Inside Pendle: The Leading Protocol for On-Chain Yield Derivatives

Protocol & Governance

Pendle’s core revolves around yield tokenization, a custom AMM for PT/YT trading, and a vote-escrowed governance model. Users convert yield-bearing assets into SY tokens, which are split into PT and YT, with trades executed efficiently through a single AMM pool. Governance is driven by vePENDLE, earned by locking $PENDLE for up to two years, granting users influence over emissions, boosted rewards, and protocol revenue. Over 54 million PENDLE are currently locked, and the protocol remains permissionless, with upcoming UI updates to simplify market deployment.

Founder and Key Backers

Pendle was co-founded by TN Lee, Vu Nguyen, and two pseudonymous partners, with a team based in South Korea. The project raised $3.7M in 2021 from top crypto VCs and later received a 2M ARB token grant from Arbitrum DAO in 2023. Backed by experienced DeFi investors, Pendle has grown steadily through multiple product iterations and ecosystem expansions.

Tokenomics & Use Cases

The $PENDLE token is a utility, governance, and incentive token. Its core functions are to:

• Incentivize liquidity provision in Pendle’s custom AMMs

• Grant governance rights via vePENDLE

• Boost LP rewards and yield accrual

Weekly emissions began at 667,705 PENDLE and are set to decrease by 1.1% per week until April 2026. After this halving schedule, emissions will stabilize at an annualized inflation rate of 2%. All team and investor tokens were fully vested by April 2023, eliminating sell-side pressure from unlocks.

Token use cases fall into several categories:

• Fixed Yield: Users buy PT tokens at a discount and redeem them for the underlying asset at maturity, locking in a fixed APY.

• Long Yield: Users speculate on increasing yield or future point rewards by purchasing YT tokens.

• Short Yield: Users mint SY, sell YT at a premium, and later buy them back at a lower price to recombine with PT for redemption.

• Liquidity Provision: LPs supply SY and PT to the Pendle AMM and earn swap fees, SY yield, and PENDLE incentives. Impermanent loss is minimized and fully eliminated at maturity.

• Points & Airdrop Farming: YT tokens allow users to farm EigenLayer points or other protocol incentives, often with amplified returns.

Institutional Integration

Pendle’s roadmap includes multiple initiatives aimed at scaling its institutional footprint.

Citadels are protocol deployments tailored to specific segments:

• Non-EVM Expansion: Pendle plans to support Solana, TON, and Hyperliquid, opening new frontiers for yield tokenization.

• Institutional Finance: The team is developing KYC-compliant versions of Pendle markets, targeted at regulated TradFi entities.

• Shariah-Compliant Products: A suite of compliant DeFi solutions for Islamic finance, estimated to be a $3.9 trillion market.

Boros is Pendle’s initiative to support broader yield derivative markets, including perpetual yield swaps similar to interest rate futures in TradFi. The first Boros product will allow hedging of funding rates on perpetual futures markets, potentially even without an underlying yield-bearing token.

These efforts aim to make Pendle attractive not only to DeFi-native users but also to hedge funds, structured product issuers, and institutional allocators.

Competitors

Pendle operates in a competitive niche of DeFi yield derivatives and tokenized fixed income. Notable competitors include:

• Notional Finance: Focused on fixed-rate lending and borrowing with principal/yield split tokens, whose AMM model inspired Pendle’s design.

• Yield Protocol: Offers fixed yield trading via options-based mechanisms.

• Element Finance: Enables fixed yield tokenization on various assets, similar to Pendle but with different UI and protocol design.

• BarnBridge: Focused on risk tokenization and yield derivatives.

Pendle differentiates itself through its SY token standard, flash swap AMM, multi-chain deployment, and strong focus on liquid restaking points and airdrop farming.

Possible Drawbacks/Risks

• Smart Contract Risk: The wrapping/unwrapping and AMM logic is complex, though audited by top firms (Ackee, Dedaub, Dingbats, Code4rena).

• Governance Centralization: vePENDLE concentration could lead to governance capture.

• Underlying Asset Volatility: PT and YT value are directly tied to the performance and volatility of the base asset.

• User Complexity: Yield tokenization remains a complex concept, particularly for retail traders unfamiliar with fixed income mechanics.

• Regulatory Uncertainty: Yield-generating assets like vePENDLE could attract scrutiny as unregistered securities, especially in jurisdictions like the U.S.

• Liquidity and Depth: Although improved, certain pools may suffer from low depth outside of restaking hype periods.

Conclusion

Pendle bridges traditional fixed income with DeFi through its SY token standard, efficient AMM, and strong multi-chain presence. With over $4B in TVL, significant market dominance, and backing from top investors, it has found strong product-market fit in liquid restaking and points farming. While its roadmap targets institutional and cross-chain growth, users should remain mindful of the complexity and risks in yield derivatives.