Pendle pendle

Pendle Finance (Pendle) is a protocol tokenising future yield on Ethereum. Its platform allows holders of yield-generating assets to lock in future yield while offering traders the ability to gain exposure to this future yield. Pendle differentiates from other tokenised yield protocols through its unique time decaying AMM model, which is designed to offer exposure in a more capital-efficient way.

Pendle went live in Jun. 2021 and was created by TN Lee and Dan Anthony ‘the Team). Three components underpin Pendle’s system: (i) yield tokenisation, (ii) Pendles AMM and (iii) governance (yet to be released).

How does Pendle work?

Holders of yield-generating assets, such as Aave’s aTokens, can deposit these tokens into Pendle. Once deposited, Pendle mints an Ownership Token (OT), representing a claim to the deposited principle, and a Yield Token (YT) representing a claim to future yield. For example, if deposit 1 aETH with an expected interest rate of 4%, the OT token represents a claim to the 1 aEth and the YT represents a claim to the 4% interest earned on the aETH. OT and YT tokens have expiry dates representing the last day to claim ownership of the underlying asset.

Users can utilise their YT in different ways. Users can increase their yield by providing liquidity to Pendle YT AMM and earn additional trading fees and protocol rewards. Alternatively, YT holders can simulate a traditional interest rate swap by selling their YT tokens to immediately lock in returns at a fixed interest rate. Traders purchasing YT tokens receive exposure to future yields without having to post their own assets as collateral on another protocol.

Pendle’s key innovation

Pendle’s key innovation and primary point of differentiation is the creation of a new AMM designed for time decaying assets. Traditional AMMs, such as Uniswap or SushiSwap, may not be suitable for time decaying assets like YTs because the pools do not factor in time decay. Therefore, traditional AMMs could misprice time-decaying assets and ultimately lead to LPs holding a potentially worthless bag of assets after contract expiry.

Pendle aims to solve the above time decay problem by adjusting the AMM curve at each timestep. This adjustment creates an AMM that can accurately price time-sensitive assets, therefore, removing the opportunity for arbitrageurs to drain the liquidity pool at the expense of LPs. This AMM innovation has larger implications because it is the first time the AMM pool model can be utilised for time decaying assets. 

Pendle’s native token is PENDLE, an ERC-20 token with no maximum supply.

PENDLE is a pure utility token that will serve governance functions once the protocol matures. The token has a hybrid inflation model beginning with incentives of 1.2M PENDLE per week for the first 26 weeks. Following the first year, liquidity incentives will decrease by 1% a week until week 260 when the perpetual inflation rate of 2% will begin.

The PENDLE token distribution after 2 years is as follows: Team (22%), investors (15%), ecosystem fund (18%), liquidity incentives (37%), liquidity bootstrapping (7%), advisors (1%).

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