HOW TO PENDLE

PENDLE INTRODUCTION

The first observation is that yields fluctuate like token prices, we can't say what a yield will be in a month or more. Pendle is a platform where you can exchange the yield of an asset, it allows different yield management strategies.

Pendle’s Assets:

  • SY (Standardized Yield Token): Is a wrapped* version of the underlying token that is compatible with the Pendle AMM. It is the same as other wrapped assets such as WETH or stETH.

  • PT (Principal Token): Is the version that holds the underlying token without the yield. Basically, 1 PT-ETH is worth less than 1 ETH during the lock period, it will recover its full value at the end of the maturity. YT (Yield Token): Is the version that only holds the yield of the underlying token.

  • 1 YT-ETH price represents the future return of 1 ETH for the epoch. It may fluctuate depending on the average yield of the market/protocol.

Value:

These tokens have different values on the timeline and it is important to understand how to calculate and predict their future value. For the example we take the following situation: Bob locks 1 ETH for a 1-year maturity with a 4% yield.

  • SY-ETH = 1 PT-ETH + 1 YT-ETH = 1 ETH - All represent the value of the underlying asset.

  • 1 PT-ETH = 1 ETH - YT-ETH = 1 ETH - 4% - It represents the underlying asset without the return that will be generated during the period.

  • 1 YT-ETH = 1 ETH - PT-ETH = 0.04 ETH - It represents how much the market value is for 1 year of yield on 1 ETH

Yields:

It is important to understand how the different types of APY are defined and how they differ:

  • Underlying APY: The average APY suggested by the market.

  • Implied APY: It is the average future APY that the Pendle AMM is pricing, i.e. if 1 YT-stETH for a 1-year lock is worth 0.04e, it means that the market is pricing the yield at an average of 4% APY.

  • Average Future APY: It is the future yield of the principal token.

TL;DR:

  • If Implied APY < Average APY = buy as much YT as you can

  • If implied APY > average APY = take advantage of the fixed rate and buy PT.

If you don't want to complicate the mechanism, think of YT as a proxy for how APY will move. When you buy YT, you are betting on an increase in the underlying APY. If you think APY will go down and you want to enjoy a higher fixed APY, you buy PT.