Project Details
What are you building?:
The Pendle protocol enables permissionless tokenization and trading of yield. Pendle allows anyone to purchase assets at a discount, obtain fixed yield, or long DeFi yield. The protocol enables this by taking yield-bearing tokens and then splitting them into their principal and yield components, PT (principal token) and YT (yield token) respectively, which allows them to be traded via Pendle’s AMM.
The Pendle AMM is purposely built for trading yield derivatives in a capital efficient manner with negligible impermanent loss due to the pool pair being strongly correlated.
Yields are often cyclical in nature and typically swing between highs and lows (much like a pendulum!). Typically, the floor and ceiling for the yield of a liquid asset are much easier to predict than its price. For example, the annual yield of staked ETH is likely to fluctuate in a band of 0.5–12%. Knowing the rough yield range of an asset enables us to concentrate liquidity within that range.
Given the previous example, our AMM can be optimized for such a range on staked ETH. The result is something conceptually similar to UniV3’s concentrated liquidity whereby liquidity is utilized much more effectively, while still retaining fungible LP tokens.
The curve shifts also adjust the model to be more capital efficient as we approach maturity by taking into account the fact that PT trades closer to the underlying asset price (for example, it becomes infinitely capital efficient at the maturity where PT trades 1-to-1 against the underlying asset).
The AMM model’s curve is specifically designed for yield trading. As time passes, PT and YT prices naturally shift as they approach maturity. The AMM curve automatically shifts to account for these changes, such that one will only trade the interest rate changes and not the prices of the individual assets