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Hello readers,
As onchain markets expand across LSTs, stablecoin lending, and tokenized treasuries, a growing share of crypto capital is now concentrated in yield-bearing assets that generate real cash flows.
Pendle is an Ethereum-based DeFi protocol that allows investors to separate principal from future yield on these assets, creating a forward market for rate expectations directly onchain.
We break it all down in this week’s edition of The Watch List.
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TN Lee: Co-Founder & CEO. TN leads the strategic vision, protocol scaling, institutional readiness, and public communications. Prior to Pendle, he was the Head of Business at Kyber Network.
Vu Nguyen: Co-Founder & CTO. Vu leads Pendle’s technical architecture, smart contract development, protocol upgrades, and core engineering. Prior to joining Pendle, he was the Co-Founder of Ceva Labs, and b.lock.
Long Vuong Hoang: Head of Engineering. Prior to joining Pendle, Long held roles at FPT Software and Jump Trading.
Per Linkedin, Pendle has 34 associated members working fully remote.
Pendle has raised roughly $17m to date, including a $3.7m seed round led by Spartan Group and Signum Capital, $11.8m from its April 2021 IDO, and a $1.6m grant from the Arbitrum Foundation.
The inability to separate and trade yield and principal independently. In most DeFi protocols (such as staking, lending, re-staking, and yield-bearing stablecoins), yield and principal are bundled together. For example, you cannot sell just the future yield or lock in the principal without selling the entire position. Pendle solves this by splitting yield-bearing assets into Principal Tokens (PT) and Yield Tokens (YT), allowing users to trade them separately. The PT is redeemable 1:1 for the underlying asset at maturity. The YT represents the stream of future yield until maturity.
Fixed Yields. Before Pendle, there were few options for accessing fixed yields in crypto. That means users cannot lock in today’s high yield for the future. Pendle solves this by allowing users to synthetically lock in a fixed yield on any supported yield-bearing asset by buying principal tokens (PT) at a discount and holding them to maturity. This effectively allows users to hedge against falling yields. For example, if you expect yields to fall, you might buy the PT (lock in the implied yield embedded in the discount, similar to a zero-coupon bond). If you expect the yield to rise, you might buy the YT (exposure to future floating yield).
Capital efficiency. Holding staked ETH, restaked tokens, or yield-bearing stablecoins locks capital into one outcome. On Pendle, users can sell future yield (YT) to unlock liquidity immediately while retaining principal exposure via PT.
Pendle effectively creates a forward market for onchain yield, allowing users to trade expectations of future yield, similar to how fixed-income markets trade forward rates.
Let’s say you have a 1-year treasury bond with a face value of $1,000. And a 5% coupon. You are entitled to:
$50 in coupons over the year.
$1,000 principal at maturity.
Normally, you can’t trade those separately.
Imagine a system that takes your treasury bond and splits it into two tradable pieces:
Claim on the $1,000 at maturity. This is the principal token on Pendle (PT). It would trade at a discount ($952) since $1,000 in a year is worth less than $1,000 today.
Claim on the $50 of coupon payments. This is the yield token on Pendle (YT).
Together, the PT + the YT = the original treasury bond.
Now. If you think rates will fall, locking in 5% yield looks attractive. So, you might buy the PT at a discount to lock in a fixed return (implied yield via the embedded discount) to maturity.
This is equivalent to buying a zero-coupon Treasury at a discount.
On Pendle, if you thought DeFi rates might rise, you might buy the yield token (YT) to get floating exposure to that. Exposure is “floating” in DeFi since staking yields, LP yield positions, and stablecoin yields are all variable (rising and falling through market cycles).
Basically, Pendle is replacing bonds with yield-bearing crypto assets to create:
A fixed income market onchain.
A forward curve for DeFi yield.
Duration and rate speculation tools.
On Pendle, “DeFi yield” becomes a tradable forward yield curve.
Pendle’s current universe of assets to grow TVL is roughly $100b across LSTs and restaking, yield-bearing stablecoins, LP fee yield, and incentive-heavy DeFi assets.
Pendle has about 3% of the market today.
But the larger opportunity comes from the multiplier effect in derivatives markets. For example, the bond market is roughly $130 trillion today. But the interest rate derivatives market is multiple times larger in notional value.
Why?
Because people don’t just hold yield. They hedge it. Speculate on it. Arbitrage it. Therefore, if onchain yield becomes financialized, Pendle’s TAM is not just “staked ETH.”
It’s yield exposure x trading turnover x leverage.
Of course, if Pendle ultimately supports tokenized treasuries, tokenized credit, private credit funds, and structured onchain income products, then you’re tapping into $100T + global fixed income.
Will onchain yield become a speculative and hedgeable asset class onchain? For example, if:
Stablecoin yields become structural.
Onchain credit scales.
Perp funding remains large and grows.
Protocol buybacks become yield-bearing assets.
Then we’ll need:
Forward markets.
Duration markets.
Volatility markets.
Pendle has an opportunity to become key infrastructure in a world where DeFi yield becomes structural.
Performance (avg/day):
Last 365 days: $84k
Peak: $313k
Last 30 days: $38k (down 87%)
71% of revenues currently come from smart contracts on Ethereum and Arbitrum.
Pendle’s revenue sources include:
AMM trading fees on PT/YT swaps.
Limit order execution fees.
Yield tokenization fees (minting PT/YT).
YT yield (5%).
Boros (structured/leveraged layer similar to interest rate swaps on perps).
20% of the fee goes to Pendle Liquidity Providers. The remaining 80% enters the pooled protocol revenue, where it is split into:
80% to Pendle buybacks for vePENDLE and sPENDLE holders.
10% to the Pendle treasury.
10% to Pendle operations.
It also takes a 5% cut of all yield accrued on YTs on the platform (staking rewards, lending interest, points, airdrop yield, etc.). 100% of these fees accrues to the pooled protocol revenue with the same splits as above.
Pendle generates revenue from essentially two categories:
Transaction-based (swaps, limit orders, boros).
Yield-based (5% of the yield produced by assets on the protocol).
Given the reflexive nature of yields in the nascent crypto market, revenues are extremely cyclical. Note that the protocol “buys back” Pendle with roughly 80% of its protocol revenue. This is then distributed to vePENDLE and sPENDLE holders.
Pendle currently has a total of $2.8b of TVL, down 79% from a peak of $13.1b in September.
The protocol directly monetizes its TVL by taking 5% of all YT token yield and by charging YT and PT swap fees.
The current TVL breakdown:
Yield-bearing stablecoins: 74.6% (mostly USDe)
RWAs: 1.9%
ETH: 1.7% (LSTs)
HYPE: 1.4%
Bitcoin: 1%
Others: 19.2%
Remember. Pendle doesn’t create yield. It simply attracts it onto its platform and then repackages it. Therefore, if the underlying yield sources are unattractive to TradFi (reflexive, unsustainable, emissions-driven), then TradFi won’t touch them.
For institutional adoption, we believe the underlying yield must come from:
Treasuries.
Credit.
Real-world lending.
Institutional staking.
High-quality DeFi cash flows.
Over the last 30 days, Pendle has averaged just 816 active addresses/day. This is down from a peak of over 6k/day — signaling the highly reflexive nature of the protocol, driven largely by speculation and cyclical crypto-native yields.
Max Supply: 281.53 million Pendle
Circulating Supply: 164.4 million Pendle (58.4%)
Liquidity Incentives: 49.2%
Team: 17.7% (fully unlocked)
Ecosystem Fund: 14.8% (fully unlocked)
Investors: 12.1% (fully unlocked)
Liquidity Bootstrapping: 5.2% (fully unlocked)
Advisors: 0.8% (fully unlocked)
4.6 million “liquidity incentive” tokens will unlock through year-end ($5.2m at current Pendle price). These unlocks/inflation normalize to 2% per year starting in April of this year.
Pendle has fairly clean token economics given that the team and investors are fully unlocked. Furthermore, roughly 80% of the protocol revenue is now “bought back” and then redistributed to vePENDLE and sPENDLE holders.
Pendle currently dominates its category onchain. Even with TVL down 79%, Pendle has over 5x that of its top three competitors combined (Napier, Exponent, Strata)
365-day protocol revenue: $30.3m
365-day Price to Sales (fully diluted): 10.6x (similar to SaaS companies today).
30-day protocol revenue annualized: $13.5m
30-day protocol revenue annualized Price to Sales (fully diluted): 23.8x
The key driver for Pendle’s valuation is high-quality TVL.
Extremely reflexive/cyclical with crypto yields. Pendle’s TVL is more volatile than other DeFi protocols for this reason.
Garbage in/garbage out. Pendle needs to attract high-quality TVL to onboard TradFi and smooth the cyclicality of its core business lines.
Execution risk. Pendle needs to keep the lights on, maintain robust security, and grow its TVL and product lines to attract TradFi assets and players. This is not an easy task, given regulatory requirements and a lack of clarity today.
Pendle is a complex protocol. It’s designed to make onchain yields tradable, which the team successfully executed on in this cycle. But to make the protocol durable in the long term, it needs to grow higher-quality TVL.
We think this will be a significant challenge in the near term.
Furthermore, we are asking ourselves if TradFi needs Pendle. After all, TradFi already has:
Bond stripping (STRIPS that are similar to Pendle’s PT/YT).
Interest Rate Swaps.
Forwards/Futures.
Structured products.
So, what’s different with Pendle?
Retail access where anyone can trade yield exposure permissionlessly.
Onchain composability (TradFi products are siloed).
Continuous 24/7 liquidity.
Capital efficiency.
We think TradFi assets want to come onto crypto rails. And we think it will happen. But that process is still quite nascent.
That means Pendle is likely a niche DeFi product that outperforms during bull markets for now.
That profile makes it a potential fit for the “hot sauce” sleeve of our portfolio during “risk-on” market regimes.
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Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.