Citizen DeFi Play: The Pendle Trade

Pendle has blazed a trail as one of DeFi’s top players this cycle. Its interest rate marketplaces match crypto users looking to lock returns with others seeking to purchase pure yield exposure on a variety of tokens.

Today, we demystify this game-changing crypto app in hopes of making yield swaps accessible to all 👇

The Pendle Basics

Anyone with money on Ethereum, Arbitrum, Base, BNB, Mantle, or Optimism can interact with Pendle.

To get started, liquidity providers add their tokens to Pendle’s on-demand trading pools. While only certain tokens can be deposited, Pendle offers markets for many of the most popular yield-bearing assets, and with the aid of Pendle’s “Zap” functionality, users can deposit into pools using virtually any token.

As proof of their deposit, liquidity providers receive LP tokens, which confer ownership over their share of the liquidity pool and can be redeemed at any time for a share of the assets backing the pool (and any accumulated swap fees).

Once tokens are deposited into a Pendle pool, they become standardized yield (SY) tokens, unifying the functionalities across all Pendle deposits regardless of their original token type. From here, liquidity deposits can be further broken down into two distinct types of Pendle-native assets: principal tokens (PTs) and yield tokens (YTs).

Principal tokens represent 1:1 claims on a given crypto asset. They can be purchased for less than the market price of the original token but cannot be converted into the underlying token until the specified maturity date for that individual market. PT holders “fix” their payout upon purchase, as this type of token grants the right to receive a known quantity of crypto tokens at a future date.

Conversely, yield tokens grant their holder with all returns generated by a crypto asset – including any airdrop rewards! YT holders speculate on the “variable” side of the equation and make fixed payments today in exchange for the rights to whatever unknown rewards can be produced by a crypto token until pool maturity.

Advanced Applications

Any token that produces yield or airdrops is theoretically compatible with Pendle, and users can trade yields on a wide range of assets, from receipts in Aerodrome’s VIRTUAL/cbBTC liquidity pool to ether.fi’s liquidBeraBTC Berachain pre-deposits.

The PENDLE token is emitted as an added deposit incentive for liquidity providers, and holders who lock for vePENDLE are entitled to share in protocol fees and receive boosted rewards on deposited liquidity.

Third-party applications, such as Penpie, take advantage of these reward dynamics by pooling together the liquidity deposits and PENDLE of numerous users to gain the maximum possible rewards rate.

Additionally, Pendle users can borrow against select types of PTs through certain high-risk lending markets, like Morpho and Dolomite.