Original title: "Pendle Research and Analysis Report"

Original source: MIIX Captial

1. Key points of the research report

1.1 Investment logic and narrative

Cryptocurrency yield trading can be lucrative, but the actual returns realized by investors are uncertain. This is because it is impossible to accurately predict future yields due to the volatility of the yield market caused by numerous factors in the crypto field.

Various yield protocols enable investors to profit from future returns, but many established protocols have flaws that may significantly reduce returns. Pendle uses an improved yield trading method to optimize investors' returns. Pendle's vision of becoming the "Uniswap of the interest rate market".

Investment points for the project include:

· The market space is large. Interest rate swaps are a derivatives market dominated by institutions. Interest rate derivatives account for 80% of the market share of the derivatives track, and interest rate swaps account for 80% of the market share. The trading volume is extremely large, but this track has just been introduced by Pendle on the chain, and it is still in a very early stage.

· Pendle's overall data performance is outstanding, and its trading volume, TVL, and currency price have all set new historical highs.

· Institutions must enter the staking track. Whether it is a bank, a hedge fund, a mutual fund, an ETF issuer, or an ETF broker, there is a need to hedge interest rate risks.

· Pendle's v3 version will introduce the traditional interest rate swap track to the chain, which will be aimed at a trillion-level market. We look forward to Pendle's performance.

· Pendle currently relies on the development of the LRT track. The overall LRT track still has room for multiple growth. Although most of Pendle's obligations rely on LRT, it has the opportunity to gradually reduce the proportion of LRT in the future, because it is essentially an interest rate swap track for the entire market, which requires the entry of institutions to help diversify its assets.

1.2 Valuation Description

In TradeFi, interest rate derivatives are the positions that occupy most of the market in the derivatives market. Moreover, with the development of TradeFi, the overall scale of the derivatives market is also gradually increasing. As of June 2023, the overall derivatives market position has reached 714.7 trillion US dollars, of which the open interest rate derivatives position has reached 573.7 trillion US dollars, accounting for 80.2% of the share.

On-chain interest rates are still in the very early stages of derivatives. With the entry of staking into TradeFi, this part of the demand will explode.

Currently, the price of Pendle has broken through the previous high, and the growth space may no longer be restricted. Its main underlying supporting token is LRT. If the current overall LRT market value is US$5.7 billion, the TVL flowing into Pendle is US$2.37 billion, including two major tokens, EETH (ether.fi) and WETH.

If the overall TVL of the LRT project rises fivefold, then Pendle's TVL will also have five times the room for growth. With the introduction of the traditional interest rate market in 2024, the entry of TradeFi will require Pendle to smooth the yield curve and hedge risks, so the project's room for growth will be higher.

1.3 Main risks

The risk of smart contracts. Although Pendle has invited multiple auditing agencies to audit the code, there may still be loopholes that lead to the loss of all funds.

The ETH spot ETF has not passed, which has a great impact on the future tradefi market of the overall pledge.

When Pendle faces extreme market conditions, some unknown risks may arise.

Pendle is currently very dependent on LRT. If it cannot effectively expand its business scope, it may form a single risk exposure.

Due to the excessive number of tokens, the liquidity of the protocol may be seriously insufficient for long-tail assets, resulting in the problem of liquidity aggregation, which will not be able to meet the rich arbitrage needs of some institutions, but this is a long-term problem.

2. Basic information of the project

2.1 Business scope

Pendle is a blockchain project focusing on yield tokenization. Through its platform, it allows users to lock in the future yield of their crypto assets and obtain returns in advance. This innovative approach not only provides a new source of income for cryptocurrency holders, but also introduces more liquidity and flexibility to the interest rate market. Pendle achieves this through smart contract technology, allowing users to participate in the market in a decentralized and secure way.

2.2 Founding Team

Pendle was founded in 2021, with team members based in Singapore and Vietnam, and currently has about 20 people registered on Linkedin.

TN Lee (X: @tn_pendle): Co-Founder, was a founding team member and business manager at Kyber Network, and then went to RockMiner, a mining company that operates about 5 mining farms. In 2019, Dana Labs was established, mainly engaged in FPGA customized semiconductors.

Vu Nguyen (X: @gabavineb): Co-Founder, formerly CTO of Digix DAO, specializing in RWA projects for tokenization of physical assets, co-founded Pendle with TN Lee.

Long Vuong Hoang (X: @unclegrandpa925): Head of Engineering, received a Bachelor of Computer Science from the National University of Singapore, joined the National University of Singapore as a teaching assistant in January 2020, joined Jump Trading as a software engineering intern in May 2021, joined Pendle as a smart contract engineer in January 2021, and was promoted to Head of Engineering in December 2022.

Ken Chia (X: @imkenchia): Head of Institutional Relations. He holds a bachelor’s degree from Monash University. He was an investment banking intern at CIMB, the second largest bank in Malaysia. He then worked as an asset planning expert at a private investment bank at JPMorgan Chase. In 2018, he joined Web3 and worked as COO at an exchange. In April 2023, he joined Pendle as Head of Institutional Relations, responsible for the institutional market — —proprietary trading firms, cryptocurrency funds, DAO/protocol treasuries, and family offices.

2.3 Investment Background

The main investors of this project include Mechanism capital, HashKey, Bixin Ventures, Binance Labs, etc.

Currently, investors that can be found on the chain include Spartan, Arthur Hayes, Hashkey, Alliance DAO, FalconX, etc.

2.4 Project Development Route and History

According to a tweet from co-founder Vu Nguyen, Pendle’s V3 version is scheduled to be launched in 2024, which includes interest rate derivatives of traditional finance, which will arouse great interest from tradeFi. The specific implementation details are not yet known.

3. Product and business situation

3.1 Official website data (as of February 2024)

3.2 Social media data

3.3 Community data

4. Project analysis

4.1 Code

The code of this product has been audited by multiple auditing agencies.

Its code development for the project remains at a normal level, and the number of developers remains stable.

4.2 Products

Pendle is a permissionless revenue trading protocol in which users can execute various revenue management strategies. The working principle of Pendle is mainly divided into three parts: income tokenization, Pendle AMM and VePendle, as follows:

Income Tokenization

Pendle innovatively tokenizes income assets into SY tokens. It is tokenized according to the ERC-5115: SY Token standard, such as packaging stETH into SY-stETH, and then SY is divided into its principal and income components, namely PT (Principal Token) and YT (Yield Token).

· PT tokens will not receive any income, but can be redeemed for the underlying assets at a ratio of 1:1 at maturity.

· PT is similar to PO (Principal Only) securities or zero-coupon bonds in TradFi.

· Yield tokens represent the yield of an asset as of maturity.

· YT is similar to IO (interest only) securities in TradFi.

Pendle AMM

Both PT and YT can be traded through Pendle's AMM, which is the core engine of Pendle. On Layer2, the oracle used by the project is Redstone. Pendle's AMM enables efficient DeFi yield trading: traders who want to earn fixed income buy PT, while traders who want to go long on yield buy YT. For buying YT, a yield token for a period of time, the process is as follows:

For those who want to sell YT tokens, the process is as follows:

SY exists as an intermediary asset for SWAP pools, so LP providers need to provide YT-SY / PT-SY token pairs. SY represents a standardized yield token that can cover a wider range of asset classes. This standardization increases its appeal to investors because it provides more flexibility and the possibility of accessing more assets, which may attract more participants and provide higher liquidity, so this method of using SY as an intermediary asset to provide LP pools is chosen.

Liquidity providers can earn income from the following aspects:

· Swap fees generated by the mining pool

· PENDLE incentives

· Protocol incentives issued by the underlying assets (such as $COMP, $AAVE)

In Pendle, the separation of the yield portion (YT) and the principal portion (PT) of the asset allows investors to trade and manage these two components independently. This separation mechanism brings some unique pricing and value changes:

· Separation of future income: When you buy PT, you actually give up any income that may be generated during the holding period, because this part of the income has been tokenized through YT and may be purchased by others. Therefore, the price of PT will reflect this lack of income, usually purchased at a discount to the full value of the underlying asset. But we have agreed on a time, that is, YT can only reflect the income situation within a period of time.

· Time value and risk considerations: Investors buy discounted PT based on the expectation that they are buying it now at a lower price, expecting that its value will rise and approach or be equal to the value of the underlying asset at some point in the future, especially at maturity. This expectation takes into account the impact of time value and the risk of holding PT until redemption.

Assume a simplified example to illustrate that PT (principal token) will eventually rise to the price of its corresponding underlying asset (ST).

Conditions:

Underlying asset (ST): a bond with a current market value of $100, an annualized interest rate of 5%, and one year until maturity.

PT initial price: Assume that the initial trading price of PT is $95 because of the separation of the next year's income (i.e., the YT part).

Process:

Income separation: On the Pendle platform, the holder of this bond decides to separate its income and principal, creating PT and YT. Since YT represents the right to future income, the price of PT will be lower than the full price of the original bond (ST), reflecting the missing value of future income.

Time Passes: As time passes, the bond approaches its maturity date. Because YT already represents all the expected returns during that period, the value of PT actually represents the principal that can be recovered from the bond at maturity.

Value Recovery: As the maturity date approaches, the market value of PT will gradually rise, because market participants expect that at maturity, PT holders will be able to redeem PT for a value equivalent to the underlying asset (i.e., the principal of the bond). If the face value of the bond is $100, then theoretically the price of PT should gradually rise back to $100.

Result:

At maturity, the holder of PT can use PT to redeem the bond principal equivalent to $100. Therefore, although PT initially trades at a discount (e.g., $95), as time passes and the maturity date approaches, its value will gradually increase, eventually rising back to the full value of the underlying asset, which is $100.

Among the counterparties, everyone is betting or hedging on future yields. Selling YT means smoothing the future yield curve, cashing out in advance, or being bearish on future yields, while buying YT means being bullish on future yields. Buying PT means buying at a certain discount and believing that the yields during this period are bearish.

VePendle

Bringing TradeFi's interest rate derivatives market to the chain and making it available to everyone, VePendle is the governance system of Pendle:

· The longer you lock up PENDLE, the greater the corresponding VePendle value.

· VePendle value decays over time, but your lockup duration can be extended to offset decay.

· The more VePendle you have, the greater your voting power. After voting for a mining pool, you are entitled to 80% of the swap fees charged by the mining pool.

· VePendle holders can also receive a portion of the protocol revenue, which comes from swap fees and YT fees.

4.3 Ecological Development and Data

Currently, due to the existence of ST tokens, the project has a series of ecosystems including:

Penpie: Penpie is a DEFI platform launched by MagPie that provides users of the Pendle platform with yield and vePendle incentive services.

Equilibria: Convert idle PENDLE to ePENDLE and earn yield by staking through the ePENDLE vault.

The above chart tracks PNP and EQB locked in Penpie and Equilibria and their ownership of Pendle's governance token (vePendle). This shows the level of control that vlPNP and vlEQB holders have over the Pendle protocol. vlPNP and vlEQB holders direct the allocation of Pendle's vePendle on governance proposals and measured weighted votes.

Penpie holds approximately 12 million vePendle shares of Pendle, while Equilibria holds approximately 7.7 million vePendle shares of Pendle. There are currently 32.7 million vePendle shares in total. Therefore, Penpie holds approximately 36.7% of Pendle's governance rights, and Equilibria holds approximately 23.5% of Pendle's governance rights (data as of March 2024).

The number of transactions and trading volume on the Pendle protocol also showed a very positive and gradual increase, which means that with the development of DEFI projects such as LSD, LSDFI, LRT, and Restaking, the market demand for interest rate derivatives is gradually increasing. And as of March 7, 2024, its cumulative trading volume has exceeded US$4 billion, and its trend is gradually increasing.

In terms of TVL, the project has its own AMM pool, which supports the exchange of various SY, PT, and YT tokens. At present, it is gradually rising from the perspective of currency standard and U standard.

At present, with the help of Staking development, people expect that the demand for the project will gradually increase, especially the possibility of institutional entry. Many institutions have begun to mention the income of Ethereum staking. They generally believe that after the spot ETF is passed, TradeFi can obtain active income on the chain while staking ETH, and can also charge depositors custody fees.

There will be a huge demand for interest rate swap products such as Pendle, and due to its leading position in the interest rate track, it will be a natural process to introduce traditional interest rates to the chain in the future. Then institutions will be able to operate interest rate derivatives on the chain, which will have a potential transaction volume of trillions of dollars.

The current liquidity of Pendle's pool is also gradually increasing.

Among all the pools, the main ones are projects in the LRT track. With the issuance of coins by LRT track projects and the continued popularity of the Staking track in the future, this track will become a hot focus of the industry, and its growth rate will also be high. At present, the TVL of the main LRT track is currently in the growth stage, which has a very direct promoting effect on Pnedle, whose main pool is LRT.

4.4 Track size and potential

Interest rate derivatives (IDR) are the most traded track among derivatives. A derivative is a security whose price depends on or is derived from one or more underlying assets. Its value is determined by the volatility of the underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices.

In TradeFi, interest rate derivatives are the positions that occupy most of the market in the derivatives market. Moreover, with the development of TradeFi, the overall scale of the derivatives market is also gradually increasing. As of June 2023, the overall derivatives market position has reached 714.7 trillion US dollars, of which the open interest of interest rate derivatives has reached 573.7 trillion US dollars, accounting for 80.2% of the share.

Among interest rate-based derivatives, there are three major subcategories, namely interest rate swaps (Swaps), FRA (Forward Rate Agreements), Options, and other tools. In traditional IDRs, interest rate SWAPS occupy about 81.2% of the market share.

In TradeFi, interest rate swaps are mainly an institutional-dominated trading market, and their trading volume is also extremely large. An interest rate swap is a financial derivative that allows two parties to exchange their respective interest payment obligations. This exchange usually involves the swap of a fixed rate and a floating rate. Interest rate swaps are widely used in financial markets, and the main participants include:

· Banks and financial institutions: Banks use interest rate swaps to manage interest rate risk, adjust the interest rate structure of their balance sheets, and optimize the efficiency of capital use. Financial institutions also use them for arbitrage and hedging risks.

· Enterprises: Enterprises use interest rate swaps to hedge against the risk of changes in borrowing costs. For example, if a company expects interest rates to rise in the future, it may lock in its interest expenses by entering into a swap contract that pays a fixed rate and receives a floating rate.

· Investors and hedge funds: They use interest rate swaps as an investment tool or risk management strategy to seek profits by predicting changes in interest rates, or to hedge the interest rate risk of other investments.

· Governments and public institutions: These entities may use interest rate swaps to manage the cost and risk of their debt portfolios. Through swaps, they are able to more efficiently match funding needs and debt servicing costs while reducing the impact of interest rate changes.

· Central banks: Although not a routine operation, in certain circumstances, central banks may participate in the interest rate swap market to influence short-term interest rates as part of their monetary policy.

In the traditional financial world, interest rate derivatives are the largest category of derivative transactions, and interest rate swaps account for 82% of the overall interest rate derivatives market share, but in the blockchain world, interest rate swaps are still in a very early stage. Pendle, as a leading project, is dedicated to on-chain interest rate swaps on Ethereum.

With the entry of traditional financial institutions, especially Grayscale, JPMorgan Chase, and BlackRock's attention to the Ethereum staking market, this can provide TradeFi with a wide range of arbitrage opportunities, which may be of great significance to Pendle's investment in the current context.

Currently supported yield tokenization currencies and market capitalization:

· Ethereum liquid staking tokens (such as wstETH): Currently, about 26% of ETH is in a staking state, so all of these tokens can be tokenized. Currently, the overall TVL of LSD is $59.7 billion.

· Tokens representing lending protocol positions (such as Compound or Aave): For example, DAI pledged in Compound is called cDAI, which also has its own annualized rate of return. This part of the stable market space that can be used for income is also very broad. The current TVL of the lending business is about 34.3 billion US dollars.

· LP tokens (such as GMX's GLP): Whether it is GMX or GLP, as long as it is pledged, it has its own interest rate. Almost most DEFI projects have LP token income.

· Liquidity re-mortgage tokens (LRT) and Restaking tokens: As of now, this part of EigenLayer and Renzo Finance, etc., has a total of 17 billion US dollars in TVL.

So overall, the ceiling of this track is extremely high, and with the gradual entry of traditional institutions, the demand for Pendle will gradually increase.

Possible use cases for institutional use include:

· Fixed income, such as earning fixed income on stETH;

· Long yield, such as betting on stETH yield increases by buying more yield;

· Earn more without additional risk, such as providing liquidity with your stETH;

For example, in the EigenLayer Restaking market, as the number of EigenLayer depositors gradually increases, the future yield is likely to be downward, so in the current high yield situation, you can choose to sell YT and cash in your yield in advance at a high APY. In the eyes of institutions, they can also lock in stETH's staking income to hedge against the problem of declining yields caused by a decline in on-chain activity in the future.

5. Tokens

5.1 Total and Circulating Amount

As of March 7, 2024, according to Coingecko statistics, the total number of tokens is 258,446,028, and the number of tokens in circulation is 96,950,723. The current market value is US$298 million and the FDV is US$790 million. Liquidity incentives account for 49.3% of the total tokens, the team currently accounts for 17.7%, and investors account for 12.1%.

Liquidity incentives are expected to last until the end of 2030, with an official assumption of an annual inflation rate of 2%, falling by 1.1% per week until April 2026. The release chart of the token is shown above. We expect that around 270 million will be in circulation by May 1, 2025 as the deadline. Overall, there will be little growth and no impact on the token price in the bull market.

5.2 Token Economics

Pendle's token is mainly used for governance custody, which is called vePendle. By utilizing vePENDLE, PENDLE holders can obtain a series of functions that can improve the utility of the token.

The value of VePendle is proportional to the amount and duration of Pendle staked. vePENDLE value will decay over time. vePENDLE holders vote and direct the reward stream to different pools, effectively incentivizing liquidity in the pools they voted for.

Pendle charges a 3% fee on all earnings generated by YT. Currently, 100% of this fee is distributed to vePENDLE holders, and the protocol does not collect any income. In addition to this, vePENDLE voters are also entitled to 80% of the interest rate swap fees from the voting pool, which constitutes the voter's APY. The above picture shows the latest voting situation. The crvUSD pool accounts for about 44% of the voting rights. As of March 7, 2024, there are a total of 49.52 million Pendles locked in Pendle. As a virtual token of voting rights and rights, there are a total of 32.76 million vePendles, which are locked for an average of 421 days.

5.3 Market performance and window period forecast

Pendle's current main liquidity pool is LRT, and the analysis is mainly based on the LRT project.

The above are LRT tokens. LRT relies on Restaking and LSD tokens. Its market space Restaking currently has 11 billion US dollars, and LSD currently has 55.1 billion US dollars. These are accompanied by the development of ETH prices, LSD tracks, and pledges gradually moving towards mainstream financial institutions, and the market space has become wider.

So under the current circumstances, the LRT token has a market space of 66 billion US dollars. For Pendle, there is such a large market growth space at LRT. In addition, it also accepts tokens that can generate yield income, such as Compound, as well as the off-chain interest rate swap products introduced in the future, that is, Pendle v3, which will be launched this year.

From the current price increase, its price growth is also in line with the development status of the Staking track. At present, the price of the currency has reached a historical high, but its market value is only 300 million US dollars (the price of the currency is 3.11), and the total circulation is about 800 million US dollars. In May 2025, due to the problem of the release mechanism, FDV can actually only be counted as 300 million US dollars, so we believe that the token may have great room for growth.

5.4 Profitability Expectation Assessment

Pendle’s price has broken through the previous high, and its growth space may no longer be limited. At present, its main underlying supporting token is LRT. If the current overall LRT market value is 5.7 billion US dollars, the TVL flowing into Pendle is 2.37 billion US dollars, which includes EETH (ether.fi) and WETH tokens.

If the overall TVL of the LRT project rises fivefold, then Pendle's TVL will also have room to rise fivefold. With the introduction of the traditional interest rate market in 2024, the entry of TradeFi will require Pendle to smooth the yield curve and hedge risks, so the project's room for growth will be higher.

6. Value Assessment

The project is in its mature stage, but the team is still improving its economic model and enhancing liquidity, exploring the possibility of introducing interest rate swaps from traditional finance. We believe that it is expected to become the Uniswap of the interest rate derivatives track. The space of this market will be much larger than the spot market, because most of them are institutional participants and their trading volume is very large.

Its competitive advantage is that it is the leader of the on-chain interest rate derivatives track, and it also has its own ecology. It is currently in an absolute monopoly position in this track, and the overall track is also in a very early stage.

In the medium and long term, not only the spot market on the chain will flourish, but also the pledge and re-pledge tracks will develop rapidly. With the attention of institutions to TradeFi, the on-chain derivatives market will also develop rapidly, and Pendle is currently a unique choice.

7. Summary

Pendle is a blockchain project focused on yield tokenization, which allows users to lock in the future yield of their crypto assets and receive income in advance. This innovative approach not only provides a new source of income for cryptocurrency holders, but also introduces more liquidity and flexibility to the interest rate market. Pendle achieves this function through smart contract technology, allowing users to participate in the market in a decentralized and secure way.

The investment points of Pendle include:

The market space is huge. Interest rate swaps are the main derivatives market for institutions. Interest rate derivatives account for 80% of the market share of the derivatives track, and interest rate swaps account for 80% of the market share. The trading volume is extremely large, but this track on the chain has just been introduced by Pendle, and it is still in a very early stage.

· Pendle's overall data performance is outstanding, and its trading volume, TVL, and currency price have all reached new historical highs.

· The trend of traditional institutions entering Staking, whether banks or hedge funds, mutual funds, ETF issuers or ETF brokers, all have the need to hedge interest rate risks.

· The V3 version will introduce the traditional interest rate swap track to the chain, which will face a trillion-level market. We look forward to Pendle's performance.

Although Pendle currently relies on the development of the LRT track, the LRT track alone still has the potential to grow at multiple levels. In addition, Pendle has the opportunity to gradually reduce the proportion of LRT in the future, because it is essentially an interest rate swap track for the entire market, which requires the entry of institutions to help diversify its assets. This also means that there is a strong mutual dependence between Pendle and institutions, which is a very valuable investment target. Investors are advised to pay close attention.

This research report was completed in early March 2024 and revised in early April 2024. The main reference materials and data sources are as follows:

《KEY TRENDS IN THE SIZE AND COMPOSITION OF OTC DERIVATIVES MARKETS IN THE FIRST HALF OF 2023》

《The Pendle Swings》

Original link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia