Pendle Finance’s Surge: Deep Dive Into The Golden DeFi Protocol

In the vast landscape of Decentralized Finance (DeFi), Pendle Finance has stood out as a golden protocol, glittering with innovation and rapid growth. From its humble beginnings in 2020, Pendle has transformed into a powerhouse, capturing the DeFi community’s attention with its unique approach to yield tokenization and strategic integrations. In this blog, we will uncover the secrets behind Pendle Finance’s meteoric rise and explore the intricacies of its technical and market mechanisms.

Founded by TN Lee and Vu Nguyen, Pendle Finance entered the DeFi arena in 2020, a time when the sector was burgeoning with potential. Despite initial struggles, the founders’ vision of a protocol that could tokenize future yield soon started to take shape. By 2024, Pendle has not only found its footing but has also surged ahead, amassing over ~ $6.5 billion in TVL. This remarkable growth is a testament to the team’s innovative spirit and strategic foresight​​.

Unpacking the Technical Marvel: Tokenization Framework

At the heart of Pendle’s innovation is its ability to tokenize the future yield of crypto assets. This is accomplished through the creation of Principal Tokens (PT) and Yield Tokens (YT) from Standardized Yield (SY) tokens, allowing for the separation and independent trading of the principal and yield components.

1. Principal Token (PT):
   • Represents the core value of a yield-generating asset.
   • Can be acquired at a discount and redeemed 1:1 for the underlying asset at maturity.
   • Integral to Pendle’s Automated Market Maker (AMM) pools.
2. Yield Token (YT):
   • Represents the yield portion of the asset.
   • Enables leveraged exposure to yield without the risk of liquidation.
   • Approaches zero value at maturity as the yield is collected over time.

This tokenization process is akin to alchemy in the financial world, turning the predictable yield of assets into tradable components that cater to both risk-averse and risk-seeking investors.

Further, Pendle’s Automated Market Maker (AMM) is designed to minimize impermanent loss (IL) while maximizing returns for liquidity providers (LPs). Unlike traditional AMMs, Pendle allows for the swapping of PT and YT through a single pool. This means LPs earn fees from both types of tokens while also benefiting from the underlying asset yields and additional rewards from Pendle tokens.

The Pendle AMM uses a time-decay function to adjust the weights of PT and YT over time, ensuring the pool remains balanced and liquidity stays high throughout the token’s life cycle. This innovation provides more stable returns for LPs and encourages deeper liquidity, making it a cornerstone of Pendle’s success.

Riding the Wave: Market Performance and Trends

Explosive Growth in TVL 

Pendle Finance’s TVL has witnessed a remarkable surge over the last 1 year. It has increased by more than 4100% and stands at $6.5 billion as at the date of writing. The true catalyst behind this has been the rise in adoption of LSDs due to activation of staked ETH withdrawals. 

Leveraging the Points Campaigns

Pendle has been excellent in identifying opportunities and participating in emerging trends, with a strong focus on business development and rapid integration. This strategy has helped them to increase the TVL. One of the most significant trends of 2024 has been the “points campaign” and Pendle has been leveraging this since a long time. Pendle’s yield splitting and tokenization have seamlessly aligned into this trend, providing a platform for yield trading and incentivizing YT trading with point multipliers, resulting in high implied APY. Pendle has also facilitated point distribution, allowing users to retain airdrop or incentive rights from integrated projects, and partner projects value Pendle for its ability to boost participation through bonus points allocation.

Growth in User Activity

The activity on the platform has witnessed a significant increase over the last 1 year owing to rising retail interest in the platform and attractive yields being offered. Monthly active users surged to ~ 120K in Apr’ 24 and stood at ~ 35K as at the date of writing. The growth in users could be attributed to airdrops from other DeFi protocols which have helped to increase the activity on Pendle Finance as airdrop farmers have been incentivized to deposit their LRTs into Pendle with the introduction of point multipliers. 

Revenue Growth

Pendle has generated substantial revenue through yield generation and the protocol’s revenue surpassed $4.3 million in Jun’ 24. This growth has been driven by strategic partnerships and integrations with major DeFi protocols like Ether.fi, KelpDAO, Renzo, Swell.

Closing Thoughts

While DeFi platforms typically provide access to current yields, these can be unpredictable and influenced by market fluctuations and crypto developments. Pendle enhances this by tokenizing future yields, granting users greater control and certainty over their expected returns.

By pioneering yield tokenization, Pendle has offered unique flexibility and returns, attracting significant liquidity and user engagement. Its collaborations with major protocols like Ether.fi, Aave, and Yearn Finance have driven impressive growth in TVL and helped in distinguishing Pendle from other protocols focused on lending and borrowing. Pendle Finance’s surge exemplifies how innovation and strategic adaptability can propel a protocol to new heights, promising ongoing value creation and setting new standards in DeFi.