It’s been highly encouraging for us to see the community actively discussing and testing yield strategies on Pendle. In this piece, we will illustrate the capital efficiency of YT and the implications of buying YT.
Conventionally, users would have to deposit funds into yield avenues to gain yield exposure. This process is capital intensive considering the relatively small yield exposure compared to the initial capital deposited.
Pendle enables direct yield exposure without the need to lock in large amounts of capital. By separating the yield from the underlying token, buyers of Yield Tokens (YTs) can get exposure to the pure yield component of the underlying asset.
By purchasing YT, a user is entering a position that is exposed to yield from a significantly higher notional value.
To illustrate this, let’s assume:
- The APR on cDAI is 2%
- 6-month YT-cDAI is trading at $0.00024, an implied yield of 2.32% (Note that each YT-cDAI represents yield from 0.021475 DAI deposited in Compound).
An initial capital of 1,000 DAI deposited in Compound would expose the trader to a yield of $10 in 6 months (assuming the 2% APR stays constant).
At the same time, capital of $1,000 used to purchase YT-cDAI would entitle the trader to 4,166,667 YT-cDAI, equivalent to ~89,500 DAI deposited in Compound.
From the example above, the trader is exposed to the yield from $89,500 worth of cDAI (notional value) with just $1,000 capital. This highlights the capital efficiency of YT where each YT represents yield from a significantly higher notional value.
If cDAI’s APR increases to an average of 10% throughout the year due to a bull run, the trader’s YT-cDAI would yield the trader ~$4,500 in total (a $3,500 profit with $1,000 capital), and the price of YT-cDAI should increase to reflect that.
Purchasing YT provides traders exposure to fluctuating rates in a capital-efficient manner as they do not need to purchase and stake the core underlying asset. This can be very powerful as a form of leverage with no liquidation risk.
On top of that, by splitting the yield component from the underlying, Pendle also allows for yield hedging against a yield downturn. Check out this piece to learn more on how a trader locked 14% yield from $300,000 notional value.
Pendle — Base Use Cases & Strategies
With the rapid development in DeFi, numerous yield-generating assets have been created. Pendle looks to create the next…
The space is still new and we’re still only scratching the surface of what’s possible with yield trading and Pendle. Join our Discord channel and join the fun, or visit the educational section on our Medium publication to find out more!