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Intro

Intro

Introduction

Pendle is a DeFi protocol that lets you separate and trade yield from your crypto assets. It allows users to sell future interest earnings today, and buy someone else's future yield at a discount.

Core Architecture: How Pendle V2 Works

The Building Blocks: SY, PT, and YT

At the heart of Pendle V2 are three fundamental token types:
Standardized Yield (SY) Tokens
  • SY tokens wrap various yield-bearing assets (like Aave's aTokens, Compound's cTokens, etc.)
  • They standardize different yield-bearing assets into a common interface
  • Support both deposit and redemption of underlying assets
  • Track the accumulated yield through an increasing exchange rate
Principal Tokens (PT)
  • Represent the principal amount of the underlying asset
  • Redeemable 1:1 for the underlying asset at maturity
  • Their value tends to approach the underlying asset's value as maturity nears
Yield Tokens (YT)
  • Represent the right to claim the yield generated by the underlying asset
  • Can be traded separately from the principal
  • Allow users to speculate on or hedge against future yield rates

The Tokenization Process

The magic happens when users convert their yield-bearing assets into PT and YT:
  1. Deposit: Users deposit yield-bearing assets (like aUSDC) into the SY contract
  1. Mint: The SY tokens are then tokenized into PT and YT pairs through the mintPY function
  1. Trade: Users can trade PT and YT separately on Pendle's AMM
This process effectively "unbundles" the yield from the principal, creating two distinct financial instruments with their own risk-return profiles.

Advanced Features

Yield Token Mechanics

YT tokens are particularly innovative because they:
  • Accumulate interest in real-time: As the underlying protocol generates yield, the interest accrues to YT holders
  • Support multiple reward types: Can handle both underlying yield and additional protocol rewards
  • Auto-compound: Interest is automatically calculated and distributed
  • Pre-expiry flexibility: Can be traded, redeemed, or combined with PT at any time before expiry

Reward Distribution System

Pendle V2 features a sophisticated reward mechanism:
  • Dual reward streams: Handles both underlying protocol yield and additional rewards
  • Fair distribution: Rewards are distributed based on users' SY-equivalent share
  • Fee mechanism: Protocol collects fees on both interest and rewards
  • Post-expiry handling: Ensures proper distribution even after contract expiry

Market Mechanics: Pendle's Custom AMM

Notional-Based AMM

Unlike traditional constant product AMMs, Pendle uses a notional-based model specifically designed for yield-bearing assets:
Key Innovations:
  • Time-decay awareness: The AMM accounts for time to maturity in pricing
  • Smooth exchange curves: Provides better liquidity for yield assets
  • Implied rate calculation: Dynamically calculates implied yield rates
The exchange rate formula:
Where proportion represents the post-trade PT to total pool value ratio.

Market Operations

The Pendle Market supports:
  • Liquidity Provision: Users can provide both PT and SY as liquidity
  • Swaps: Efficient trading between PT and SY with minimal slippage
  • Dynamic Fees: Protocol fees that adapt to market conditions

Key Use Cases and Strategies

1. Fixed Yield Strategy

Users who want predictable returns can:
  • Buy PT tokens at a discount
  • Hold until maturity to redeem at full value
  • Effectively lock in a fixed yield rate

2. Yield Speculation

Traders can:
  • Buy YT tokens to bet on increasing yield rates
  • Short yield by selling YT tokens

3. Liquidity Provision

LPs can:
  • Provide liquidity to PT-SY pairs to earn trading fees

4. Yield Hedging

Protocols and large holders can:
  • Hedge against declining yield rates
  • Protect against interest rate volatility
  • Create customized yield exposure

Conclusion

Pendle V2 represents a significant leap forward in DeFi's maturation. By treating yield as a first-class, tradable asset, it opens up possibilities that were previously only available in traditional finance. The protocol's mathematical foundations, combined with its practical user experience, make advanced yield strategies accessible to everyone.