Pendle Finance [Initial Review Dec 2022]

The Serenity Research
5 min readDec 20, 2022

Pendle Finance is a yield swap market for DeFi. Yield swap is a common derivative concept in fixed income instruments. It means splitting the principal and the yield of a bond, and trading them separately, rather than trading the bond as a whole. This is to leverage yield and meet the specific demand: on one hand, some users wish to use a small amount of capital to get the yield from the entire bond; some others wish to cash out the yields portion of their bond earlier than maturity.

The Strategy in this Article

Providing liquidity into FRAX-USDC (Convex) Pendle market.

Current yield: 8.5% (20 Dec 2022)

Our risk assessment: Low to medium.

Our yield projection based on this week’s BenchMark Yield: 6.0%

The Concept and How the Protocol Works

Pendle Finance, similar to traditional yield swap markets, allows users to buy and sell the yield or the principal of a DeFi product separately. Currently, it has 5 markets:

Taking FRAX-USDC (Convex) as an example, in Pendle, users can purchase YT token of one unit of FRAX-USDC in Convex, or the PT token of it. In this description:

  • One unit of FRAX-USDC (Convex) means approximately one dollar of USDC or FRAX deposited into Curve FRAX-USDC pool to get the LP token of this pool; then this LP token is deposited into Convex for farming. For design purposes, Pendle has a wrapped version of the underlying FRAX-USDC (Convex) unit, called SY token (standardised yield token).
  • YT token of FRAX-USDC (Convex) means the yield token of this one unit of FRAX-USDC (Convex). Holding the YT token will provide the user the yield (trading fees, CRV and CVX rewards from Convex) to be received by this one unit of FRAX-USDC (Convex), till maturity.
  • PT token of FRAX-USDC (Convex) means the principla token of it; this token does not generate yield but allows users to redeem for one unit of FRAX-USDC (Convex) upon materity.

Therefore, the price of one unit of FRAX-USDC (Convex) = price of YT token + PT token. Please note the in the above example the actual price of FRAX-USDC (Convex) is not $1, but the virtual price of it in its Curve Pool (accrued trading fee).

Pendle allows users to buy and sell both YT and PT tokens, so the prices of these tokens are determined by the market supply and demand. One can derive a new yield based on the PT token price, which is the discount between the PT token and the FRAX-USDC (Convex), and annualised. Think of this just as a zero-coupon bond. This can be higher or lower than the real time FRAX-USDC (Convex) yield. Similarly, based on the price of YT token and the real time yield of FRAX-USDC (Convex), an estimated return can be calculated as well. For instance, if FRAX-USDC (Convex) is delivering a yield of 3%, or 3 cents on one unit of FRAX-USDC (Convex), and the YT token with 1-year maturity is trading at 1.5 cents, then the annual yield of YT token is 100%.

Provide Liquidity for the Pendle’s Markets

First of all, you can buy the PT token and hold till maturity if the derived yield is good — but likely it’s not too different from the underlying’s yield. Or you can trade YT tokens, betting on the movement of the yield.

A more advanced way is to provide liquidity for the existing Pendle Markets. Like any AMM, there’s no order book and trades take place within the liquidity pool. So for each Pendle Market, there has to be a liquiditiy pool.

Pendle has a ve- design similar to Curve — you can lock your Pendle for some time and using locked Pendle to boost your liquiditiy providing yield.

In each Pendle pool, the two components are the SY token and the PT token (and YT token is SY — PT, as if you have bought one unit of SY and short one unit of PT). This allows anyone wishing to trade in PT or YT has a readily available market. Below is the an example of the USDC-FRAX (Convex) Pendle market:

The yield of the above comprises of:

  • trading fees from this pool as users trading between PT and SY;
  • PENDLE incentives
  • Fees that accrued to SY token (in the above case, the CRV, CVX rewards and Curve pool trading fees)
  • The discount of PT token

For USDC-FRAX (Convex) Pendle market, the two tokens are close in terms of price, so the improvement loss is negligible. For some other markets, like APEcoin, the permanent loss can be several percent, as its SY and PT tokens have huge price gaps. The price gaps of any market’s SY and PT are dependent on the maturity and real time yield of the underlying — which is the intrisic value of the YT token.

Pendle Finance’s AMM is its indegeneous design inspired by Notional Finance; it’’s not the same as the Curve or Uniswap ones. Information on the AMM design is in its whitepaper, which is quite mathematical.

Investment Risks and Yield Projection

Our assessment is purely based on the economic perspective of investing stablecoins into the protocol, and is not based on the smart contract or the other soft factors, such as company/project/investor quality. Our assessment of investing into the FRAX-USDC (Convex) Pendle market is of LOW to MEDIUM risk.

  • Exposures to stablecoins: FRAX, USDC
  • Exposures to protocols: Curve, Convex, Pendle
  • Quality of the yields: The yield is largely PENDLE token rewards, plus the yield from the underlying FRAX-USDC LP.
  • Major risk points: Pendle V2, a new protocol with innovative AMM design, is prone to hacker attacks.

Based other economic risks, we project the equilibrium yield rate of this investment to be 1% + Benchmark yield, i.e. 6.0% based on this week’s Benchmark Yield of 5.0%. Our Benchmark yield is the weekly average yields of the 10 selected stablcoin strategies, in protocols on Ethereum. This is published weekly in our Medium and Twitter, under the section “Other Stablecoin Platform”.


The information provided on this document and the referenced sources do not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the content as such. The author of the document makes no representation or warranties as to the accuracy and or timelines of the information contained herein. A qualified professional should be consulted before making any financial decisions.



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