Have you ever thought of creating and trading tokenized yield assets? Pendle Finance provides such an opportunity. Here’s a guide to help you understand all this decentralized protocol entails.
As the decentralized finance (DeFi) space continues to evolve, Pendle Finance emerges as a pioneering platform that transforms the way users interact with yield assets. With its innovative approach to tokenizing future yields, Pendle Finance offers a unique avenue for traders and investors to optimize their DeFi strategies.
In this comprehensive guide, we will explore what Pendle Finance is about, from its inception and roadmap to its underlying mechanisms, tokenomics, and practical applications.
What Is Pendle Finance?
Pendle Finance is a DeFi protocol that operates on the Ethereum (ETH) blockchain, functioning as a permissionless yield trading platform. With Pendle Finance, assets deposited by users are tokenized into Principal Tokens (PT) representing the underlying asset and Yield Tokens (YT) symbolizing its future yield. Basically, Pendle Finance aims to provide liquidity and flexibility to DeFi yield farmers. This dual-token system enhances users’ ability to manage their assets and participate in diverse yield strategies efficiently.
One of Pendle’s distinguishing features is its automated market maker (AMM), which incorporates time decay considerations. This mechanism mitigates potential financial losses stemming from inaccurately priced assets, a common issue in traditional AMMs. This functionality empowers users to efficiently manage their exposure to yields and capitalize on market conditions.
By continuously adjusting asset prices based on time decay, Pendle optimizes capital allocation and bolsters exposure to future yields, thereby maintaining robust liquidity pools.
Pendle Finance Origin
Pendle Finance emerged in the DeFi space in June 2021. It was founded by a group of developers operating under the stage names TN Lee, GT, YK, and Vu. Backed by notable investors like Bitscale Capital and Crypto.com Capital, which represented strong initial support for its vision, Pendle was able to secure $3.7 million in funding during its early stage.
Headquartered in South Korea, Pendle boasts a team of over 10 skilled developers dedicated to crafting inventive DeFi solutions that streamline yield management. Despite its relative youth, Pendle has already achieved significant milestones, leveraging its experienced team, cutting-edge product, and engaged user community to establish a strong foothold in the rapidly evolving DeFi landscape.
How Does Pendle Work?
Built on the Ethereum network, Pendle Finance allows users to trade tokenized future yields. Users deposit assets into Pendle’s smart contracts, which are then tokenized into Principal Tokens (PT) and Yield Tokens (YT). PT tokens represent the principal amount of the deposited asset, while YT tokens represent the asset’s future yield over a defined period. This separation enables users to trade PT and YT tokens independently, offering flexibility in yield management strategies.
These PT and YT tokens can be traded on Pendle’s platform, allowing users to speculate on future yields and manage their exposure to different DeFi protocols’ yields. Furthermore, Pendle’s automated market maker (AMM) adjusts the prices of PT and YT tokens based on factors like time decay and market demand, ensuring fair and accurate pricing for efficient trading.
Users have the flexibility to redeem their PT and YT tokens at any time, reclaiming their original assets and any accrued yields, enabling them to adapt to changing market conditions or investment strategies.
PENDLE Token
The Pendle token, known as PENDLE, is an ERC-20 utility token within the Pendle Finance ecosystem. PENDLE holders can vote on governance proposals, earn incentives for providing liquidity, stake tokens for rewards, and participate in various ecosystem activities.
The total and maximum supply of PENDLE tokens stands at 231,725,335, with approximately 97 million tokens in circulation as of February 2024.
PENDLE serves various functions within the Pendle ecosystem, primarily governing the protocol’s operations and value accrual mechanisms. It follows a hybrid inflationary model, with a perpetual inflation rate set at 2%.
Initially, PENDLE’s distribution allocated 37% to liquidity incentives, 22% to the team, 15% to investors, 18% to the ecosystem fund, and 7% to liquidity bootstrapping, with 1% reserved for advisors.
However, in October 2022, Pendle revised its token distribution. As of February 2024, 65.1% of PENDLE tokens are in circulation, with 19.2% allocated to the ecosystem fund, 10% to incentives, and 5.7% to the team. Tokens allocated to the team were subject to vesting until April 2023, with weekly emissions decreasing by 1.1% each week until April 2026.
What Is vePendle?
VePendle, short for “Voting Escrow Pendle”, is a governance token within the Pendle Finance ecosystem. It represents voting power and is obtained by locking up PENDLE tokens in a smart contract for a specified period, typically referred to as a “voting escrow.”
By locking up PENDLE tokens in the vePendle smart contract, users receive vePendle tokens in return. These vePendle tokens represent the user’s voting power within the Pendle governance system. The longer the tokens are locked up, the more vePendle tokens the user receives, thereby increasing their voting weight in governance decisions.
VePendle holders can participate in voting on proposals related to protocol upgrades, fee structures, tokenomics adjustments, and other governance-related matters within the Pendle Finance ecosystem.
Using Pendle
Pendle Finance allows users to maximize their defi experience through the following;
Yield optimization. Pendle allows users to tokenize future yields from various DeFi protocols, enabling them to optimize their yield farming strategies by trading these tokenized future yields.
Risk management. By separating principal and interest into distinct tokens, Pendle provides users with greater flexibility in managing their risk exposure to different DeFi assets and protocols.
Liquidity provision. Users can provide liquidity to Pendle’s trading pools, earning fees and incentives in return, thus contributing to the liquidity and efficiency of the platform.
Speculation. Traders can speculate on future yields by trading tokenized yield assets on Pendle’s platform, potentially profiting from changes in yield expectations and market conditions.
Governance participation. PENDLE token holders can participate in the governance of the Pendle protocol, voting on proposals and decisions that shape the future development and direction of the platform.
Staking rewards. PENDLE token holders can stake their tokens to earn rewards, incentivizing long-term engagement and support for the Pendle ecosystem.
Bottom Line
Unlocking the potential of yield trading in the crypto market has never been easier with Pendle. Whether you’re a seasoned trader or just dipping your toes into the world of DeFi, Pendle’s intuitive interface and comprehensive tutorials make it accessible to everyone. By leveraging Pendle’s innovative features, you can maximize the profitability of your yield trading endeavors.
