1. Key points of the research report

1.1 Investment Logic and Narrative

Cryptocurrency trading can be lucrative, but the actual returns realized by investors are uncertain because future yields cannot be accurately predicted due to the numerous factors in the crypto space that cause the yield market to fluctuate.

Various yield agreements enable investors to profit from future yields, but many established protocols have flaws that can significantly reduce yields. Pendle uses an improved approach to income trading to optimize investor returns. Pendle’s vision to become the “Uniswap of the interest rate market.”

Investment highlights of the project:

• The market space is huge. Interest rate swaps are a derivatives market dominated by institutions. Interest rate derivatives account for 80% of the market share of the derivatives market, of which interest rate swaps account for 80%. The transaction volume is extremely large, but this game on the chain has just been introduced by Pendle, and it is still in a very early stage.
• Pendle’s overall data performance is outstanding, and its transaction volume, TVL, and currency price have all reached record highs.
• There is an inevitable need for institutions to enter the Staking track. Whether they are banks, hedge funds, Mutual Funds, ETF issuers or ETF brokers, they all have the need to hedge interest rate risks.
• The v3 version of Pendle will introduce the traditional interest rate swap track to the chain, which will be oriented to the trillion-level market. We are looking forward to Pendle’s performance.
• Pendle currently relies on the development of the LRT track. The overall LRT track still has room for growth at multiple levels. Although Pendle relies on LRT for most of its obligations, it has the opportunity to gradually reduce the proportion of LRT in the future because it is essentially for the entire market. The interest rate swap track requires the entry of institutions to help diversify their assets.

1.2 Valuation Description

In TradeFi, interest rate derivatives are the positions that account for the majority of the market in the derivatives market. Moreover, with the development of TradeFi, the overall size of the derivatives market is gradually increasing. As of June 2023, the overall derivatives market position has reached 714.7 trillion U.S. dollars, of which the open position of interest rate derivatives has reached 573.7 trillion US dollars, accounting for 80.2% of the share.

On-chain interest rates are still in the very early stages of derivatives, and as staking enters TradeFi, the demand for this part will explode.

At present, the price of Pendle currency has exceeded the previous high, and the growth space may no longer be restricted. Its main underlying supported token is LRT. If the current overall LRT market value is US$5.7 billion, the TVL flowing into Pendle is US$2.37 billion, which includes the two major tokens EETH (ether.fi) and WETH.

If the overall TVL of the LRT project increases five times, then Pendle’s TVL will also have room to increase five times. With the introduction of the traditional interest rate market in 2024, the entry of TradeFi will create demand for Pendle to smooth the yield curve and hedge risks, then the project’s upside will be higher.

1.3 Main risks

Regarding the risks of smart contracts, although Pendle has hired multiple auditing agencies to audit the code, there may still be loopholes that could lead to a total loss of funds.

The ETH spot ETF failed to pass, which will have a greater impact on the overall pledged future Tradefi market.

When Pendle faces extreme market conditions, some unknown risks may arise.

Pendle currently relies heavily on LRT, and if it cannot effectively expand its business scope, it may form a single risk exposure.

Due to the excessive types of tokens in this protocol, there may be a serious lack of liquidity in long-tail assets, causing liquidity accumulation problems. This will not be able to meet the rich arbitrage needs of some institutions, but this is a long-term problem.

2. Basic situation of the project

2.1 Business scope

Pendle is a blockchain project focused on yield tokenization, allowing users to lock in the future yield of their crypto assets and obtain returns in advance through its platform. This innovative approach not only provides cryptocurrency holders with a new source of income, but also introduces more liquidity and flexibility into the interest rate market. Pendle implements this function through smart contract technology, allowing users to participate in the market in a decentralized and secure manner.

2.2 Founding Team

Pendle was founded in 2021, with team members based in Singapore and Vietnam. Currently, there are about 20 people registered on Linkedin.

TN Lee(X: @tn_pendle): Co-Founder, he was a founding team member and business leader at Kyber Network, and then went to a mining company RockMiner, which operates about 5 mines. Dana Labs was established in 2019, mainly to make FPGA customized semiconductors.

Vu Nguyen(X: @gabavineb): Co-Founder, who once served as CTO of Digix DAO and specializes in RWA projects for tokenization of physical assets. He co-founded Pendle with TN Lee.

Long Vuong Hoang(X: @unclegrandpa925): Engineering Supervisor, obtained a bachelor’s degree in computer science from the National University of Singapore, joined the National University of Singapore as a teaching assistant in January 2020, joined Jump Trading as a software engineering intern in May 2021, joined in January 2021 Pendle worked as a smart contract engineer and was promoted to engineering director in December 2022.

Ken Chia(X: @imkenchia): Director of Institutional Relations, received a bachelor’s degree from Monash University. He once worked as an investment banking intern at CIMB, Malaysia’s second largest bank, and then worked as an asset planning expert in private investment banking at JPMorgan Chase. He entered Web3 in 2018. Served as COO of an exchange and joined Pendle in April 2023 as institutional director, responsible for institutional markets - proprietary trading companies, cryptocurrency funds, DAO/protocol treasury, and family offices.

2.3 Investment background

Major investors in the project include Mechanism capital, HashKey, Bixin Ventures, Binance Labs, etc.

Currently, investors that can be found on the chain include Spartan, Arthur Hayes, Hashkey, Alliance DAO, FalconX, etc.

2.4 Project development route and history

According to a tweet posted by co-founder Vu Nguyen, Pendle’s V3 version is planned to be launched in 2024, which includes interest rate derivatives of traditional finance, which will arouse great interest from tradeFi. Specific implementation details are currently unknown.

3. Products and business conditions

3.1 Official website data (as of February 2024)

3.2 Social media data

3.3 Social data

4. Project analysis

4.1 Code

The product’s code has been audited by multiple audit agencies.

Its code development for the project still maintains normal levels, and the developers remain stable.

4.2 Products

Pendle is a permissionless revenue trading protocol where users can execute various revenue management strategies. The working principle of Pendle is mainly divided into three parts: revenue tokenization, Pendle AMM and VePendle, as follows:

Revenue tokenization

Pendle innovatively tokenizes income assets into SY tokens, which are tokenized according to the ERC-5115: SY Token standard, such as packaging stETH into SY-stETH, and then SY is divided into its principal and income components. They are PT (Principal Token, principal token) and YT (Yield Token, income token) respectively.

• PT tokens will not earn any yield, but can be redeemed for the underlying asset at a 1:1 ratio upon maturity.
• PTs are similar to PO (principal only) securities or zero-coupon bonds in TradFi.
• Yield tokens represent the asset’s yield as of maturity.
• YT is similar to an IO (Interest Only) security in TradFi.

Pendle AMM

Both PT and YT can be traded through Pendle’s AMM, which is Pendle’s core engine. On Layer 2, the oracle used by the project is Redstone. Pendle’s AMM enables efficient DeFi yield trading: traders who want to earn fixed returns buy PT, while traders who want to make long returns buy YT. For purchasing the yield token YT over a period of time, the process is as follows:

The process for selling YT tokens is as follows:

SY exists as an intermediary asset for the SWAP pool, so LP providers need to provide YT-SY / PT-SY token pairs. SY represents a standardized yield token that can cover a wider range of asset classes. This standardization increases the appeal to investors as it offers more flexibility and the possibility to access more assets, potentially attracting more participants and providing higher liquidity, so opt for this A way to use SY as an intermediary asset to provide an LP pool.

Liquidity providers can benefit from the following aspects:

• Swap fees generated by mining pools
• PENDLE incentives
• Protocol incentives issued by underlying assets (such as $COMP, $AAVE)

In Pendle, the separation of the yield part (YT) and the principal part (PT) of the asset allows investors to trade and manage the two components independently. This separation mechanism brings some unique ways of pricing and value changes:

• Separation of future earnings: When you buy PT, you are actually giving up any earnings that may have been generated during the holding period, because this part of the earnings has been tokenized through YT and may be purchased by others. As a result, the price of PT will reflect this lack of income, and it is often purchased at a discount to the full value of the underlying asset. But we have agreed on a time, that is, YT can only reflect the income within a period of time.
• Time value and risk considerations: Investors purchase discounted PT based on the expectation that they are buying at a lower price now, expecting that at some point in the future, especially at maturity, its value will rise and be close to or equal to The value of the underlying asset. This expectation takes into account the impact of time value and the risk of holding PT until redemption.

Suppose there is a simplified example to illustrate that PT (Principal Token) will eventually rise back to the price of its corresponding underlying asset (ST).

condition:

Underlying Asset (ST): A bond with a current market value of $100, an annualized interest rate of 5%, and one year left until maturity.

PT initial price: Assume that PT’s initial trading price is $95 because of the separation of the future year’s earnings (i.e., the YT portion).

process:

Separation of income: On the Pendle platform, the holders of this bond decided to separate their income and principal, creating PT and YT. Since YT represents the right to future earnings, the price of PT will be less than the full price of the original bond (ST), reflecting the missing value of future earnings.

Time passes: As time passes, a bond approaches its maturity date. Because YT already represents all expected returns over the period, the value of PT actually represents the return of principal that can be obtained from the bond at maturity.

Value recovery: As the maturity date approaches, the market value of PT will gradually increase because market participants expect that at maturity, PT holders will be able to redeem the value of the underlying asset (i.e., the principal amount of the bond). Back to PT. If the face value of the bond is $100, then in theory the price of PT should gradually rise back to $100.

result:

At maturity, PT holders can use PT to redeem the bond principal equivalent to US$100. So, although PT initially trades at a discount (e.g. $95), as time passes and expiration approaches, its value will gradually increase, eventually rising back to the full value of the underlying asset, which is $100.

Among counterparties, everyone is betting or hedging on future yields. Selling YT means smoothing the future yield curve, cashing out early, or being bearish on future yields, while buying YT means being bullish on the future. rate of return. Buying PT means you can buy it at a certain discount and believe that the yield during this period is bearish.

VePendle

Introducing TradeFi’s interest rate derivatives market onto the chain and making it available to everyone, VePendle is Pendle’s governance system:

• The longer the PENDLE is locked, the greater the corresponding VePendle value.
• VePendle values ​​decay over time, but your lock duration can be extended to offset the decay.
• The more VePendles you own, the greater your voting power. After voting for a pool, you are entitled to 80% of the swap fees charged by the pool.
• VePendle holders also receive a portion of the protocol revenue, which comes from swap fees and YT fees.

4.3 Ecological development and data

At present, due to the existence of ST tokens, a series of projects’ ecology includes:

Penpie: Penpie is a DEFI platform launched by MagPie, which provides users of the Pendle platform with income and vePendle incentive services.

Equilibria: Convert idle PENDLE to ePENDLE and earn income by staking the ePENDLE vault.

The chart above tracks the PNP and EQB locks on Penpie and Equilibria and their ownership of the Pendle governance token (vePendle). This shows the level of control vlPNP and vlEQB holders have over the Pendle protocol. vlPNP and vlEQB holders direct the distribution of Pendle’s vePendle on governance proposals and measurement weight voting.

Penpie occupies approximately 12 million vePendles for Pendle, while Equilibria occupies approximately 7.7 million vePendles for Pendle. There are currently 32.7 million vePendles in total, so Penpie occupies approximately 36.7% of Pendle’s governance rights, and Equilibria approximately occupies 23.5% of Pendle’s governance rights ( Data as of March 2024).

The number of transactions and transaction volume on the Pendle protocol have also shown a very positive and gradual increase, which means that with the development of DEFI projects such as LSD, LSDFI, LRT, Restaking, etc., the market demand for interest rate derivatives has gradually increased. And as of March 7, 2024, its cumulative transaction volume has also exceeded US$4 billion, and its trend is gradually increasing.

In terms of TVL, the project has its own AMM pool that supports the exchange of various SY, PT, and YT tokens. At present, the currency standard and U standard are also gradually rising.

With the current development of Staking, people expect that the demand for the project will gradually increase, especially the possibility of institutions entering the market. Many institutions have begun to mention the issue of income from staking Ethereum. They generally believe that after the adoption of spot ETF, TradeFi will be able to obtain active income on the chain by staking ETH, and at the same time, it can also charge depositors’ custody fees.

Then there will be a huge demand for interest rate swap products such as Pendle, and due to its complete leading position in the interest rate track, it will be a natural process to introduce traditional interest rates to the chain in the future, then institutions will be able to Conduct interest rate derivatives operations, which will have a potential trading volume of hundreds of billions.

The current liquidity of Pendle’s pool is also gradually increasing.

Among all the pools, the main projects are LRT track projects. With the currency issuance of the LRT track project and the continued popularity of the Staking track in the future, this track will become a hot focus in the industry, and its growth rate will also be will be higher. The TVL of the major LRT tracks is currently in the growth stage, which has a very direct promotion effect on Pnedle, whose main pool is LRT.

4.4 Track size and potential

Interest rate derivatives (IDR) are among the most heavily traded derivatives. A derivative is a security whose price depends on or is derived from one or more underlying assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets includeStocks, bonds, commodities, currencies, interest rates and market indices。

In TradeFi, interest rate derivatives are the positions that account for the majority of the market in the derivatives market. Moreover, with the development of TradeFi, the overall size of the derivatives market is gradually increasing. As of June 2023, the overall derivatives market position has reached 714.7 trillion U.S. dollars, of which the open position of interest rate derivatives has reached 573.7 trillion US dollars, accounting for 80.2% of the share.

Derivatives based on interest rates are divided into three major subcategories, namely interest rate swaps (Swaps), FRA (Forward Rate Agreements), Options (options), and other instruments. In traditional IDR, interest rate SWAPS occupies approximately 81.2% market share.

In TradeFi, interest rate swaps are mainly a trading market dominated by institutions, and their trading volume is also extremely large.An interest rate swap is a financial derivative that allows two parties to exchange their respective interest payment obligations. This exchange typically involves a fixed-rate and floating-rate swap. Interest rate swaps are widely used in financial markets, and the main participants include:

• Banks and financial institutions: Banks use interest rate swaps to manage interest rate risk, adjust the interest rate structure of their balance sheets, and optimize capital use efficiency. Financial institutions also use them for arbitrage and hedging risks.
• Businesses: Businesses use interest rate swaps to hedge against changes in borrowing costs. For example, if a business expects interest rates to rise in the future, it might lock in its interest expense by entering into a swap contract that pays a fixed rate and receives a floating rate.
• Investors and hedge funds: They use interest rate swaps as an investment vehicle or risk management strategy to seek profits by predicting changes in interest rates, or to hedge interest rate risk in other investments.
• Governments and public agencies: These entities may use interest rate swaps to manage the costs and risks of their debt portfolios. Through swaps, they are able to more efficiently match funding needs and debt servicing costs while reducing the impact of interest rate changes.
• Central Bank: Although not a routine operation, under certain circumstances central banks may participate in the interest rate swap market to influence short-term interest rates as part of their monetary policy.

In the traditional financial world, interest rate derivatives are the largest derivative transaction category, and interest rate swaps account for 82% of the overall interest rate derivatives market share. However, in the blockchain world, interest rate swaps are still in a very early stage, and Pendle is the leader. Project, dedicated to on-chain interest rate swaps on Ethereum.

With the entry of traditional financial institutions, especially Grayscale, JPMorgan Chase, and BlackRock, they are paying attention to the Ethereum pledge market, which can provide TradeFi with a wide range of arbitrage opportunities, which may be important for Pendle’s investment in the current context. significance.

Currencies and market capitalizations that currently support revenue tokenization:

• Ethereum liquid pledge tokens (such as wstETH): Currently about 26% of ETH is in a pledged state, so all these tokens can be tokenized. The current overall TVL of LSD is US$59.7 billion.
• Tokens representing positions in lending protocols (such as Compound or Aave): For example, DAI pledged in Compound is called cDAI, which also has its own annualized rate of return. The stable market space for this part of the income is also very extensive. Currently, The tvl of the lending business is approximately US$34.3 billion.
• LP tokens (such as GMX’s GLP): Whether it is GMX or GLP, it has its own interest rate as long as it is mortgaged. Almost most DEFI projects have income from LP tokens.
• Liquidity re-mortgage tokens (LRT) and Restaking tokens: As of now, this part of EigenLayer and Renzo Finance has a total TVL of 17 billion US dollars.

So overall, the ceiling of this track is extremely high, and with the gradual entry of traditional institutions, the demand for Pendle will gradually increase.

Possible use cases for institutional use include:

• Fixed income, such as earning fixed income on stETH;
• Long yield, such as betting on stETH yield rising by buying more yield;
• Earn more without additional risk, such as using your stETH to provide liquidity;

For example, in the restaking market of EigenLayer, as the number of depositors of EigenLayer gradually increases, the future rate of return is likely to be downward. Then when the current rate of return is high, you can choose to sell YT in advance when the APY is high. Cash in on your own returns. In the eyes of institutions, they can also lock in stETH’s pledge income to hedge against the decline in yields caused by the decline in activity on the chain in the future.

5. Tokens

5.1 Total volume and circulation

As of March 7, 2024, according to Coingecko statistics, the current total number of tokens is 258,446,028, and the number of tokens currently in circulation is 96,950,723. The current market cap is $298 million and the FDV is $790 million. Liquidity incentives account for 49.3% of the overall tokens, with the team currently accounting for 17.7% and investors accounting for 12.1%.

The liquidity incentive is expected to last until the end of 2030, with officials assuming annual inflation of 2%, declining by 1.1% each week until April 2026. The release chart of this token is shown in the figure above. We estimate that by the deadline of approximately May 1, 2025, approximately 270 million of it will be in circulation. Overall, there will be little growth and no impact on the token price in the bull market. .

5.2 Token Economics

Pendle’s token is mainly used for governance custody, which is called vePendle. By utilizing vePENDLE, PENDLE holders can obtain a series of features that increase the utility of the token.

The value of VePendle is directly proportional to the staked amount and duration of Pendle. The vePENDLE value will decay over time. vePENDLE holders vote and direct reward streams to different pools, effectively incentivizing liquidity in the pools they voted for.

Pendle charges a 3% fee on all revenue generated by YT. Currently, the fee is 100% distributed to vePENDLE holders, while the protocol does not collect any revenue. In addition to this, vePENDLE voters are entitled to receive 80% of interest rate swap fees from the voting pool, which constitutesVoter APY. The picture above shows the latest voting situation. The crvUSD pool occupies approximately 44% of the voting rights concentrated in this pool. As of March 7, 2024, a total of 49.52 million vePendle is currently locked on Pendle. As a virtual token of voting rights and rights, there are 32.76 million vePendle, which is locked for an average of 421 days.

5.3 Market performance and window period forecast

Pendle’s current main liquidity pool is LRT, and the analysis is mainly based on the LRT project reference.

The above are LRT tokens. LRT relies on Restaking and LSD tokens. Its market space, Restaking, is currently US$11 billion, while LSD is currently US$55.1 billion. These are accompanied by the price of ETH, the development of the LSD track, and staking. Gradually moving towards mainstream financial institutions, the market space becomes wider.

So under the current situation, the LRT token has a market space of 66 billion US dollars. For Pendle, LRT has such a large market growth space. In addition, it also accepts tokens such as Compound that can generate yield income, and The off-chain interest rate swap product introduced in the future, namely Pendle v3, will be launched this year.

Judging from the current currency price increase, its currency price growth is also in line with the development status of the Staking track. At present, the currency price has reached a record high, but its market value is only 300 million U.S. dollars (coin price 3.11), and its full circulation is about 800 million U.S. dollars. In May 2025, due to problems with the release mechanism, FDV can actually only count as 3 billion, so we think there could be significant upside potential for the token.

5.4 Earnings Expectation Assessment

The price of Pendle currency has exceeded the previous high, and the growth space may no longer be limited. At present, its main underlying supported token is LRT. If the current overall LRT market value is US$5.7 billion, the TVL flowing into Pendle is US$2.37 billion, including the two major tokens EETH (ether.fi) and WETH.

If the overall TVL of the LRT project increases five times, then Pendle’s TVL will also have room to increase five times. With the introduction of the traditional interest rate market in 2024, the entry of TradeFi will create demand for Pendle to smooth the yield curve and hedge risks, then the project’s The upside will be higher.

6. Value assessment

The project is in a mature stage, but the team is still improving its economic model and enhancing liquidity, exploring the possibility of introducing interest rate swaps in traditional finance. We believe that it is expected to become the Uniswap of the interest rate derivatives track, and the space in this market will It is much larger than the spot market because most institutions participate and its trading volume is very large.

Its competitive advantage is that it is the leader in the on-chain interest rate derivatives track, and it also has its own ecology. It currently has an absolute monopoly in this track, and the overall track is also in a very early stage.

In the medium to long term, not only the spot market on the chain will flourish, but the staking and re-staking tracks will also develop rapidly. As institutions pay attention to TradeFi, the on-chain derivatives market will also develop rapidly, and pendle is currently unique. choose.

7. Summary

Pendle is a blockchain project focused on yield tokenization, which allows users to lock in the future yield of their crypto assets and receive returns in advance. This innovative approach not only provides cryptocurrency holders with a new source of income, but also introduces more liquidity and flexibility into the interest rate market. Pendle implements this function through smart contract technology, allowing users to participate in the market in a decentralized and secure manner.

Pendle’s investment highlights include:

• The market space is huge. Interest rate swaps are the main derivatives market for institutions. Interest rate derivatives account for 80% of the market share of the derivatives market, of which interest rate swaps account for 80%. The transaction volume is extremely large, but in This on-chain track has just been introduced by pendle, and it is still in a very early stage.
• Pendle’s overall data performance is outstanding, and its transaction volume, TVL, and currency price have all reached record highs.
• The trend of traditional institutions entering Staking, whether it is banks, hedge funds, Mutual Funds, ETF issuers or ETF brokers, all have the need to hedge interest rate risks.
• The V3 version will introduce the traditional interest rate swap track to the chain, which will be oriented to the trillion-level market. We are looking forward to the performance of pendle.

Although Pendle currently relies on the development of the LRT track, there is still the possibility of multiple growth in the LRT track alone. In addition, Pendle has the opportunity to gradually reduce the proportion of LRT in the future, because it is essentially an interest rate swap track for the entire market, which requires the entry of institutions to help diversify its assets, which also means that there is a gap between Pendle and institutions Strongly dependent mutual needs are very valuable investment targets, and investors are advised to pay close attention to them.

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