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Crypto interest rate market Spring breeze coming? In-depth analysis of LSD interest rate market service Pendle
Summarized by AI
An in-depth analysis of LSD interest rate Market Pendle
Original source: Mint Venturs
1. Research points
1.1 Core investment logic
As the LSD narrative deepens, there are growing calls to develop more sophisticated DeFi tools based on LSD, focus on and deduce the bond market narrative, including Pendle, which is beginning to be recognized by the market and explore new trading strategies.
From the perspective of transaction model, in V2 version of Pendle, based on the AMM model proposed by Notional Finance, the reconstructed AMM significantly improves transaction efficiency. From the perspective of underlying assets, Pendle has gradually constructed four layers of fixed income market with different risk levels, which can basically meet the needs of four different user roles: low-risk investors, arbitrageurs, liquidity providers and yield speculators.
With the introduction of Ve model, PENDLE tokens gradually have stronger value capture ability. As business indicators such as TVL continue to improve, PENDLE may be on the watch of some prudent investors.
1.2 Main Risks
Contract risk: If such an event occurs, it can have a significant impact on the normal operation of the project and the capture of token value. This risk is not limited to Pendle itself. Because the underlying assets of Pendle come from other DeFi projects, Pendle could also be affected by contract risks arising from other projects.
Strategic risk: If you do not choose the assets and the public chain of the assets, you may be left out by competitors in the next stage of competition. Project teams need to have a clear idea of what underlying assets to choose and an accurate understanding of the harshness of public chain competition.
Market risk: If the market falls sharply during the project's operation, causing underlying assets to fall, this may not be friendly to U-standard investors.
1.3 Valuation
In terms of "total market value/lock-up volume", the current valuation of PENDLE is lower than that of the other two projects in the same circuit that have issued money.
2. Basic information of the project
2.1 Business scope of the project
Based on the income tokenization market, Pendle divides interest-bearing assets into principal token PT (principle token) and yield token YT (yield token) after locking in the term, which satisfies the low risk liquidity management of users. It also provides a tool for traders who can grasp the fluctuation of yield keenly.
2.2 Past development and roadmap
In March 2021, the company changed its name from Benchmark to Pendle and tested online in the same month.
In June 2021, the Pendle main network was launched on Ethereum;
Pendle deployed in Avalanche in November 2021;
In March 2022, it proposed Project Permissionless, in which anyone can open an asset pool.
In November 2022, V2 version will be launched;
In March 2023, Pendle was deployed in Arbitrum.
2.3 Team Situation
2.3.1 Overall situation
According to LinkedIn, the Pendle team has a total of 13 employees, mainly engineers and BD employees.
2.3.2 Founder
TN Lee is the founder of Pendle. Prior to founding Pendle, he founded data analytics company DSR and entered the blockchain industry in 2017 as a founding member of Kyber Network, responsible for market and business development. He served as a mine consultant for RockMiner in 2019. That same year, TN Lee founded Pendle and Dana Labs, a research and development company focused on FPGas.
2.3.3 Core Members
Long Vuong Hoang: Head of smart contract development at Pendle, graduated from the National University of Singapore. Prior to that, he worked as an intern software development Engineer at Jump Trading. Jeffrey Soong: Head of front-end development, prior to that Jeffrey worked as an engineer at various Internet companies.
2.4 Financing Situation
Announced a $3.7 million funding round led by Mechanism Capital, with other notable institutions including Hashkey Capital, Spartan Group and others. In April 2023, Bixin Ventures announced an OTC investment in Pendle for an undisclosed price and amount.
3. Service analysis
3.1 Service Object
Pendle can provide corresponding products and services for four different investment groups: low-risk investors, interest rate traders, liquidity providers and arbitrageurs.
Low-risk investors can buy principle token to earn fixed income. PT is similar to zero-coupon bond, that is, a bond that does not pay interest during the holding period and is sold at a discount. As the maturity date approaches, the price rises and the maturity is paid according to the face value. Interest rate traders can buy YT (yield token), which allows them to earn a high yield when the yield rises as expected. Liquidity provider: If the expected rate of return does not fluctuate too much, it can choose to provide liquidity to earn transaction fees, earnings from underlying assets and incentives; Arbitrageurs can arbitrage by buying different asset classes when yields do not match or when changes in underlying assets have not been transmitted to pendle.
3.2 Service Classification
Pendle has been focusing on tokenizing revenue since its launch. So far, there have been two versions V1 and V2. Through the changes of underlying assets in the two versions, Pendle's business strategy can be adjusted.
In the early version of V1, Pendle chose to use debit-like certificates of deposit as its core, with the underlying asset being "Stablecoin + public chain token." For example, on the Ethereum chain, the underlying assets are Aave and Compound stablecoin loan assets as interest-bearing assets: aUSDC and cDAI; In Avalanche, Trader Joe's xJOE, BenQi's qiUSDC, qiAVAX, etc. Such target selection was in line with the narrative of "institutional investor entry" and "Treasury fund management" at that time: The great bull market opened in 2020 has attracted the attention of many traditional investment institutions to the crypto market. Along with the expansion of the market, DAO Treasury of some projects is also filled with a large amount of funds. It has become the focus of some investors and entrepreneurial teams to take into account the categories familiar to traditional investors and how to better make DAO Treasury funds earn more returns. For example, in October 2021 Multicoin Capital started discussing interest rate management tools with this vision in mind. At the same time, we cooperated with Rari Capital and Olympus to expand the application scenarios of some tokens.
From the late V1 version to the current V2 version, Pendle adjusted, shutting down operations in Avalanche and deploying on Arbitrum. At the same time, the target is no longer limited to public chain tokens and stablecoins, but has become mainly four directions. Ethereum is involved in three directions:
On the Ethereum chain, liquid pledge derivatives LSD are used as the main underlying assets, such as stETH, ankrETH, etc. Expand on popular tokens with high pledge revenue, such as APE and LOOKS; For relatively popular tokens, peripheral services, such as APE Compounder, offer reinvestment services for holders of these tokens and introduce a corresponding pool of revenue tokens.
Pendle's business in Arbitrum involves a fourth direction: incorporating other higher-yielding but less risky targets, such as GLP and gDAI. GLP and gDAI are liquidity tokens for derivatives projects GMX and Gains Network, respectively, and GLP consists of about 50% stablecoin, 28%ETH, 20%WBTC and some other mainstream assets. Liquidity providers enter or exit the market by casting or destroying GLPS. The composition of gDAI is DAI. Both GLPS and gDAI earn fees, liquidation gains, etc.
Source: https://app.pendle.finance/pro/markets? utm_source=landing& utm_medium=landing
So far, Pendle hasn't expanded the use of its tokens to include other DAOs for Treasury management, perhaps because Pendle wants users to come here just to use its services directly.
The previously anticipated PP (Project Permissionless) plan, although affected by the shutdown of partner Rari Capital and strategic adjustment, is still not interrupted: the launch of a new token standard that can encapsulate most of the interest-bearing assets: ERC-5115 solves the problem of LP tokens that are difficult to be encapsulated and tokenized for revenue.
In addition, LayerZero, a cross-chain solution, and Kyber Network, a decentralized exchange, are integrated to support higher-yielding products that may appear on other chains.
3.3 Service Details
Pendle's revenue tokenization business is simply a division of interest-bearing tokens into two parts: cost and revenue.
In the case of DAI, after the user deposits 100 DAI into Pendle, Pendle first deposits the DAI into compound, which becomes 100 cDAI. Then, Pendle will Standardized Yield 100 cDAI into sy-cdai (sy), and divide them into 100 principle tokens. Abbreviated PT) pt-cdai and 100 yield tokens (abbreviated YT) Yt-cdai. Each principal token, PT-cDAI, can be exchanged for one DAI upon maturity; Each YT-cDAI can be redeemed for cDAI earnings during the holding period.
We can view the principal token PT as a zero coupon bond. The closer you get to maturity, the closer the price of PT gets to par; The income token YT receives any gains during the holding period. YT-cDAI, for example, has a credit yield over the holding period, as well as COMP incentives provided by Compound.
It is worth noting that in the above step, YT+PT=SY.
From a business process perspective, several changes occur when a user deposits an asset in Pendle. Here we take the asset stored by the user as ETH:
When the user stores ETH, Pendle will automatically replace the ETH with stETH via Kyberswap in Zap mode. Pendle encapsulates stETH as sy-stTH. Standardized Yield (sy) is the token in ERC-5115 that encapsulates most interest-bearing assets. The token protocol is also the standard token designed by the Pendle team; If the user chooses "zero price impact mode", Pendle will split half of sy-stTH into income token YT-stETH and principal token PT-stETH in the third step. PT-stETH and the other half sy-stTH are combined into LP and put into the pool, and the revenue token YT-stETH is stored in the user account. If the user does not choose "zero price shock mode," Pendle will automatically sell YT-stETH by combining it with the other half, sy-stTH, into an LP and placing it in the pool. The proceeds will then be used to buy more PT-stETH. If you select manual, you need to perform the preceding steps manually.
In addition to the direct deposit of asset composition LP, users can also purchase PT and YT directly through Pendle.
Pendle uses an AMM mechanism to trade PT and YT, but this AMM mechanism takes into account PT and SY prices over time, as well as interest rates, which is different from the traditional Uniswap AMM mechanism.
In version V2, Pendle improved the AMM mechanism, drawing on the AMM model of Notoinal Finance, another fixed income project. Pendle made the change because it found that Notional Finance's model is more efficient with equal liquidity and less volatile losses for its users (the red curve below is Notional Finance's model; The black curve is the Pendle V1 version of the AMM model; The blue curve is for other fixed income items, such as Element Finance, Sense Finance's AMM model).
Source: https://raw.githubusercontent.com/pendle-finance/pendle-v2-resources/main/whitepapers/V2_AMM.pdf
In addition, compared with the Pendle V1 version of the AMM model, Notional Finance's model can adjust parameters according to the interest rate range of different interest-bearing assets to develop customized AMM models that are more suitable for different assets.
Source: https://raw.githubusercontent.com/pendle-finance/pendle-v2-resources/main/whitepapers/V2_AMM.pdf
Source: https://raw.githubusercontent.com/pendle-finance/pendle-v2-resources/main/whitepapers/V2_AMM.pdf
In the above model, the expiration time can be set by adjusting the "rate scalar", which can improve the efficiency of capital utilization. If the expiration time is shorter, the liquidity is more concentrated, and the efficiency of capital utilization is higher. By adjusting the "rate anchor" to set the interest rate range, the utilization efficiency of funds can also be improved.
According to the backtest, the capital efficiency of different underlying assets can be significantly improved compared with V1's AMM model after using the new model.
Source: https://docs.pendle.finance/PendlePro/HowItWorks/AMM
The original intention of this AMM model was to trade principal token PT and standardized income token SY. However, because YT+PT=SY, YT= sy-pt, this AMM model also supports the trading of the income token YT.
If a user wants to buy YT, the transaction process is as follows:
The buyer sends an SY into the trading contract, hoping to purchase YT; The trading contract is going to draw N SY's from the pool; N SY was divided into N PT and N YT; Send N YT to the buyer; PT back to the pool.
Source: https://docs.pendle.finance/PendlePro/HowItWorks/AMM
If the user wants to sell YT, follow these steps:
The seller puts N YT into the trading contract, hoping to sell YT; The contract is going to lend N PT from the pool; The contract synthesizes N YT and N PT into N SY; Part of SY will be converted into PT and sent to the contract to repay PT borrowed in step (2); The remaining SY will be sent to the seller.
Source:https://docs.pendle.finance/PendlePro/HowItWorks/AMM
Therefore, although Pendle's AMM model supports the transaction of YT, PT and SY3 tokens, when no YT transaction occurs, only SY and PT assets exist in the pool.
Under this AMM mechanism, several different investment strategies can be derived.
First, users can add liquidity to do LP, earning fees with token incentives.
Because the only two assets in the pool are PT and SY, and the price of a PT is less than an SY before it matures, and the relationship between PT and SY is based on the interest rate. Therefore, if you are a liquidity provider in Pendle, it can actually be regarded as providing a class of assets, namely SY. Because LP=PT+ST=SYf(r)+SY=SY (1+f(r)), where 1+f(r)< 2. f(r) represents the function of interest rate and is inversely correlated with interest rate, because the higher the interest rate, the lower the PT price; The lower the interest rate, the higher the PT price. Therefore, as an LP in Pendle, it can be seen as providing only a type of asset SY and believing that the interest rate will decrease in the future period, that is, shorting the interest rate.
At maturity, LP=PT+SY=2SY-YT.
Therefore, there are four sources of income for LP before maturity:
Part of the transaction fee of PT's appreciation stimulates the interest-bearing income brought by SY's underlying interest-bearing assets
If LP is held to maturity, there is no transient loss. Secondly, users can deposit interest-paying assets, split them into PT and YT and then sell YT to lock in the yield. Third, users can directly buy PT, which is equivalent to buying zero-coupon bonds to make stable investment. Fourth, users can directly buy YT and gain more profits by predicting the direction of yield changes.
In order to better guide users to trade, Pendle gives two figures for the probability "interest rate" :
underlying APY, or the rate of return on holding assets; implied APY, the implied yield, is the result of market trades and is the expectation of future APY.
implied APY is calculated as follows:
Eg. When the underlying force is underlying, implied APY, this time can consider buying YT, or sell PT, LP. But perhaps the underlying APY converges with implied APY through the underlying APY falling rather than the implied APY rising; When underlying When implied APY, it may consider buying PT, trading LP, or selling YT. underlying APY may converge with implied APY through implied APY falling rather than underlying APY rising.
Source: https://app.pendle.finance/pro/markets/0xfcbae4635ca89866f83add208ecceec742678746/swap? view=yt
Source: https://app.pendle.finance/pro/markets/0x5546d0f27bed4075ea03a22c58f7016e24c94ea7/swap? view=yt
Source: https://app.pendle.finance/pro/markets/0x9a76925dd91a7561b58d8353f0bce4df1e517abb/swap? view=yt
Source: https://app.pendle.finance/pro/markets/0x9a76925dd91a7561b58d8353f0bce4df1e517abb/swap? view=yt
The core of the relationship between implied APY and underlying APY is the need to take into account actual market conditions. The prediction of APY direction should be analyzed in combination with the factors that the underlying assets affect the rate of return.
Take the interest-bearing assets on the Ethereum chain as an example. Currently, three types of interest-bearing assets are LP tokens, including wstETH-WETH, rETH-WETH and ankrETH-WETH in Aura Finance. For these 4 types of assets, in addition to token incentives from corresponding projects, the biggest factor affecting short-term returns is still LP commission fee.
Looking at the volume of the three trading pairs may guide us to the direction of yields.
As can be seen from the four charts below, transaction volume increases in May, June, and November in 2022, and January and March in 2023, during which transaction fees increase.
If we can anticipate the core factors affecting the market at that time and make timely judgments on the rise and fall of yields after the event, we may have a better chance to guide the trading strategies of PT, LP and YT in Pendle.
Source: https://stats.gmx.io/
Source: https://dune.com/unionepro/Everthing-Gains-Network
The same is true for GLPS and gDAI trading, but the net yield of GLPS and gDAI should take into account the trader's profit in addition to the fee income generated by the volume of trading. If the overall profit of the trader is large in the short term, the net profit of GLP will be reduced, or even loss.
For projects like APE, you are still staking a token, but unlike tokens like stETH, the staking yield will likely be high early on, then rapidly decreasing as the number of staking tokens increases.
Source: https://dune.com/ponzidope/apecoin-staking-apy
Because PT is negatively correlated with the yield, and YT is positively correlated with the yield, the investment strategy for this kind of token is to observe the number of pledged tokens and the pledge yield. If the pledge yield drops rapidly, PT will rise significantly relative to SY in the short term.
If the investment rate of return is calculated on the basis of U standard, it is hoped that SY will increase while the pledge rate will increase and the pledge rate will decrease, then PT will be a good investment target. On the whole, we can get different investment strategies according to different attributes of the target.
Source: Mint Ventures
3.4 Multi-Chain Deployment
In the V1 release, Pendle was deployed on Ethereum and Avalanche, while working with some projects on both public chains.
For example, in Avalanche, make a deal with BENQI to launch qiAVAX and qiUSDC pools. BENQI DAO deployed his $250,000 USdcs and Avavs to Qiusdcs and qiAVAX pools in Pendle; We also worked with Trader Joe's to launch the xJOE Pool and set up the PENDLE/AVAX pool at Trader Joe's.
In the latest V2 version, Pendle is only deployed on Ethereum and Arbitrum at this stage. The reason why Pendle makes such a choice may be related to the current ecological state of Avalanche:
Avalanche's TVL is less than $1 billion, and the highest TVL in its native DeFi is Benqi, with a lock-up of around $240 million, Arbitrum is currently close to 2.3 billion lock-in volume, the largest TVL project - GMX close to $600 million lock-in volume gap is obvious. Such a view also got a positive response from the community concerned.
Source: https://defillama.com/chain/Avalanche
3.5 Industry space and potential
3.5.1 Classification
While Pendle itself is positioned in the fixed income market, the V2 changes seem to show that the Pendle team has stratified the "on-chain fixed income market" :
LSD as the representative, as a low risk fixed income market. The characteristics of this kind of market are that the underlying asset risk is very low, the rate of return is relatively stable, and the periodicity has little impact on the rate of return.
It is represented by LP token of LSD and LP token of stablecoin, as a low risk fixed income market. This kind of market is characterized by low risk underlying assets, but relatively obvious periodicity, especially when there is high volatility in the market, the return rate may be high in some moments.
Represented by GLP and gDAI, as the medium risk fixed income market. This kind of market is characterized by high returns and high risks. The yield is affected by the derivative traders on the chain and fluctuates violently with the market.
Represented by APE, as a high risk fixed income market. This kind of market is characterized by sharp fluctuations following the underlying, high returns but may fluctuate greatly. With the crazy influx of single project pledge users, the yield may plunge.
3.5.2 Market size
First look at the LSD market
From the TOP 5 public chain projects with the highest TVL ranking and which can be pledged, the average pledge rate at the present stage is about 35%. Public chains, including Ethereum, still have plenty of room to grow.
If it reaches the pledge rate of more than 50% as expected by the market, then the pledge market growth rate of the head public chain is higher. For example, Ethereum, which has the highest market value and the most mature ecology, accounts for about 33% of liquid collateral derivatives. If Ethereum's pledge rate increases to 50% in the next 3 years, about 16.5% of ETH will eventually form derivatives such as stETH. Based on Ethereum's current market value of around $230 billion, LSD could be a market of around $38 billion.
Source: StakingRewards, Mint Ventures, data as of April 11, 2023
Source: https://dune.com/impossiblefinance/liquid-staking-derivatives
Second, let's look at the LSD LP token market
In Ethereum's liquidity pledge circuit, Lido accounts for about 73.4%. About 14 per cent of Lido's liquid collateral derivatives went into the Curve.
Source: https://dune.com/LidoAnalytical/Lido-Finance-Extended
Source: https://dune.com/LidoAnalytical/stETH-deposited-per-protocol
If the market share of Lido will not decline significantly in the future, and the destination of LSD in DEX is mainly Curve, then about $3.9 billion of LSD will be formed into LP and exist in Curve in the future, and the corresponding market value of LP is about $7.8 billion. So the total size of LSD plus LSD LP is close to $46 billion. This will increase further as Ethereum's market cap increases, its pledge rate increases, and more LSDS are added to the DEX.
Demand for LSD and LSD LP tokens is strong in the fixed income market. As of now, TVL has reached a scale of $24 million after the corresponding asset pool in Pendle was brought online.
The third is the LP token market of stablecoin
Although Stablecoins are actively traded, it seems that the market is not keen on stablecoin-based LP tokens. This type of pool has been online for more than 1 year, and the overall liquidity has declined. Pendle's strategy for the new pool also suggests that Stablecoin LP may not be Pendle's focus in the next phase.
The fourth is the medium risk market of GLP and gDAI
The demand of this type of market is relatively clear. Since the establishment of the pool, there have been about 20 million dollars of TVL, compared with the total market value of 530 million dollars of GLP. This is partly because of the incentive given by Pendle, and partly because there is a stronger demand for speculation and risk hedging in the market.
Source: https://defillama.com/protocol/pendle
For both GLP and gDAI, the current PT yield is attractive. Simply buying and holding PT can lock in a yield level at a time of higher yields, which is attractive enough for some conservative investors, and the yield is higher than the long-term holding yield of GLP. The same goes for gDAI.
Source: https://app.pendle.finance/pro/markets
However, GMX and its imitation disk run through business is the only similar derivatives at present. Therefore, the development space of this part of the business is limited by the development of this type of project. In the short term, the market space may be within 1 billion dollars.
Finally, APE and LOOKS are the type of high-risk fixed market
The development of this type of market is not only related to the market value of the token itself, but also to the rate of decline in the return on the pledge. If pledge yields fall too fast, it will be hard for these types of pools to grow.
Source: https://defillama.com/protocol/pendle
However, the strategy for this type of pool may not be the expectation that a single pool can grow to a large market cap, but rather the speed of competition: once a token with a higher market cap and a higher pledge yield is available, a fixed income trading pool with that token should be deployed quickly. Individual pools may end up with only a few million to a few tens of millions of dollars worth of TVL, but because there are a series of similar pools, the combined TVL will be higher.
Regardless of low risk or high risk, there are other strategies with different risks and returns in the market, which can be included in the scope of Pendle in the future.
3.6 Service Data
Pendle currently has a TVL of about $55.32 million. Avalanche has been suspended and there are still some outstanding assets left, with a TVL of $960,000. There was $28.71 million TVL on Ethereum and about $25.65 million TVL on Arbitrum.
Source: https://defillama.com/protocol/pendle
Among the existing 12 pools, there are 7 LSD-related pools, and TVL accounts for more than half of them.
Source: https://app.pendle.finance/pro/pools
Trading volume is currently around $10 million a week and peaked at close to $1.1 million a week.
3.7 Project competition pattern
Swivel Finance, Delv (Element Finance), APwine and Sense Finance are also projects that deeply cultivate the fixed income market based on income tocoinage. The differences between them can be seen from the two simple dimensions of TVL and product line.
3.7.1 TVL
After a bear market in 2022, TVL for a large number of projects plummeted, and the track Pendle is on is no exception. At present, only Pendle's TVL is in the tens of millions level, while Delv's TVL is in the millions level. The TVL of the other three projects has been hovering in the hundreds of thousands or even tens of thousands of dollars.
3.7.2 Product Line
APWine and Delv are not in the right place when it comes to product lines. In the current crypto ecosystem, only LSD supports long-term value capture without counterparty risk.
Swivel Finance and Sense Finance include LSD in the underlying assets is a good strategic move, but you can also try to incorporate LSD's LP tokens or LSD's debit tokens into the ecosystem. Take Lido for example. 15% of stETH is LP in Curve, and nearly 30% of stETH is Aave as collateral.
Taking LSD as a low-risk market can ensure that the project still has a relatively good rate of return during the bear market. Taking "medium-risk" and "high-risk" assets as a more aggressive strategy can also meet the needs of users when the market is hot. Such asset pool distribution is more appropriate. At present, Pendle has the most abundant product lines, and new product lines such as GLP and gDAI have also been recognized by the market, while TVL is growing fast. All things considered, Pendle temporarily takes the lead on the track.
3.8 Analysis of the token Model
3.8.1 Total amount and distribution of tokens
There is no cap on the supply of tokens in PENDLE, and the release is divided into three stages:
First 26 weeks: 1.2 million PENDLE releases per week; Week 27 to 260: Weekly release decreased by 1%; 261 weeks from now: Future annual inflation rate of 2%, used to incentivize users.
Two years after PENDLE launched, the distribution of tokens is as follows:
Among them:
Tokens held by the team: will be unlocked on a quarterly linear basis starting 1 year after the tokens are released, and will be unlocked after 2 years. According to the latest situation, all unlock will be completed in April 2023; Tokens held by investors and advisers: linear unlocking started 3 months after the liquidity mining incentive was activated, and all of them have been released now; Ecological Fund: 50% of the tokens will be unlocked once they are online, and 50% will be unlocked linearly one year later.
3.8.2 Token value capture
In the V1 version, PENDLE is only a utility and governance token, with the primary function of participating in project governance. However, at that time, the Pendle team had noticed the advantages of the Ve model in governance, leaving a window for improving the token mechanism by referring to the Ve model.
In version V2, the Pendle team officially introduced the Ve model to the PENDLE token, giving the PENDLE token value capture capabilities.
The user can choose from a minimum of 1 week to a maximum of 2 years. Like the veCRV, the vePENDLE decreases in value over time.
In terms of value capture, first of all, vePENDLE holders can participate in the distribution of fees and revenue.
vePENDLE holders can vote on which pool to give incentives to and receive a portion of the revenue within that pool: 3% of the proceeds generated from YT will be distributed to vePENDLE holders who vote on the pool. If the PT is not redeemed by the user after maturity, the proceeds generated after maturity will also be distributed to the vePENDLE holders who voted for the pool.
At present, most of the pools on the Ethereum chain are ETH's liquidity pledge derivatives, with TVL of about $24 million. Assuming that the annual rate of return provided by these assets is 5%, vePENDLE holders can be distributed to: 2400*5%*3%= $36,000;
Currently, in the pool on the Arbitrum chain, only GLP and gDAI, TVL is about $20 million. According to the past data of the two projects, assuming that these two projects can provide an annualized rate of return of 15%, vePENDLE holders can be allocated to: 2000*15%*3%= $90,000. In addition, 80% of the transaction fees generated by each pool will be distributed to the vePENDLE holders who vote for the pool.
Since the beginning of this year, Pendle's average daily trading volume has been around $400,000, and the transaction processing fee is 0.1%. If the average daily trading volume remains unchanged and calculated at this ratio, the annual revenue for vePENDLE holders is: 40*365*0.1%*80%= $117,000.
If business doesn't change significantly, vePENDLE generates about $243,000 in total revenue a year. Second, in addition to the fee and income, if the vePENDLE holder is also an LP, the Pendle emission incentive of up to 250 percent can be obtained.
Take sfrxETH pool as an example, the base rate of return of LP for the user is 25.1%, and the maximum rate of return can be 50.3% under the incentive of vePENDLE.
The significant increase in yields has also spurred PENDLE's lock-in size. Currently, 30.2 million Pendles are locked up, nearly one-fifth of the total number of pendles in circulation.
3.8.3 Core demand side of tokens
After adopting the vePENDLE model, the demand side for PENDLE becomes more diversified:
Liquidity Provider (LP) :
For LP, the adoption of vePENDLE will significantly increase the rate of return. Some investors may choose to buy PENDLE and lock up their positions. At the same time, vePENDLE can also obtain the income of the pool and part of the commission fee.
Long-term investors in PENDLE tokens:
Because of the fees and revenue sharing, PENDLE has become attractive to investors looking for long-term cash flow, who may want to include PENDLE tokens in their portfolio.
But given that vePENDLE is only expected to make about $200,000 a year, that's a pittance compared to a locked-in PENDLE, so PENDLE owners are more likely to care about future growth.
Since the release of version V2, PENDLE's number of holders has grown by nearly 50%, to 3,415 addresses.
In terms of concentration of holdings, the TOP 5 currently hold about 44 percent of PENDLE tokens. Among them, the first address of the amount of coins is the address of the lock-up warehouse PENDLE. Some investors in private equity rounds, such as Crypto.com, are still holding tokens. Currently it holds about 3.4 percent of PENDLE tokens, according to Bubblemaps.
3.8.4 Summary of Token Model
With the V2 update, PENDLE's application scenarios and value capture have been significantly improved. If we hope to attract long-term stable low-risk investors, how to enrich the varieties of underlying assets and make TVL bigger is very key.
3.9 Risk Analysis
Contract risk:
There have been a number of recent hacks in which hundreds of millions of dollars have been stolen, and the types of projects stolen are not limited to decentralized exchanges and lending agreements. If such an event occurs, it will have a significant impact on the normal operation of the project and the capture of token value. This risk is not only related to Pendle itself. As the underlying assets of Pendle come from other projects, if contract risks occur in other projects, Pendle will also be involved, leading to the contraction of its business and operation.
Strategic risks:
Choosing the underlying assets is critical. If you do not choose the assets and the public chain that the assets belong to, you may be left out by competitors in the next stage of competition. In the V1 version, deploying in Avalanche is a strategic mistake. The Avalanche service increases briefly and then decreases continuously. Deploying Avalanche in V1 failed because the team didn't have a clear idea of the underlying assets to choose from and didn't anticipate the rigor of public chain competition.
Market risk:
The prices of some underlying assets, such as GLPS, are not anchored in dollars or tokens, are relatively floating, and are not easily hedged. This is not friendly to U-investors. If the market drops sharply during the operation of the project, leading to a decline in the price of GLPS denominated in dollars, the investors in YT, in particular, may suffer a large loss, which may drive users away to other relatively safe projects.
4. Preliminary value assessment
4.1 Core Issues
Where is the project in the operating cycle? Is it the maturity stage or the early and middle stages of development?
After about two years of development, the project team's ability to select underlying assets has been improved. By learning other excellent AMM models, the user's trading experience has been improved and the cost has been reduced. Compared with other projects on the same track, the product is in a period of rapid growth. However, the revenue tokenization, fixed income circuit, is still in the early stages of DeFi.
Does the project have a solid competitive advantage? Where does this competitive advantage come from?
Part of DEX's core strength comes from trading models and asset classes. The current AMM model mechanism used by Pendle has certain advantages. In the choice of asset class, LSD is taken as the basic order, which ensures that the project will have relatively stable income in the bear market and can retain some investors. The Pendle team also needs to further improve its model innovation capabilities and the ability to identify underlying assets in order to stay ahead of the competition in the revenue tokenization race.
Is the long-term investment logic of the project clear? Is it in line with industry trends?
The yield of PT is close to the annual yield of low-risk arbitrageurs, and YT can satisfy the game of high-risk investors on the market. At present, the choice of "low-medium-high" asset class is appropriate, which is relatively close to the composition of investors in the current market.
What are the main operational variables of the project? Is it easy to quantify and measure?
The main variables remain the optimization of the AMM model and the choice of asset class. Both of these factors can be observed through trading and product popularity.
How is the project managed and governed? How good is the DAO?
The project is still managed by the team and will be gradually transferred to the DAO in the future. Judging by the level of discussion in the discord group, people involved in the project have a good understanding of the product. Of concern going forward is the level of management of DAOs.
4.2 Valuation level
As the major projects in the current track have not issued all coins, the items that issue coins do not have the capability of value capture for the time being, so the "market value/lock-in quantity" is taken as the reference standard here. According to the data, Pendle's current valuation is relatively cheap compared to the other two projects that have issued coins.
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