defi 101: intro to pendle yield trading

Core Concepts

• Yield Fluctuations: DeFi yields rise in bull markets and fall in bear markets, with additional fluctuations caused by micro and macro factors.

• Pendle’s Solution: Pendle enables users to split yield-bearing assets into two separate tradable tokens:

  • Principal Token (PT): Represents the principal amount (like owning a building). It can be redeemed at maturity for the full principal, offering predictable fixed income.

  • Yield Token (YT): Represents the right to receive future yield (like the “rent” from the building). YTs allow users to speculate on future yield changes.

Detailed Explanation of Pendle’s Mechanism

• When you stake a yield-bearing token (e.g., 100 DAI in Compound), you receive an APY yield (e.g., 5%).

• Pendle splits this staked asset into:

  • PT: Sold at a discount (e.g., 0.9 DAI for 1 PT DAI) because it does not include yield.

  • YT: Represents the yield part, priced much lower, reflecting only the future interest.

• PT holders can redeem 1 PT for 1 underlying token at maturity, locking in a fixed yield.

• YT holders continuously receive the yield during the period and speculate on yield fluctuations, which involves higher risk and the potential for higher returns.

Key Features and User Strategies

• PT Tokens (Fixed Yield/Lower Risk):

  • Ideal for users seeking predictable, fixed returns.

  • PT is always cheaper than the underlying asset.

  • PT holders redeem principal at maturity, gaining fixed yield regardless of interim yield fluctuations.

  • PT price and yield can be influenced by market expectations and time decay as maturity approaches.

  • Users can trade PT tokens before maturity, potentially realizing capital gains if implied yields decrease.

• YT Tokens (Speculative/High Risk):

  • Suitable for advanced traders speculating on the future direction of yields.

  • YT price fluctuates based on implied APY expectations relative to the underlying APY.

  • High potential yields (e.g., 100% APY) can be achieved by correctly timing the market.

  • Requires understanding of yield sources and risks, including volatility and protocol-specific strategies.

Important Metrics and Trading Considerations

Practical Examples

• Stablecoin Yield Trading:

  • Pendle is gaining popularity through stablecoin markets (e.g., SUSDF, YOUSD).

  • Example: PT SUSDF offers ~29% fixed APY for a 12-day maturity at a discounted price.

  • Users can lock fixed yields with PTs or speculate on yields with YTs.

• Capital Gains and Impermanent Loss:

  • Buying PT when yields are high but then yields rise further can cause temporary “impermanent loss.”

  • However, at maturity, PT holders receive the locked-in yield and principal, eliminating permanent loss.

  • Conversely, buying PT as yields fall results in capital gains plus locked yield at maturity.

• Yield Source Understanding:

  • Knowing the underlying protocol and yield strategy (e.g., Delta neutral strategies for YOUSD) is critical for valuation and risk assessment.

Key Insights

• Pendle enables fixed income and speculative trading on DeFi yields, offering a novel way to manage yield risk.

• PT tokens provide predictable income, akin to bonds in traditional finance, suitable for risk-averse investors.

• YT tokens offer high-risk, high-reward exposure to future yield fluctuations, recommended for experienced DeFi traders.

• Market dynamics such as time decay, slippage, and maturity timelines critically influence token pricing and yield outcomes.

• Understanding the underlying APY and implied APY is essential for informed trading and yield speculation.

• Pendle is increasingly popular in stablecoin markets, reflecting growing demand for fixed and tradable DeFi yields.