Mobilization of Yield, Made Possible with Pendle
We are excited to introduce Pendle, an on-chain yield asset aggregator that enables the separation and trading of future yield.
Introduction
In 2020, real economic value has been created in DeFi through lending platforms (e.g. Aave and Compound), smart pools (e.g. Curve and Balancer), and on-chain strategies (e.g. Yearn and Harvest). These platforms all play a different role in the DeFi ecosystem, but the common thread binding them together is the focus on yield capture. While there are numerous benefits, yield is extremely fickle and volatile, even more so in the young and evolving DeFi ecosystem.
Pendle aims to leverage on the volatile nature of yield and allow more options to manage yield according to individual risk appetites. Our novel AMM system enables the trading of tokenized future yield, allowing more options to manage your yield. This will allow for a higher level of trading in DeFi, where one party can exchange streams of yield payments for immediate cash while the other can hedge and speculate on pure yield exposure. This is an integral part of any functioning fixed income market and will lead to the creation of a new DeFi building block, allowing the ecosystem to further evolve and flourish.
Overview
At the highest level, Pendle incentivizes the pooling of yield-generating assets and the creation of yield markets across DeFi platforms. Holders of yield-generating assets can sell their rights to yield for a fixed period of time, allowing them to lock in their profits and receive upfront cash.
Buyers of these rights gain exposure to the fluctuating rates in a more capital-efficient manner as they do not need to purchase and stake the core underlying asset. As such, there is no need to worry about collateralization or liquidation risk. This can be very powerful as a form of leverage that is not currently available.
Through this, greater price discovery in the yield market will be achieved.
- Hedgers can tokenize (lock) and sell future yields when they are high.
- Borrowers can hedge borrowing rates when they are low.
- Traders and speculators can express views on future interest rates and gain exposure without owning capital-heavy assets.
With the rise of fixed borrowing/lending protocols such as Yield and Notional, we expect greater arbitrage opportunities to be realized, using Pendle as a key building block.
Collectively, Pendle and our community are a stepping stone towards a more mature DeFi market, where we have greater control, composability, and visibility.
Tokens with Time Decay
Pendle is focused on being fully on-chain and allowing our native yield tokens to be traded on AMMs. These are important prerequisites for us to be integrated as part of the greater DeFi ecosystem.
We have developed a new AMM variant catered to tokens with time decay/theta. As our yield tokens decay with time and have a value of zero upon expiry, utilizing a Uniswap-style constant product function AMM would results in guaranteed losses for liquidity providers.
Our AMM is designed to counteract the time-dependent impermanent loss specific to these token classes. We hypothesize that it will be relevant for other on-chain derivatives affected by theta as well, such as American-style options, credit default swaps, and other forms of bond instruments.
Building the Future of Yield Trading
Over the years, the growth of the DeFi ecosystem has been phenomenal, from simply trading cryptocurrencies to creating assets that give higher yield. Pendle aims to unlock the next step in this system by mobilizing future yield, thus shifting the management of yield from its current passive position to an active one.
We are thrilled to build Pendle and hope that we can expand the DeFi ecosystem with novel building blocks, asset classes, and the introduction of structured yield products.
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