Pendle V2 Launch (Part 3/3) — Updated Tokenomics

Preface

Part 1 shared the new design of the Pendle AMM, with significant structural improvements in capital efficiency, LP risk, and fee accrual.

Part 2 highlighted the steps taken to ensure the protocol can scale into the future, solved with EIP-5115, improved tooling, and removing gatekeepers.

With these in place, we can begin exploring how to align and incentivize fee creation. We lean heavily into Andre Cronje’s approach with ve(3,3) and recommend reading here: https://andrecronje.medium.com/ve-3-3-ouroboros-part-1-fee-distribution-5dcf131dc82e

The best bits of his writing will also be shamelessly forked into this piece.

vePENDLE

The goals behind ve(3,3) are clear: Align incentives to generate liquidity and fees.

Looking at Curve’s original design, you will receive 50% of all fees as a veCRV holder, regardless of where you vote for emissions to go, so you might vote your emissions onto a pool that generates 0 fees for the protocol, but you still reap the reward of fees generated by other more active pools.

The solution: vePENDLE lockers to receive swap fees only for pools they voted for.

This aligns where vePENDLE lockers vote, and ideally have them vote for the pools that generate the highest fees.

The benefits:

Source: https://andrecronje.medium.com/ve-3-3-ouroboros-part-1-fee-distribution-5dcf131dc82e

As Pendle is an AMM, and fees are generated by trading, profit-oriented lockers will vote emissions on pools with the highest trade volume, this will incentivize more liquidity for that pool, which improves trade quotes, which increases trade volume, and thus earns more fees.

So, the Pendulum swings.

Network Ownership and Signalling

Fees are distributed in stables, uncorrelated to PENDLE. This means that by owning a % of the supply, you are taking a bet on the future fee growth of the protocol.

There’s a trove of sidelined capital sitting amongst existing LPs on protocols such as Convex, with the potential for them to leverage composability and stack yield on Pendle. Beyond additional smart contract risk, such market participants have incentives to LP on Pendle — IL is negligible and they get additional sources of yield.

Finally, Signalling.

Different variations have been tried for locking but we believe the original method grants maximum flexibility for both low and high+immediate signaling.

The minimum time frame for locking vePENDLE is 1 week and the maximum is 2 years.

This allows signalling and fee claims to occur at a minimal time and $ cost, while if there is competition for an attractive pool, longer locks can still have an instant multiplier effect.

vePENDLE Summary:

vePENDLE grants lockers familiar benefits of Reward Boosting and Incentive Channelling, while Swap Fees will only be received from pools they voted for.
The lock duration ranges from 1 week to 2 years, which gives the locker flexibility on what to optimize for.
As the protocol matures, the alignment of emissions and incentives will result in self-optimization by participants

*check out our docs for more details