Before we get started, this is not a recommendation or endorsement to buy any token(s) mentioned.
Recently on The Edge Podcast, I had the opportunity to interview one of the most accomplished DeFi founders, who tends to keep a low profile–TN Lee. TN was a Founding Team Member at the DeFi liquidity protocol Kyber Network back in May 2017. Kyber remains one of the most foundational protocols in DeFi today, with a suite of products such as their DEX aggregator Kyberswap, and a free analytics tool called KyberAI which uses machine learning and AI to score how bullish or bearish a token is. During this early part of his career, TN also contributed to WBTC, which is now the most liquid form of tokenized BTC in the world, currently $4.7B in total BTC liquidity.
Fast forward to 2021, TN saw an opportunity to address the needs of DeFi investors who were struggling with the volatility and unpredictability of yields on-chain so he co-founded Pendle Finance. Pendle is a DeFi yield-trading protocol. It aims to reimagine the TradFi interest derivative market, worth over $400T in notional value, as trustless money lego, where anyone in DeFi can execute yield strategies such as earning fixed yield and longing the stETH yield rate.
One of the core innovations behind Pendle is yield tokenization. The source of yield in Pendle starts with yield-bearing assets such as Lido stETH, rETH by Rocket Pool, a Balancer LP staked on Aura, a Velodrome LP earning VELO emissions, GLP by GMX, or even a stablecoin LP deposit on Stargate. Yield-bearing assets are then split into two components: Principal Tokens (PT) and Yield Tokens (YT). PT represents the principal of the underlying yield-bearing token, while YT represents entitlement to all the yield of the asset.
The YTs and PTs can be traded on Pendle, creating a number of interesting scenarios such as long/shorting yield rates, earning a fixed yield (similar to a zero-coupon bond), and providing liquidity for the Pendle AMM to enable all of this trading activity. Below are examples of the calculated Base APY and Boosted APY for LPs providing liquidity in the Pendle AMM.
Pendle is a Cinderella story among DeFi projects this last bear market. In 2021, Pendle’s product struggled to achieve product-market fit because the product was simply too complex for average users. In 2022, they shifted gears to reimagine the Pendle app and all of its complexity abstracted away which ultimately led to 2 different formats of the Pendle app–Pendle Earn (aka Simple) vs Pendle Trade. Pendle Earn allows users to earn fixed rates on their deposited assets by buying PT tokens, similar to a zero-coupon bond that will mature to its full value.
With Pendle Earn, users simply choose an option based on their preferred asset, maturity date, and the going Fixed APY based on the price of PTs in the Pendle AMM pool.
In the more advanced version of the Pendle app (Pendle Trade), users can buy or sell PTs and YTs in order to express their view on the underlying yield rate vs the implied yield rates. This is where yield traders might buy YTs for a stETH market that matures in December 2023, with an Underlying APY that’s higher than the Implied APY, because they’re bullish on the stETH yield rate. By holding the YT, it streams all of the stETH yield until maturity.
To learn more about yield trading…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
