Segueing Into the Yield Metaverse

The fungible nature of DeFi offers greater flexibility when compared to traditional finance. For example, you can’t use a stock as collateral to take out a mortgage. You can, however, leverage a long ETH position into a liquidity pool and use that LP token as collateral to take out a loan. This level of interoperability is unique to DeFi and can be used to bootstrap entirely new markets.

We’ve seen significant progress with decentralized credit markets that use established lending protocols like Aave and Compound as their base layer foundations. By interoperating with these markets, Pendle aims to support the creation of a credit derivatives market within DeFi, akin to interest rate derivatives in traditional finance.

Credit markets are massive, and are key to a well-functioning financial system. As highlighted in this Messari publication, the credit market is roughly triple the size of the global equity markets while interest rate derivatives comprise the majority share of the global derivatives market. As DeFi’s credit markets grow, we see tremendous potential for credit derivatives on Pendle to grow along with it and play a key role within the DeFi ecosystem.

Yield Trading & Beyond

At its core, Pendle separates yield from yield-bearing assets and allows it to be traded on our novel AMM. Some of our mechanics were inspired by bond strips, where yield is ‘stripped’ from the bond and selling that strip is essentially exchanging future yield for cash. However, the fungible nature of DeFi means that Pendle enables much more than that. These yield stripping mechanics can be extended to every yield-generating asset in DeFi (stablecoin deposits, LP tokens, synthetic tokens, vault strategies etc.) and those strips of yield can be utilized as money legos across various DeFi protocols.

To help visualize this, imagine being able to strip and trade coupons without limitation in the traditional world — future dividends of equity assets, yields of any structured product or even real estate rents. This implementation in traditional finance would be near impossible with barriers in listings, price discovery, settlement, regulations, counterparty risk etc. Thankfully, DeFi lacks such limitations.

Beyond the stripping and trading of yields, Pendle also enables an interesting recursive loop for sellers of yield. As users receive cash for their future yield immediately, they can use those funds to purchase more yield-bearing assets and sell the yield again. This cycle can be repeated indefinitely. For anyone convinced that yields are rich, they are able to act on that view without liquidation risk.

Pendle looks to build the next layer of DeFi on top of all yield assets. The nature of our AMM allows the seamless creation of yield markets for yield-bearing tokens. The deposits on lending protocols (Aave, Compound, Cream, Venus, etc), yield aggregators (Harvest, Yearn etc), LP tokens and more all hold yield that can potentially be traded on the Pendle AMM.

Multiple AMMs already coexist, each solving different specific issues across all asset classes, with more to be created in future. AMMs have proven themselves to be very suitable for long-tailed assets, solving fragmented liquidity and inefficient price discovery issues. While constant product AMMs (Sushiswap/Uniswap) have paved the way for Curve’s stablecoin AMM and Balancer’s smart pool, Pendle contributes to the AMM landscape by providing an avenue for time-depreciating assets to be traded on. Once live, we believe that Pendle will become one of the key AMMs in DeFi’s credit ecosystem.

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