Dissecting the Pendle protocol

Trade and hedge future income.

This was first published on substack, make sure to follow 0xkowloon on twitter and substack for more comprehensive protocol deep dives. Keep an eye out for Element.fi and another SQL analysis of both protocols coming soon!

Pendle is a protocol that enables the trading of tokenized future yield on an AMM system. It builds on top of first-degree DeFi protocols including Aave and Compound. DeFi users who hold yield-bearing tokens from Aave and Compound can deposit them into Pendle, which in return mints ownership tokens (OT) and yield tokens (YT). Yield tokens can be immediately sold for USDC in Pendle’s AMM pools, or they can be added to the AMM pools so that token holders can earn trading fees and other incentives (stake LP token, earn $PENDLE). The value of a yield token decays as it gets closer to the expiry because claimable yield drops with time. There is an expiry because YT buyers are buying the right to access yield without owning the underlying asset. If there is no expiry, that means YT buyers have access to the yield perpetually by only paying a fixed price. There isn’t a way on the blockchain to enforce the buyers to make regular payments to the yield-bearing asset holders and hence an expiry is necessary.