TN Lee is the CoFounder of Pendle Finance and a CoFounding member of Kyber Network.

In this episode, we explain Pendle Finance and provide a rare guide to DeFi yield trading strategies within the increasingly popular protocol. Pendle was a breakout star in DeFi during the doldrums of the crypto bear market, and if you listen to the ethos behind TN Lee, you'll soon understand why. Pendle aims to reimagine the traditional finance interest derivative market, worth over $400 trillion in notional value, but instead as trustless DeFi money lego, where anyone with a crypto wallet can execute yield strategies such as earning fixed yield or longing the stETH yield rate. 

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Timestamps

00:00 - Intro
04:12 - TN's background and founding Pendle Finance
10:07 - Why has the DeFi fixed yield use case struggled 
12:11 - What is Pendle Finance?
13:53 - Yield tokenization
16:54 - How Pendle Earn works
21:40 - Pendle AMM and Pendle LPs
24:30 - Strategies for profitability in Pendle LPs 
28:15 - The best yield trade explained
31:21 - Pros and cons of YTs
34:47 - What happens when we buy YTs
37:17 - vePENDLE and its utility
39:04 - Pendle Wars
41:32 - Reflections on insane growth
49:23 - TN's favorite Pendle strat and roadmap updates
52:38 - Closing

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🔗 Guest Links 🔗

► TN Lee on Twitter: https://twitter.com/tn_pendle
► Pendle Finance on Twitter: https://twitter.com/pendle_fi
► Learn about Pendle Finance: https://www.pendle.finance/
► Pendle Earn: https://app.pendle.finance/earn/fixed-yield
► Pendle Trade: https://app.pendle.finance/trade
► The Pendle Yield-Trading Handbook: https://handbook.pendle.finance/
► Pendle docs: https://docs.pendle.finance/
► Pendle Guide to Profitable Yield Trading: https://app.pendle.finance/trade/education/learn?level=0
► "The Best Trade of All Time" on Pendle: https://twitter.com/pendle_fi/status/1678781288759824386
► Links to Term Discord, Telegram, and Medium: https://linktr.ee/term.finance

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🙏 The Edge Podcast is produced by 4RC Labs. If you're a DeFi/Web3 builder, contact our team at: https://fourthrevolution.capital/

All opinions expressed by hosts and podcast guests are solely their own opinions and not necessarily those of Fourth Revolution Capital. Podcast guests and 4RC may have positions in the assets or other matters discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Do your own research. This is not a recommendation or endorsement to buy any token(s) related to any platform(s) discussed.

So I think fundamentally, because we launched Panel V1 in 2021, and it wasn't the best product.

It was the fact that the product was difficult and complex.

It was overwhelming for users to utilize the V1, and we recognize that.

So a good part of last year was actually going back to the whiteboard to redesign the protocol, the underlying mechanics while retaining the principal direction, which is to enable fixed rates for users in DeFi.

Hey everyone, welcome to the Edge podcast.

I'm DeFi Dad from Fourth Revolution Capital, and I'm here with my co-host from 4RC Nomadic.

In this episode, we'll cover Pendle Finance, a DeFi yield trading protocol.

Pendle aims to reimagine the trad-fi interest derivative market worth over 400 trillion in notional value as a trustless money Lego, where anyone in DeFi can execute yield strategies Whether you're a trader, farmer, analyst, or newbie, you can trade smart with KyberSwap, the OG decentralized exchange and aggregator on 13 chains.

Swap at the best rates, farm with real yields, set limit orders, use their proprietary trading and AI tools with the best UX and DeFi, securely and permissionlessly.

Get better rates, better opportunities, better alpha, and a better trading experience.

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I'm a co-founder at Utopia Labs, and today we're really, really excited to be announcing and launching a feature called USDC Bank Transfers.

We're basically allowing for any company based anywhere in the world to be able to send USDC to any US bank account, whether that US bank account is a US citizen or a person who might have something as simple as a WISE account.

If we zoom out since a year ago, there's been a chokehold on kind of the interoperability and seamlessness between traditional rails and crypto rails.

We put a lot of time and effort into this to be able to provide a smooth end experience for you as a consumer or as a company using crypto and using traditional

It all started so simply with CryptoKitties and Maker on Ethereum, but quickly became complex with more applications and many chains.

Today, everyone agrees, UX issues are the biggest blocker standing in the way of crypto adoption.

Multi-chain UX redesigned from the ground up.

The first wallet to abstract networks, accounts and gas.

1 gas tank to pay transaction fees on all chains.

right, in just a moment, we'll introduce Tien Le, the co-founder of Pendle Finance.

He is 1 of the few people I can think of who have been building full time in DeFi since 2017, being a founding team member of the foundational liquidity protocol at Kyber Network.

He was also an early contributor to wrapped Bitcoin, the most popular form of tokenized BTC today, with over 4.7 billion in tokenized Bitcoin liquidity on Ethereum and other L1s and L2s.

Yeah, just, It's a real pleasure to finally get to talk with you, not just about Pendle, but you are 1 of the most OG DeFi builders in the space.

For folks that are newer to DeFi, I think it's worth noting that Kyber is truly 1 of the earliest, purest form of DeFi that was being developed going back to

And a lot of what we enjoy today in DeFi derives from work that your team was doing back in the day.

But Tian, do you want to share just a bit more about your journey in crypto?

Like maybe what led to you getting started with Kyber and then ultimately moving over here to Pendle Finance?

I think along the way I got really lucky.

But everything started with a research project for a professor back in 2014.

And that really got me intrigued with the whole cryptocurrency technology.

So I remember I was tasked to look into various business models in the FinTech sector.

And 1 of the companies involved was using Bitcoin to remit money from Singapore to the Philippines.

And I thought that was a very, very interesting proposition to users because they were able to offer the same service at a fraction of the cost.

So that had me looking deeper into the whole technology and also coincidentally at that point in time, Ethereum was getting more traction.

And then I went to read up on the Ethereum white paper.

I think fast forward, I was working, like building up the, because I wasn't technical, and I figured like I needed a way to be involved in the sector.

And the only way that I could contribute was to manage communities.

So I set up Ethereum Singapore Facebook community and had to look through many different types of resources to share with the community.

And so I have to come across a white paper called Oyante, which was co-authored by Lloyd.

Reach out to him because he was a couple of bus stops away from me, and we became friends.

And then fast forward, when he started out Kyber in 2017, we had a conversation.

He asked if I'd be open to join the team to head the business development unit and the community building site.

So it turned out to be 1 of the most pivotal decisions that I've made because that got me started in crypto professionally.

And it opened up a lot of doors for me personally, to be introduced to really, really intelligent and capable people, and all the different people who have become also very important to the founding of Pendle eventually.

Now so I stayed on in Kyber until 2019, early 2019, and then following that I decided to take a step back and really start to explore different opportunities in and out of the crypto sector.

So I gathered a group of people who are now co-founders of Pendle to work on a string of very unsuccessful ventures, starting with mining software to farm privacy coins.

We also did something around data engineering.

So that had a little bit more success, but it wasn't anything major.

So 2019, 2020 period, it was a relatively difficult time for us because we haven't been able to construct a product that had product market fit.

And we had to figure out ways to make like little money here and there to try to get through that period.

And DeFi summer happened to be 1 of the best things to happen to us.

We were farming tokens and all this food coins were giving out like thousands of percent of APYs.

And as much as we like the idea of capturing all this APYs, it also occurred to us that there was no good way for us to lock in the rates.

We knew that the APYs were fleeting, but there was nothing that we could do about it.

And then when we contrasted what was in DeFi at that point in time to a mature financial sector, it just occurred to us that fixed rate, fixed income products are some of the most important verticals in the financial sector, and it was largely missing in crypto.

And we figured that, you know, coming from our own perspective, that innately, because as individuals, we value certainty, and we thought that that was something that we wanted, and it was absent in crypto, and we felt that most other people other than us would also value that product.

So we decided to start ideating around the solution to offer fixed income products to, to, to the crypto sector.

So that was basically, I think, the motivation of starting Pendle.

Tian, why do you think DeFi fixed income or fixed yield has struggled in terms of adoption?

I think in a bull market, when we introduced the product, because I think in general the risk appetite of most crypto natives is quite different.

Most of us who are relatively native to crypto have higher tolerance for risk.

And we wouldn't be too bothered about locking in like say 5%, 10% even in a bull market, especially because if you lock in 10%, you're probably missing out the opportunity to gain 20, 30% or even 100% APY.

So I think at that point in time in a bull market, a lot of individuals would favor higher APYs and had higher risk tolerance because Those were real opportunities to generate wealth, but I think times are changing, especially now in a relatively inactive period within crypto to be able to lock in rates at say 5-6% happens to be quite attractive as a proposition.

And beyond that, I think there's with more capital inflow into the crypto sector.

I believe that the awareness for fixed income products in a certain user's portfolio will become increasingly important.

Again, because innately, I believe most individuals value that certainty.

And I think there is a price to certainty.

Tian, I really like what you said there as far as kind of the behavior of DeFi actors in a bull versus a bear.

I want to come back to that later because I think that's important.

Like, yeah, in the bull, there's just way more risk taking appetite and people are almost willing to forego maybe a smaller fixed rate.

But yeah, we should definitely get into that later.

But first, I kind of want to just get into Pendle a little bit.

In the intro, we mentioned Pendle is a yield trading protocol.

And in the Pendle docs you say we give users the reins to their yield.

What do you mean by that and what can we do on the Pendle protocol?

So I think yield is 1 of the biggest items within crypto, DeFi.

And today I am of the impression that a lot of users are quite familiar with the whole notion of yield bearing assets.

So For example, STE, Stargate USDT, AUSDC, these are all yield bearing assets.

And the reason for these assets to exist in the first place is like maybe 2 purposes, right?

Number 1, it functions as a proof of deposit into a certain pool.

And then secondly, it functions as a receipt for the yield that is accrued from the underlying protocol.

So When the way we look at it, like with all these yield bearing assets conventionally, aside from just like the principal value, there's also the yield that is accruing all the time.

And these are value that is, I mean, this is a value that is locked within the asset.

So we believe that by splitting up the value coming from the yield, accrued yield from the underlying asset, we can open up more opportunities for users to do more, whether it's to long or short yield, or to lock in the fixed rates.

So, Tian, I want to start to break down the major components that make up the Pendle protocol.

1 of those you started to touch upon there, which is yield tokenization, that concept of principal token versus a yield token.

So could we start to talk then about, in terms of the yield tokenization, how do we use that as users?

And I'm hoping we could start with Pendle Earn.

I feel like that's the simplest, easiest use case for those of us who are new to the Pendle protocol.

So, with regards to Pendle, So Pendle's source of liquidity is actually yield-bearing assets.

So yield-bearing assets like STE, Stargate USDT, AUSDC, any kind of asset that generates yield, when you deposit into Pendle, the outcome would be 1 principal token and 1 yield token.

So the principal token, in short for PT, represents the principal component of a yield-bearing asset, while the yield token, the YT, accrues the yield that is paid off from the underlying protocol.

So as an example, if the underlying protocol is Lido, the YT will accrue the yield in the form of SDE.

Now, these 2 assets, after separated, they can be traded independently of each other.

So the PT side is actually structured quite similarly to that of a 0 coupon bond, in which it is priced at a discount relative to the underlying, in this case, the STE.

And at maturity, it can be redeemed for the underlying par.

And then on the other hand, the yield token, YT, will continue to accrue interest, or the yield that is paid off from the underlying protocol.

It realizes it as and when the yield is paid out.

And then at maturity, it will become $0 in value because by then it will no longer accrue any kind of yield.

So this is, I think, a very important relationship between the YT and PT that we need to establish.

And ultimately, right, with Pendle, 1 PT, the value of 1 PT plus the value of 1 YT has to equal to the value of 1 underlying.

And in this case, right, because of this entire relationship, PT and YT are inversely related, meaning to say, if PT price goes up, YT price has to come down, or vice versa.

1 of the more popular pools on Pendle has been the staked ETH pools.

And so you have different maturities depending on when folks watch this.

Hopefully they're watching this long into the future.

But given that we're midway through 2023, we have maturity dates that take us out to the end of 2023 and then out even further like let's say almost a year, year and a half.

And so if I were to go to the Pendle Earn application and I've got 1 staff and I want to earn a fixed rate with that staff.

Can you explain when I use Pendle Earn what happens under the hood?

Am I buying PT tokens or are we minting PT and YT?

I was just struggling last night to think about how to ask you that question.

So much harder to actually answer the question.

So Pendle Earn is actually, I think it will help to give a bit more context as to why we construct Pendle Earn.

Because when we started out Pendle v2, end of last year, right?

So that means we need to do something about the UI UX.

And the initial implementation for V2 involves a simple UI and a pro UI.

So the Pro UI is like what you're seeing right now on the trade page.

Simple UI has already been replaced by Petal Earth.

But the simple UI, at that point in time when it was out, the narrative around it was actually to buy asset at a discount.

How it works is basically users buy PT like 0 coupon and then hold it until maturity and then redeem it par for the underlying.

So you buy for example 95 cents for USDC and then in maturity you redeem the full USDC at $1.

And that's the the the 5 cent difference is your gain.

So we realized like a couple of things When we have the simple UI as the asset at the discount as the narrative, 2 things, right?

The first observation is that when we have asset at the discount, the natural follow-up question is, where does the discount come from?

And then we realize that we have to go through the whole, like a relatively complex explanation of how like Pendle works.

And then secondly, which is a very important 1, is that like crypto community is a lot more familiar with the whole concept of APY versus discount because 1 involves like putting money in and then at some point in time further down, you take more money out.

Whereas like asset added discount is you put less money in and then at maturity, you take the full amount out.

So I mean, structurally and maybe from perspectives, different perspectives, they are somewhat similar, but framing wise, they are very, very different.

So we decided to drop that narrative, prime it as an ERR product, structure it like a fixed deposit that I think a lot of users are familiar with, and really try to minimize the learning curve.

So with Panel ERR, at the back of it, it's basically just users buying the principal token and then holding it until maturity and redeem it for the underlying for the fixed gain.

But how the yields, the percentage of yield is derived is a result of the yield trading that happens on the other side.

Again, because like Pt, Yt are inversely related.

So when PT, these 2 cannot, like they have to exist together.

It's just that when the demand for PT increases, that there will be opportunities for YT because the price of YT has to come down.

So this is where the traders can come in, speculate on the yield token.

And then, yeah, if users think, if traders think that there is a potential for the yield token to grow even more in value in the coming 3 months, 6 months or so, then they can express a view there by buying the YT.

And as a result of that, it changes the implied yield, which determines the fixed rates.

Tien, that trader part is super interesting too and something I also want to get into a bit more.

I've been seeing on crypto Twitter some of these like the greatest trades ever, you know, done on Pendle.

We definitely want to ask you about those, But I want to ask you kind of about another component of Pendle.

So we've talked about Earn, we've talked about the yield tokenization, but I guess after those steps are done, what happens on the Pendle AMM?

And what sort of, I guess, yields, and where are those yields coming from to the liquidity providers on the Pendle AMM?

of the yield, I think I'll start with the yield first.

So the yield for liquidator providers, it's composed of multiple sources.

So again, I think taking Stargate USDT as an example.

So when a user deposit Stargate USDT into Pendle, The Pendle AMM actually has some sort of a module to tabulate the reward that is made up from the underlying protocol, which in this case is Stargate.

So as a liquidated provider, the user is entitled to Stargate SDG reward, the lending APY from Stargate, and then on top of that, the Pendle incentives and the fixed yield within the Pendle, fixed yield within the, of the PT component and the swap fees.

So collectively, there are multiple sources of yield.

And that results, like the stacking of yield makes it more appealing for liquidity providers to deposit asset into the Pendle pool.

Now, how it's done is actually pretty straightforward.

It's just like any other AMM pool like Uniswap or Trader Joe.

I mean, first of all, I go to the page and then select the pool.

Like again, in this case, Stargate USDT, choose the maturity of choice and then deposit the asset.

In this case, you could deposit something as close to the close to the asset in consideration like USDT or if you have only Ether, you can deposit Ether, but it will have to be swapped to USDT first before it gets deposited into the pool.

And then for importantly, I think for traders or users with a more sizable position, it helps to select the 0 price impact mode when they provide liquidity into the pool.

Because in some sense, right, the 0 price impact mode takes away the swapping involved into the pool and mint the YT and PT, pair them up in proportion, and then add the assets into the pool.

Zap-in is probably the simpler way to do it.

I basically went through like the very manual steps.

Yeah, Tian, that's what I'm wondering is For those who are newer, who then move beyond Pendle Earn, what are the more popular strategies?

So I know I was personally looking at whether to zap in to 1 of these pools.

Like I was looking at the, 1 of the staff pools that let's say the 1 that expires in December, 2023.

And I was thinking, all right, I could provide yield with my staff plus the, plus the, would it be the PT token that I'm ultimately holding?

If I was gonna zap into 1 of the pools, what happens under the hood and what am I ultimately exposed to?

Because I think the goal for many is to remain exposed to the underlying asset in this example it's Stealth.

So they're just wanting to earn more Stealth or more ETH at the end of the day.

Can they do that by getting into an LP like that?

Or is there some sort of risk that they could walk away with less ETH than what they started?

So with regards to the example, so say a user has a staff pool, sorry, staff asset, right?

And the user, the easiest way I think any user can participate in Pendle to earn APY is to become a liquidity provider.

So the way to go about it is to look at the pool and the duration of choice, and then deposit STEs into the pool.

So what happens at the back is, STEs will, a portion of it, let's say 50-50, right?

So it's a 50-50 pool and the pool will consist of 2 assets.

First is the principal token of STE and then the second asset is STE but wrapped in the EIP-5115 format.

So we call this like the super composable yield or short for like in short, like SY token format.

So PT, again, PT STE, again, it's STETH in SY token format.

So when you deposit STETH into the pool, half of that gets converted, traded against the pool and gets converted into PT, and then the other half remains as STETH but wrapped into SY, paired together, and then deposited into the pool.

Now, I think because the assets, PT is a derivative of the STETH, they are very, very highly correlated.

And from our studies, because of the high correlation of the assets in the pool, in general the impermanent loss of the assets of becoming an LP is actually quite negligible.

And importantly, because PT at maturity can be redeemed for the underlying par.

So at maturity, all the assets in the pool will actually have the same value.

So fundamentally, right, If you are a liquidity provider and you deposit asset into the pool and you hold it until maturity, you will have 0 impermanent loss.

And I think this is 1 of the more important points for user.

So if you're comfortable with 2024 pool, for example, and since you already lull youth and then depositing into the 2024 pool, hold it until maturity just for additional APY could be quite, quite, quite attractive.

Tien, I want to ask you just about some of these trades I mentioned earlier.

And I don't know if you're familiar with this 1, but I'll lay it out for you.

So the 1 I saw was it involved like, I think it was about $10, 000 worth of capital earning yield on a $320, 000 position.

And I honestly, I read the tweet and I still don't know if I fully understand it, but just wondered if you can maybe lay out a bit of what was happening there at a high level way and maybe describe kind of that opportunity that may exist for other opportunistic traders or users of Pendle.

So again, let's go back to the relationship between Pt and Yt and the underlying.

So 1 Pt plus 1 Yt has to equal to the value of 1 underlying.

So effectively, let's just say that in this case, the underlying is, I'm going to use like US dollar because it's easiest to represent.

So this you this is the underlying is 1 US dollar, 1 USDC, for example.

So the YT price should be, I mean, like for simplicity's sake, 5 cents.

And then as a result of that, the PT is 95 cents.

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Pendle Finance Explained: A Guide to DeFi Yield Trading Strategies