Why Pendle
Pendle is a yield generation platform allowing users to separate the principle of an asset (PT) with its interest bearing component (YT). Let's dive in.
- PT (Principal Token): Represents the original asset. Holding the PT means you own the underlying asset at maturity.
- YT (Yield Token): Represents the yield of the asset over time. Buying the YT means you're speculating on all yield accrued over a given time period.
How It Works
- If you believe the yield is undervalued (too cheap), you can buy the YT and lock in a future yield at the current price, betting that the actual yield will be higher.
- If you believe the yield is overvalued (too expensive), you avoid buying or sell the YT, as you expect the future yield won't justify the current cost.
Airdrops and Leveraging
- The introduction of restaking protocols (like Etherfi, Renzo, Kelp etc.) built on Eigenlayer has enhanced Pendle's use case. YTs are valued less than the principal, (around 3-10% currently) allowing for leveraged positions.
- For instance, you might buy the yield from 20 Ether with just 1 Ether. This would allow you to lever the amount of yield (and points) you accrue from Eigenlater and the restaking protocol of your choice.
Balancing Mechanisms
- The PT token offers a balance by providing a more predictable return. When you sell the yield of your asset (via YT), you still hold the PT, which will have a fixed return based on the yield sale. For example, selling 3 months of yield from 30 ETH for $6,500 means the PT holder will get that $6,500 after three months, foregoing the variable staking returns for a guaranteed payout. Not bad at roughly a 23% APY
APY Calculation for PT Token Holding
Given:
- Fixed Yield in 3 Months: $6500
- Value of Underlying Position: $110,000
- Time Period: 3 Months
The Annual Percentage Yield (APY) can be calculated using the formula:
APY = (Fixed Yield / Underlying PT Value) * (12 / # Months Yield) * 100
Substituting the given values:
APY = ($6500 / $110000) * (12 / 3) * 100 APY = 23.64%
This generates an annualized return of 23.64% based on a three-month fixed yield period. This number is based on predicted average in March 2024, before the final numbers can be determined.
PT-eETH Outlook May 2024
Per the data pulled (via DefiLLama API) as of 6 May 2024, the maximum APY is 48%.
APY Calculation for YT Token Holding
(Using YT-eETH as an example)
Given:
- Cost of YT-eETH Token: $2600
- Airdrop Values: 1500 $ETHFI, ~ $4 per $ETHFI, $5000 of $EIGEN, and 3.5% native ETH yield
- Purchase Date: January 10th
- Expiration Date: June 29th
The value received from airdrops and yield:
Total $ETHFI Value = 1500 $ETHFI * $4/$ETHFI = $6000 Total Value from Airdrops = $6000 (from $ETHFI) + $5000 (from $EIGEN) = $11000
Including the 3.5% native ETH yield generated from January 10th through June 29th, the adjusted APY calculation considering the specific time frame and airdrop values:
APY = ((Total Value from Airdrops + Actual Native ETH Yield / Cost of YT-eETH Token) * (12 / # Months Until Expiration)) * 100 APY = 963.5%
This calculation suggests an annualized return of 963.5%, including the airdrop value and native restaking yield.
Key Points
- YT Tokens: Ideal for speculative investments on the yield of an asset. You're betting on the future yield being higher than what's currently priced in. (Long Live Airdrop Farming)
- PT Tokens: Offer a stable, predictable return. You know exactly how much you'll get after a certain period, making it a safer but potentially less lucrative option.
This innovative approach allows investors to separate the risk and reward profiles of yield generation from asset ownership, enabling a more precise strategy alignment with their risk tolerance and market predictions.