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LD Capital: Analyzing Pendle's Innovations and Challenges in Staking Business.

LD Capital

2023-07-05 11:41

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Source: LD Capital

1. Pendle Status

Pendle Finance is a yield strategy protocol deployed on Ethereum and Arbitrum. The v2 version will be launched at the end of 2022 with changes to the economic model, followed by support for LST assets and launch on Arbitrum. For more fundamental information, please refer to the LD Pendle historical report.

Image: Pendle TVL

Image: Liquidity Distribution (Million)

Source: LD Research

The liquidity of the Pendle protocol mainly comes from LST assets, with GLP, stablecoins, and other tokens accounting for only about 30% of its TVL. The main source of income for GLP is 70% from trader profits and protocol fees, which vary daily and have higher gaming space and tradability.

The initial yield of LST assets comes from ETH PoS, while the changes in staking amount, LSD protocol operation mechanism, and platform fees vary, resulting in differences in the yield rates of various LSD platforms. However, the differences are not significant, and the yield rates usually remain around 4%. The small elasticity of yield rate changes also determines the poor tradability of LST assets. The Pendle protocol adopts the veToken and Gauge voting mechanism for liquidity mining, so the yield rate of the Pendle LST pool can reach 10%-30%.

Image: Pendle Protocol Trading Volume

Source: app.sentio.xyz, LD Research

According to historical trading volume data, the daily trading volume of the Pendle protocol is generally below $1 million. LSD asset trading volume accounts for 54.82% of the total trading volume, while GLP's historical trading volume accounts for 24.09% of the total trading volume. GLP's trading usually occurs when the market is more active, so in the past 1 day of trading, GLP accounted for 51.29%. Considering the LTV ratio of various assets in the protocol, GLP has a greater potential for profit.

2、Pendle Economic Model Token Distribution

Image: Token Distribution

Source: Pendle Docs, LD Research

The current team, advisors, and investors have all been unlocked.

In the liquidity incentive section, 1.2 million tokens are distributed every week for the first 26 weeks, followed by a weekly reduction of 1.1% until the 260th week. After the 260th week, the final annual inflation rate is based on a 2% supply of circulating tokens, and the weekly liquidity release remains at a relatively stable level. According to the team's description, the weekly release amount in October 2022 is 667,705 (the 79th week release amount), currently around weeks 113-117, with a weekly release amount of approximately 450,000 tokens. PENDLE will continue to release tokens in the long term.

Image: PENDLE weekly release amount

Source: LD Research

Pendle introduced the veToken model in November 2022 to improve the protocol's liquidity. Pendle's lock-up period ranges from 1 week to 2 years. vePENDLE holders direct rewards to different pools through voting, incentivizing liquidity in the voting pool. Snapshots of all votes will be taken at the beginning of each cycle on Thursday at 00:00 UTC, and the incentive rate for each pool will be adjusted accordingly.

vePENDLE main features:

1) The motivation for LST asset issuer to bribe vePendle is small. As a leading DEX, the asset issuer typically provides its own token mining rewards and bribes veCRV voting to increase CRV liquidity mining incentives in order to improve the liquidity of its assets in Curve. However, the demand for vePENDLE mainly comes from LPs participating in mining, and there is a lack of strong demand from asset issuers.

2) vePENDLE lockers can only participate in the allocation of transaction fees for pools that are eligible for voting.

3) vePENDLE holders can share 3% of the yield generated by Yield Token (YT).

4) vePENDLE holders can receive 80% of the trading fees from the AMM pool they vote for.

Image: PENDLE Staking Status

Source: Pendle Finance, LD Research

As of July 3rd, the PENDLE lock-up amount is 37 million, with an average lock-up time of 392 days.

3、Penpie/Equilibria

Penpie and Equilibria are both auxiliary protocols that improve LP yield based on the Pendle veToken economic model. LPs do not need to stake Pendle to receive Pendle mining boost rewards. The business models of the two are not significantly different.

Penpie

The protocol currently supports Ethereum mainnet and Arbitrum.

Users can convert PENDLE to mPENDLE through Penpie, and the protocol collects PENDLE staked as vePENDLE for LP mining boost. 83% of the boost income is distributed to LP, 12% to mPENDLE holders, and 5% to vlPNP. The team plans to allocate 17% of the YT rewards in vePENDLE equity to the Bribe market, but it is not yet online.

Table: Income Distribution

PNP is the governance token of Penpie. Users can obtain vlPNP at a 1:1 ratio by locking PNP tokens. Holding vlPNP allows users to earn protocol distribution income and participate in governance. Once a user locks their PNP tokens as vlPNP, they will enter a default lock-up state with no time limit. Users must "start unlocking" to enter a 60-day cooling-off period. During the cooling-off period, vlPNP holders can continue to earn passive income but cannot participate in voting. After the 60-day period, users can fully unlock their vlPNP as PNP. The penalty cost on the first day of the cooling-off period is 80% of the total amount of PNP tokens locked by the user, which will decrease non-linearly over time.

Equilibria

Equilibria's business model is similar to Penpie's, which helps Pendle LP achieve mining boosts without the need to pledge PENDLE. Once Pendle is pledged as ePendle, it cannot be reversed. Users need to lock EQB/xEQB as vlEQB to obtain protocol fees and voting rights. xEQB can be converted to vlEQB, and the team plans to integrate xEQB into other protocols, but currently there are not many use cases.

Image: Equilibria Architecture

Source: Equilibria docs, LD Research

After implementing mining boost through Equilibria, 77.5% is allocated to LP, 12.5% is allocated to ePendle holders, 7.5% is allocated to vlEQB holders, and the Treasury receives 2.5%. The income distribution ratio for each role is set within a certain range.

Table: Income Distribution

Protocol Data

Image: PENDLE locks data.

Source: dune.com, LD Research

*Dune data is provided for reference (as of June 28th) and may differ from the current data on the protocol's official website.

According to official website data, as of July 4th, the locked amount of Penpie PENDLE is 7.45M, and the locked amount of Equilibria is 7.54M. Although ePENDLE, mPENDLE, and PENDLE are all exchanged at a ratio of 1:1, Equilibria announced on June 19th that it will suspend the liquidity pool of ePENDLE/PENDLE. The original plan was to delay for 2 weeks or longer, but currently, based on community dynamics, the team has not given a definite time. On the other hand, mPendle has been listed on Wombat, but the exchange ratio is approximately 1:0.72, which is severely worn.

Table: Penpie vs Equilibria

Source: LD Research

Compared to Equilibria, Penpie distributes a larger portion of boost profits to LP, making it more friendly to LP and retaining more profits for LP. Under the same conditions, LP would be more willing to choose Penpie.

From a data perspective, the TVL of the Pendle protocol has steadily increased and the fundamentals have gradually solidified. However, the risk lies in the continuous issuance of PENDLE tokens, which makes it difficult for both the PENDLE protocol and Penpie and Equilibria to maintain high APR in the long term, thus making it difficult to continue to attract users to stake PENDLE. Additionally, there is currently a large amount of ePENDLE and mPENDLE that cannot be sold due to lack of liquidity or being unanchored, resulting in hidden selling pressure.