——New projects emerge in the “falsification” track
The coin price and TVL both increased by 500%, and Pendle, an old project that has blossomed, has emerged in the "falsification" track of fixed interest rates.
Fixed interest rate? No, it’s actually a casino of interest rates! In this industry, “gambling” is always the most attractive
This article will use actual examples to give you an in-depth understanding of the mechanism of Pendle, as well as how enthusiasts of interest-bearing assets such as LSD/GLP can use it to make better profits, and look forward to the important derivative track of interest rate swaps.
Overview
Pendle is an interest rate swap platform.
Split the principal (PT) and interest (YT) of an interest-bearing asset (SY) over a certain period of time
PT/YT is priced by the built-in AMM. The algorithm parameters determine the liquidity curve of the AMM, and the free market makes the final pricing.
The core is that converting SY to PT can lock the interest rate within a certain period, while YT is a leveraged gambling tool for betting on rising interest rates.
Calculation Example
Let’s take GLP as an example.
GLP = $0.9755
YT = $0.1642
PT = $0.8113
Expiration time = 375 days
That is to say, all the income of GLP in these 375 days belongs to YT, and PT can get GLP at a 1:1 ratio after 375 days.
PT
Suppose you bought $0.9755/$0.8113 = 1.202 PT for 1 GLP.
Then after 375 days you will have 1.202 GLP
Converted to annualized return APY = 1.202 ^ (365/375)-1 = 19.6%
That is to say, no matter how much transaction fee GLP actually gets in the next year or so, you can get 19.6% APY
This is the fixed interest rate function corresponding to PT
YT
Assume you spend 1 GLP to buy $0.9755/$0.1642 = 5.941 YT
What will be your profit after 375 days? It all depends on the actual profit performance of GLP!
Actual interest rate = Implied interest rate
The so-called implied APY = 19.6% means that assuming the actual APY of GLP in the next 375 days is 19.6%
The return of 1YT is 1.196^(375/365) -1 = 0.202 GLP
So 5.941 YT bought for 1 GLP will eventually become 5.941*0.202= 1.200 GLP
Converted to APY, it is 1.2^365/375-1 = 19.6% (the actual result on the left is 19.4%, with a slight error
Actual interest rate > Implied interest rate
Assuming that GLP's actual APY can maintain the current level of 53.1% for the next 375 days
If you spend 1 GLP to buy YT now, you will get
5.941* (1.531^(375/365) -1) = 3.261 GLP
Converted to APY, it is 3.261^365/375-1 = 207%
Yes, in this case, buying YT will make you a lot of money.
Actual interest rate < Implied interest rate
What if the actual APY of GLP is only 10%?
5.941*(1.1^(375/365) -1) = 0.611 GLP
Yes, if you buy YT, you will lose 0.4 GLP.
To sum up:
SY actual interest rate = implicit interest rate, YT return is the implicit interest rate
SY actual interest rate > implied interest rate, YT is equivalent to earning excess interest rate with several times leverage
SY actual interest rate < implied interest rate, YT is equivalent to several times the leverage to compensate for the gap interest rate, and may even lose the principal
Pricing and AMM
So how is YT/PT priced and traded?
Pendle has a built-in PT/SY AMM that allows external participants to provide liquidity. Users can trade PT through this AMM. Trading YT is more complicated:
User executes a transaction to buy X YT using 1 SY
The Pendle contract takes out (X-1) SY from the AMM
Pendle merges two SY and then splits X SY = X PT + X YT
X YT is sent to the user, and X PT is returned to the AMM. Since X PT = (X-1) SY = X SY- X YT, the total assets in the pool will not change.
The process of selling YT is reversed, as shown in the picture below.
So how is Pendle's AMM priced? Its AMM is borrowed from Notional, and the formula is complicated. Bulbasaur helps you refine the core concept:
The longer the maturity period, the wider the liquidity distribution. The shorter the maturity period, the more concentrated the liquidity.
The liquidity concentration point is at the current actual APY of SY. What does it mean? For example, the liquidity of Curve V1 is concentrated at 1:1.
When the PT ratio fluctuates between 10% and 90%, the interest rate fluctuates between [0,Max], where MAX is the set parameter and the estimated maximum APY
The reason for this design is probably because
The implied interest rate formed by the transaction should be close to the actual interest rate, so it can be concentrated here
The longer the maturity date, the greater the uncertainty in future interest rate expectations, so a wider liquidity distribution facilitates transactions with larger deviations.
Through these designs, Pendle has achieved a market-based interest rate transaction with a decent experience, serving two groups of customers: fixed-rate customers and betting expectations customers.
Value Capture
Most of the products that failed in the fixed-rate track in the past did not take into account both certainty and gambling. Pendle did a good job in this regard. In addition, LSD/Perp DEX brought a large amount of interest-bearing assets. Pendle once again seized the opportunity to enter the rising range.
After discussing the mechanism, it can be seen that Pendle's product still has merits, but the value capture ability of its tokens is still relatively low.
Its core capture mode is
The transaction fee of PT/YT is 0.1%, which is adjusted dynamically over time. 80% belongs to vePENDLE and 20% to LP.
YT's interest, 3% goes to vePENDLE
ve-tokenomics, voting to decide which pool to incentivize
The transaction volume in the past 7 days is about 1M, and the annualized transaction fee income is: 1M520.001*0.8 = 40k
Currently 34M TVL, main assets include both low-interest assets such as LSD and high-interest assets such as GLP, with a gross average interest rate of 10%
The annualized interest income is 34M0.10.03 = 100k
The total income is 140k, which is relatively small. Even if it increases tenfold, it is not much. So we still need to pay attention to whether his bribery can develop in the future. After all, LSD is also a big bribery user. If it can develop, it will also have good returns.
Track Outlook
The interest rate swap market plays an important role in traditional finance, and is particularly important to institutions. However, these beautiful imaginations were not supported by actual data and performance in the last round of DeFi development, and the fixed-rate track is a well-known "falsification" track.
With the rise of Real Yield, interest-earning assets have become more sustainable. If the experience and mechanism are further optimized, they may be able to bloom again. Pendle is an example.
Summarize
For those who love interest-bearing assets such as GLP/LSD, they can achieve the two goals of locking in a fixed interest rate and betting on interest rate expectations. Its token value capture ability is not very prominent at present, so if you want to invest, you should be cautious.
