Pendle is becoming a major draw in DeFi amid frenzied yield derivatives trading among crypto whales; investors with millions in cryptocurrencies.
TN Lee, co-founder of the DeFi yield derivatives protocol, said its $2.5 billion worth of Principal Tokens, or PTs, now account for 5% of all collateral in DeFi, a 52% growth in the last four months.
Major recovery
Onchain data from DefiLlama shows Pendle has crossed $5 billion in investor assets, a major recovery from the slump below $2 billion in October.
Pendle lets users trade future yield rather than simply holding a yield-generating token like staked Ether and waiting for passive income.
Traders can deposit tokens into Pendle, and the protocol splits the user’s deposits into two tokens: PT and a Yield Token, or YT.
The PT represents the user’s deposit, while the YT represents the future interest that can be earned on the deposit. Both tokens can be traded separately.
Yield chasers
Pendle has attracted DeFi yield chasers because it allows them to slice yield into separate, tradeable instruments.
By separating the principal from future interest via PTs and YTs, users can speculate on interest rates, hedge risk, or offload yield exposure.
That has created a fixed-income DeFi market where users build yield curves out of protocols like DeFi lender Aave and staking giant Lido.
While it’s mostly a whale’s game, Togbe said smaller farmers with large risk appetites still participate.
“As the market gets more efficient, then the YT side of the trade will be better for smaller farmers,” Togbe said.
Togbe said they expected smaller players to be able to tap into better returns if PT collateral grows in DeFi.
The growth will enable them to use capital tranches that previously provided lower yields by way of looping ― a strategy that uses recursive borrowing to magnify yield.
“Right now, they are more attractive as double-digit yields, but if you can get high yields by looping, like how it’s available on Aave with USDCe, then even lower yield PTs can turn into high yield strategies,” Togbe said.
Major risks
To be sure, Kazmierczak warned that the growth comes attached with risks such as liquidity mismatches and cascading failures, especially if market stresses cause yields to unwind quickly.
An oracle is a feature that provides information to smart contracts from offchain sources.
In July, Rho Markets suffered a so-called oracle exploit where the attacker manipulated the oracle to drain $7.5 million in Ether from the DeFi protocol.
