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3 months 3 times, Pendle's LSD narrative

Leo

2023-03-08 12:42

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Original author:Trissy, DeFi researcher

Leo, BlockBeats

Pendle, a licenseless DeFi trading income protocol on Ethereum that allows users to execute various revenue management strategies, has emerged as one of the best performing protocols in the revenue market and could potentially take DeFi to the next level. DeFi researcher Trissy wrote about why Pendle is one of my biggest investments ahead of the next bull market, compiled by BlockBeats:

Overview of Pendle

Pendle aims to provide maximum benefit to its users by simply increasing their exposure to earnings in a bull market and hedging against earnings declines in a bear market. Users can execute various revenue strategies through their dual revenue tokens. In Tradfi, institutional participants rely on various hedges, such as future income contracts, to protect their positions.

Pendle standardized yield token by wrapping income assets into SY (standardized yield token). SY was further divided into two types: PT (principal token: principal token) and YT (yield token: Income token).

PT: principal token at maturity

YT: Income token at expiration

For example:

1 GLP ($0.92) = 1 PT GLP ($0.78) + 1 YT GLP ($0.14)

This feature also unlocks several new strategies for DeFi. For example, you can buy 1 PT GLP for $0.78 (16.6% off) and receive 1 GLP at expiration date. 1 YT GLP allows you to earn 1 GLP of income (collect the income until maturity and withdraw it at any time).

Simplicity and motivation

Protocol simplicity is something that is often overlooked, and DeFi is a complex ecology with high barriers to entry due to its technical nature. What I like most about Pendle is that I can read its white paper and learn about its products in as little as an hour.

A token will not enter my portfolio unless it has strong incentives. Pendle takes a 3% fee on all proceeds generated by YT (income token). Currently, this fee is distributed 100% to vePENDLE holders and the team does not charge anything. By holding an incentive mechanism on a vePENDLE enabling Pendle, the vePENDLE holder votes and flows the reward to a different pool, effectively incentivizing liquidity in the pool where they vote.

If you provide liquidity in and to the pool while holding vePENDLE, the PENDLE incentives and rewards for all your LPS will also be further raised based on the value of your holding vePENDLE, up to a maximum of 250%.

This creates a flywheel effect of returns, where the more vePENDLE you put in, the more incentive you get. With the token locked, more supply disappears from the market, and LP boosts up to 250%.

User policy

There are several strategies users can practice on Pendle:

- Buy PT (1Hour) GLP - Get fixed income before maturity, you can see that the APR of GLP on GMX is 20% (base APY), but Pendle can offer users a fixed rate with an implied APY of 16.9%. It might not be a good time because you'll get a lower interest rate than you actually do.

Buying PT GLP (1Day) and getting 27.5% fixed is a good deal (27.5% fixed vs 20.9% base).

- Buy YT -- long interest rate for income token.

The case is long YT GLP. I believe the yield (APY) on GLPS will remain around 20% for some time, but the implied APY is 16.6%, which is the fixed APY offered by Pendle. I think there is still a gap between Pendle's implied yield: 16.6% versus around 20%. So buying YT GLP in the hope that yields will rise could be a good bet.

narrative

My prediction is that LSD will begin to dominate the ETH pledging ecology. My reasoning boils down to two options:

- LSDS have a high utility factor because they can be used as collateral for deposits to earn income, or they can be lent through a borrowing/lending agreement to earn additional interest;

- Liquidity needs of users; After the Shanghai upgrade, there is a waiting time of 27 hours. This creates a lack of asset liquidity, and investors will prefer scalable solutions unlocked instantly via LSD.

What does this mean for Pendle? With LSD dominating, most holders are looking to increase their ETH yields, and this is Pendle's opportunity for users to earn double digit APY while resolving their pledge and liquidity.

Integration and roadmap

According to Pendle's announcement, there are many projects that Pendle is currently integrating, such as GMX, LayerZero Labs, Balancer, Arua Finance, and Rocket Pool.

Business development is critical to increasing Pendle's visibility and liquidity. At their current valuations, that's pretty good. In addition, Pendle has a very good road map, and the pools they will soon list on Arbitrum will attract more users.

valuation

Before reaching an ambitious goal, you need to consider the current float and dilution market value. For example, if Pendle had a float market value of about $20m, it would have a fully diluted market value of about $2bn.

conclusion

Given the time it may take to unlock, which could eventually extend to unlocking an additional 20% of tokens to the total supply, LSD pledge supercharging could catalyze Pendle to higher positions.

In the case of the DeFi agreement before the last bull market, there were three key issues:

- What is it about them that makes them worth billions?

- How will token holders benefit?

- How does their product help users?

Pendle has done a good job on all three, so I hope you can understand why I'm optimistic about this project. Finally, Pendle has a strong marketing arm and several top DeFi investors and researchers are very bullish.