenize both the principal and yield of assets and introducing PT and YT tokens, enables users to separately manage their fixed returns and fluctuating yields. This feature is attractive for creative investors and traditional financial institutions.

Based on on-chain data, the future of Pendle looks very promising. The growing number of active and new users, along with the increasing TVL, indicates wider adoption of this platform among DeFi investors.

The transaction volume and demand for interest rate derivatives on Pendle, due to its on-chain interest rate swap capabilities and tokenization of yield, have seen an upward trend. This shows that Pendle is becoming a key tool in managing profits and yields in DeFi. Pendle’s presence in markets like Ethereum staking and the increasing interest from traditional financial institutions strengthens its growth outlook. Given the rising demand for risk-hedging tools and the gradual entry of traditional financial institutions into DeFi, Pendle could become one of the main options for managing assets and interest rates in this space.

Ultimately, if Pendle can integrate into the financial systems of traditional institutions and DeFi users, it could become a leader in the field of on-chain interest rate swaps.