Introduction
DeFi has brought countless innovative financial tools and strategies to the cryptocurrency market, among which Pendle Finance's unique Yield Tokenization mechanism splits tokens into principal/yield components to satisfy different users' needs.
This article will help you understand the mechanisms behind Principal Tokens (PT) and Yield Tokens (YT) and the gameplay derived from liquidity pools, allowing you to create income and earn hidden airdrops in the DeFi space.
Introduction to Pendle Finance
Pendle Finance is a DeFi platform focused on splitting native yield tokens. Launched in 2021, the platform initially did not perform outstandingly. However, with the arrival of the airdrop point wave in 2024, Pendle quickly became one of the channels for users to participate in projects.
Pendle's core concept is to separate the 'principal' from the 'yield' of assets, allowing users to flexibly trade the assets they need. If a user prefers low risk and wants to preserve principal, they can buy Principal Tokens (PT) at a discount, whereas if they prefer high risk and high yield, they can purchase Yield Tokens (YT) at a lower price.
Pendle Market Performance
At the time of writing, Pendle's Total Locked Value (TVL) is $3.8 billion, ranking among the top on the Ethereum blockchain. When transitioning to the 2024 airdrop frenzy, the TVL reaches as high as $6.6 billion. Pendle currently supports multiple EVM blockchains, which is a significant advantage, allowing users to learn about upcoming airdrop point information for emerging chains.
Image Source: DeFiLlama
Essential Terminology for Pendle | What are PT and YT?
Before using Pendle, users are advised to first understand the following five terms to avoid confusion during the participation process.
Standardized Yield (SY)
When users deposit yield-bearing assets onto the Pendle platform, the platform allows users to convert them into SY as a basis for subsequent splitting into PT and YT. Since PT and YT are derived from SY, the formula is PT + YT = SY.
Principal Token (PT)
PT represents the principal portion after splitting, usually traded at a discount price. Users purchasing at a discount can wait until the maturity date to redeem for the underlying asset at a 1:1 ratio.
Since PT can preserve principal, it retains a certain value after splitting, and its redeemable characteristic at maturity allows for a 1:1 exchange, making the ideal PT yield curve as shown below.
Yield Token (YT)
YT represents the yield portion after splitting, including staking interest, protocol rewards, and airdrop points, all of which are claimed by YT holders. The price of YT will fluctuate with expected returns and maturity dates.
Since YT can only claim yields and does not retain assets, the price of YT will drop to zero on the maturity date. The ideal YT yield curve is shown below.
vePENDLE
vePendle is the staked version of the platform token $Pendle, where users staking $Pendle can earn a share of the trading fees from the liquidity pools and enjoy additional liquidity pool incentives. At the time of writing, 38% of the total circulating supply of $Pendle is staked on the platform.
Airdrop Points
Airdrop points are a reward mechanism used by many DeFi projects to incentivize early participants, typically linked to the project's airdrop tokens. Purchasing YT tokens or creating liquidity pools on Pendle can also earn Points rewards, such as Pendle offering 25x Spark Points to YT holders and liquidity providers.
Actual Case Hypothesis
To understand Pendle's complex mechanisms, the author will first use real-world assets for illustration and then extend to the cryptocurrency domain.
Case Hypothesis - House
Assuming a house ($House) is worth 10 million, and the expected annual rent is 500,000, we find that 1 SY House = 0.95 PT House + 0.05 YT House.
What can be done after the split? It can generally be categorized into two scenarios based on expected yield increase/decrease:
Expected Rent Increase in the Area: If the rent is expected to exceed 500,000 over the next year, PT can be sold to buy YT, thereby transforming a property that originally could only collect one rent into one that collects 20 rents, achieving 'yield leverage.'
Expected Rent Decrease in the Area: If the rent is expected to fall below 500,000 over the next year, YT can be sold to gain one yield in advance while retaining PT. As the maturity date approaches, 0.95 PT will gradually rise to 1 PT, which can then be exchanged for the house.
Case Hypothesis - Cryptocurrency
In the cryptocurrency world, the action of splitting SY into PT and YT also occurs. Interestingly, besides receiving underlying yields, YT holders can also earn Points, which can provide additional income during future airdrops.
Taking sUSDe as an example, the current annualized APY for the YT token is 8.72%. The actual rewards obtained from holding YT tokens over the past seven days have been annualized to 6.5%, indicating that users expect potential returns and airdrop rewards > 2.2%.
Pendle Liquidity Pool
The difference between Pendle's liquidity pool and most DeFi projects is that Pendle's liquidity pool is composed of SY/PT token combinations, meaning that all assets will be returned at maturity, thus reducing the risk of impermanent loss compared to regular liquidity pools.
Steps to Deposit into the Liquidity Pool
Go to the Pendle official website and connect your Web3 wallet.
Select a liquidity pool in the 'Pools' interface.
Pendle allows the purchase of liquidity pool certificates using 'any' asset.
Choose whether to use the Keep YT Mode; enabling it means retaining YT tokens, otherwise, they will be sold.
Click Zap in and pay Gas Fee to deposit assets into the liquidity pool.
Start Accumulating Liquidity Pool Returns
Sources of Liquidity Pool Revenue
Transaction Fees (Swap Fee): A portion of the PT and YT transaction fees obtained from this liquidity pool.
Underlying Yield: The basic rewards issued by the project team to deposit users.
PT Yield: The yield that can be obtained in PT tokens from deposit to maturity.
$Pendle Rewards: Platform-issued $Pendle as additional rewards for liquidity providers.
Airdrop Points: Some liquidity pools can earn airdrop points, such as Sparks and Sats on Ethena.
How to Make the Most of Pendle?
Pendle's model of splitting principal and yield allows the platform to cater to both low-risk and high-risk users. The author categorizes them into three types: buying PT to earn stable income, creating liquidity pools to earn $Pendle and points, and purchasing YT to earn interest and points.
Comparison Table of Three Strategies
Strategy Risk-Return Potential Strategy Drawbacks Applicable Audience Buying PT Low Stable 5-10% APY Returns Ordinary, No Additional Rewards Seeking Stable Returns In Liquidity Pool 6-14% APY + Small Airdrop Points May Produce Impermanent Loss Before Maturity Aiming to Preserve Principal + Lay Low for Airdrops Buying YT High Project Issued Returns + Large Airdrop Points Must Be Well-Acquainted with the Project; Otherwise, Serious Losses May Occur Expecting Airdrop Points to Exchange for High-Value Airdrops.
Common Misunderstandings about Pendle
After reading the above introduction and comparison, PT and liquidity pools may seem like guaranteed profits, but is this really the case? The author believes this notion is partially true for the following reasons:
Firstly, the premise for PT and liquidity pools to preserve principal or even profit is that they can be redeemed for underlying assets without loss at 'maturity.' However, before the maturity date, PT may still rise or fall; thus, if PT is sold early or liquidity is removed, some loss might need to be borne.
Additionally, the assets recovered at maturity are 'underlying assets.' If underlying assets such as BTC or ETH are staked and the price drops during the redemption period, the market value (in USD terms) may still decrease. However, in terms of coin value, it may still retain principal or even gain profit.
Attention to Liquidity Pool List
Currently, the liquidity pools of aUSDC and USDS are receiving more attention, as both are expected to participate in upcoming airdrops. The downside is that both belong to projects that require deposits to earn points, so the expected airdrop for small-cap users may not be high.
aUSDC
aUSDC is a yield-bearing token issued by the Aave platform, providing 24x Sonic points rewards. Sonic is expected to conduct its first quarterly airdrop event in June, thus likely converting airdrop points into cash in a short time.
The aUSDC liquidity pool offers a maximum APY reward of 10.34%. Compared to other liquidity pools on Pendle with higher TVL, this is considered a quite generous reward.
USDS
USDS is a decentralized stablecoin issued by Sky Protocol (formerly MakerDAO). The liquidity pool offers 25x Spark points rewards, and Spark's first-quarter points will continue until August, thus likely converting points into tokens this year.
The USDS liquidity pool offers a maximum APY reward of 5.37%. Although it seems that the annualized return is lower than other liquidity pools, recent observations suggest that the Spark airdrop rewards are worth looking forward to, so the author has also created a small amount of USDS liquidity pool participation.
Conclusion
Pendle Finance, with its unique model of splitting principal and yield, offers diverse participation strategies for DeFi players. Whether you are a user who loves low-risk stable finance or a player aiming for substantial airdrops through in-depth project research, Pendle can meet your needs. If you are interested in early on-chain projects, why not explore Pendle Finance immediately and start earning airdrop points!
This report is for informational purposes only and does not constitute any form of investment advice or decision-making basis. The data, analysis, and opinions cited in this article are based on the author's research and public sources, which may involve uncertainty or change at any time. Readers should make investment judgments carefully based on their own circumstances and risk tolerance. For further guidance, it is recommended to seek professional advice.