New Launch: Sushi LP Tokens
Yield tokenization for Sushi LP tokens is here!
When Pendle launched in June, we started with the aim of bringing optionality and capital efficiency to the lending markets in DeFi. This was accomplished by allowing the tokenization and trading of yield from Aave and Compound assets on our AMM, letting traders make direct bets on the direction of lending market yields.
We’re now extending this utility to yield-bearing assets from decentralized exchanges, starting with Sushi LP tokens.
- SLP tokens for the PENDLE/ETH pool on Sushiswap
- SLP tokens for the ETH/USDC pool on Sushiswap
Why is this useful?
This integration introduces a new utility to the DeFi ecosystem, by allowing the future swap fees of LP tokens to be traded and hedged.
Swap fees accrued to liquidity providers are directly linked to trading volume.
Traditionally, fees surge in times of high volatility, where liquidity providers also take the greatest risk in terms of Impermanent Loss (IL).
With this new feature, traders can now speculate on the underlying trading activity or use it as a proxy for volatility. Existing LP holders can lock in their future swap fee yield if they deem the yield to be attractive.
Quick Explainer for new joiners:
Depositing LP tokens into Pendle splits it into its yield token (YT) and ownership token (OT).
YT-SLP represents the yield of the underlying SLP token and its holders will receive the swap fees from the underlying pool until expiry. YT token holders will be able to claim the swap fees based on the amount and duration held from Pendle’s smart contracts.
OT-SLP represents the ownership of the underlying pool assets and will be redeemable for the equivalent amount of SLP upon expiry (prior to expiry, both YT and OT are required to redeem the underlying). OT holders take on the risk of IL as the owners of the underlying assets.
OT holders will also be entitled to the liquidity mining rewards from the underlying pool (Sushi Onsen reward). Note that if the OT is used to provide liquidity, the underlying liquidity mining reward is lost.
Liquidity providers can mint and sell YT to “lock-in” the yield at the price YT is trading at. Those who believe that YT is trading at an attractive price against the potential LP swap fees can lock in the yield by minting and selling YT to receive an upfront payment.
Users that are looking to maximize asset exposure and Sushi Onsen rewards can also sell YT to unlock capital. Increasing OT holdings with said capital would maximize exposure to the underlying liquidity mining rewards and collateral.
Swap fee speculators can buy YT to obtain direct exposure to pure swapping fees from the underlying pool. YT holders receive the yield from underlying SLP with minimal risk of IL as the bulk of the IL risk is borne by OT holders.
Traders can also buy and hold YT for the duration that they believe swapping fees are high to receive the fees and sell their YT once yields drop. This is one of many potential strategies for yield speculators as YT is a more capital-efficient way to trade and hedge yield. Learn more about YT’s capital efficiency here!
More Use Cases
Note that YT holders receive the swap fees of the underlying SLP while OT holders own the principal, and are exposed to IL of the underlying.
This creates an interesting dynamic where:
- SLP holders that predict a large price swing can temporarily hedge IL by selling OT away during that high activity period.
- The remaining YT accrues yield while IL has been hedged.
- They can then re-enter their SLP position at any time by repurchasing OT.
As OT undertakes the risk of IL and does not generate yield, it should trade at a discount to the underlying. Similar to other assets currently listed on Pendle, arbitrageurs should theoretically keep the price of YT+OT equal to the underlying. The level of discount on OT then depends on the expected yield generated by YT and the perceived IL risk. The higher the yield and perceived risk, the higher the discount on OT.
Traders can also speculate on IL and the future price range of the underlying Sushiswap pair. During high volatility (high IL risk) periods, traders can purchase OT at a bigger discount (from their estimation of future fair value) and exit their position once volatility subsides and OT price has appreciated accordingly.
OT-SLP and YT-SLP allow traders to bet on the market’s volatility in a completely decentralized manner. A trader expecting volatility to rise can buy YT to receive the higher swap fees due to higher trading volume, and also potentially sell the YT at a higher price at peak volatility. A trader expecting volatility to go down can buy OT at the deeper discount, expecting to sell it when volatility is lower.