Pendle Finance is a yield strategy protocol deployed on Ethereum and Arbitrum. It launched its v2 version and revamped its economic model in late 2022, subsequently adding support for Liquid Staking Tokens (LSTs) and expanding to Arbitrum. This analysis provides an updated look at Pendle's performance, tokenomics, and ecosystem.
Understanding Pendle's Market Position
Pendle's Total Value Locked (TVL) has experienced consistent growth since the end of 2022. Current data shows its TVL has surpassed the $126 million mark, indicating growing user adoption and capital inflow.
The protocol's liquidity is predominantly sourced from LST assets. Holdings in GLP, stablecoins, and other tokens collectively constitute only about 30% of its total TVL. GLP's yield is derived primarily from trader profits/losses and 70% of the protocol's fees. Since these fees and trading outcomes fluctuate daily, GLP's yield offers greater potential for trading strategies and speculation.
In contrast, the initial yield for LST assets comes from Ethereum Proof-of-Stake (PoS). Variances in staking amounts, the operational mechanics of different Liquid Staking Derivative (LSD) protocols, and platform fees create slight disparities in yields between LSD platforms. However, these differences are generally minimal, with yields typically stabilizing around 4%. This lower volatility makes the yield from LST assets less suitable for trading. To enhance attractiveness, Pendle employs a veToken and Gauge voting model for liquidity mining, enabling Pendle's LST pools to offer significantly higher yields, often ranging between 10% and 30%.
Daily trading volume on the Pendle protocol has historically remained below $1 million. A breakdown reveals that LSD assets account for 54.82% of the total historical trading volume, while GLP has contributed 24.09%. GLP trading tends to spike during periods of high market activity; for instance, it represented over 51% of the trading volume in a recent 24-hour window. This suggests that GLP's variable yield presents a more substantial opportunity for yield trading compared to the more stable LST assets.
Examining the Pendle Economic Model
Token Distribution and Emissions
The initial allocation of PENDLE tokens has seen allocations for the team, advisors, and investors fully unlocked. The ongoing liquidity incentive program began with a weekly distribution of 1.2 million tokens for the first 26 weeks. This emission rate decreases by 1.1% each subsequent week until week 260. After this point, a steady annual inflation rate of 2% based on the circulating token supply will be maintained. Current estimates place the protocol around weeks 113-117, with a weekly emission of approximately 450,000 PENDLE tokens. This continuous, long-term emission is a key feature of the token's supply schedule.
The vePENDLE Mechanism
In November 2022, Pendle introduced a veToken model to bolster protocol liquidity. Users can lock PENDLE tokens for periods ranging from one week to two years. These vePENDLE holders then vote to direct reward streams to different liquidity pools, incentivizing liquidity in their chosen markets. Snapshots for these votes are taken every Thursday at 00:00 UTC, and incentive rates for each pool are adjusted accordingly.
Key characteristics of vePENDLE include:
- Limited Bribery Incentive for LST Issuers: Unlike protocols like Curve, where asset issuers heavily bribe veCRV holders to direct incentives to their pools, demand for vePENDLE votes stems primarily from liquidity providers (LPs) within the ecosystem itself, creating a different dynamic.
- Fee Sharing: vePENDLE lockers are entitled to a share of the trading fees generated in the pools they vote on.
- Yield Token Revenue: Holders also receive 3% of the fees generated from Yield Token (YT) actions.
- AMM Pool Fees: Specifically, vePENDLE holders receive 80% of the trading fees from the AMM pools they support through voting.
As of recent data, about 37 million PENDLE tokens are locked, with an average locking period of 392 days. For those looking to deepen their engagement with DeFi yield strategies, understanding these mechanisms is crucial. 👉 Explore advanced yield farming strategies
Ecosystem Partners: Penpie and Equilibria
Penpie and Equilibria are secondary protocols built on top of Pendle's veTokenomics. They allow LPs to gain the benefits of boosted farming rewards without needing to lock PENDLE tokens themselves. Their core business models are very similar.
Penpie Protocol
Operating on Ethereum and Arbitrum, Penpie allows users to convert PENDLE into mPENDLE. The protocol then stakes the collected PENDLE to acquire vePENDLE, which it uses to boost rewards for its LPs. The revenue from this boost is distributed as follows: 83% to LPs, 12% to mPENDLE holders, and 5% to vlPNP (vote-locked PNP) holders.
PNP is Penpie's native governance token. Locking PNP tokens yields vlPNP on a 1:1 basis, granting holders rights to protocol fees and governance participation. vlPNP locks have an indefinite duration. To unlock, a user must initiate a 60-day cooldown period. During this time, they continue to earn rewards but cannot vote. An initial unlock penalty of 80% applies on the first day, decreasing non-linearly over the cooldown period.
Equilibria Protocol
Equilibria functions similarly, enabling boost-less farming for LPs by converting PENDLE into ePENDLE (a one-way, irreversible conversion). Users lock EQB or xEQB to receive vlEQB, which confers fee-sharing and voting rights.
Equilibria's revenue distribution is slightly different: 77.5% to LPs, 12.5% to ePENDLE holders, 7.5% to vlEQB holders, and 2.5% to the protocol treasury.
Protocol Comparison and Data
Recent data indicates that Penpie has locked approximately 7.45 million PENDLE, while Equilibria has locked around 7.54 million. Although mPENDLE and ePENDLE are intended to be 1:1 with PENDLE, both face liquidity challenges. Equilibria paused its ePENDLE/PENDLE liquidity pool, and while Penpie's mPENDLE is listed on Wombat Exchange, it trades at a significant discount of roughly 1:0.72, indicating severe peg deviation.
When comparing the two, Penpie allocates a larger share of the boosted rewards directly to the LPs, making it a more attractive option for liquidity providers seeking to maximize their returns under current conditions.
Potential Challenges and Risks
While Pendle's TVL shows promising growth, underlying risks persist. The continuous emission of PENDLE tokens creates inherent sell pressure. This emission schedule makes it challenging for Pendle, Penpie, and Equilibria to sustain high Annual Percentage Rates (APR) indefinitely, which is critical for attracting and retaining users to stake their tokens.
Furthermore, the significant quantities of ePENDLE and mPENDLE that are currently illiquid—either due to a lack of trading pools or their discounted rates—represent a substantial overhang of latent sell pressure. This could materialize if liquidity improves or users find exit routes, potentially impacting the token's price.
Frequently Asked Questions
What is Pendle Finance?
Pendle Finance is a decentralized finance protocol that allows users to tokenize and trade future yield. It enables investors to separate the underlying asset from its yield, creating two distinct tokens: Principal Tokens (PT) and Yield Tokens (YT) that can be traded independently.
How does the vePENDLE model work?
By locking PENDLE tokens, users receive vePENDLE, which grants them voting rights. These votes determine how liquidity mining incentives are distributed across various pools on the platform. In return, vePENDLE holders earn a share of the trading fees and protocol revenue.
What are the main risks associated with investing in Pendle?
The primary risks include the continuous emission of new PENDLE tokens, which creates inflation and potential sell pressure. Additionally, the sustainability of high APRs is uncertain, and there is latent sell pressure from illiquid derivative tokens like mPENDLE and ePENDLE that trade at a discount.
What is the difference between Penpie and Equilibria?
Both protocols offer similar services by allowing users to gain boosted yields without locking PENDLE. The main differences lie in their tokenomics and reward distribution. Penpie allocates a higher percentage of the boosted rewards back to LPs (83%) compared to Equilibria (77.5%), making it potentially more attractive for liquidity providers.
Can I convert mPENDLE or ePENDLE back to PENDLE?
Direct, frictionless 1:1 conversion is not always available. ePENDLE conversion is currently paused, and mPENDLE trades on decentralized exchanges at a significant discount to its peg, meaning converting back to PENDLE would currently result in a financial loss.
What assets provide the most yield on Pendle?
Liquid Staking Tokens (LSTs) like stETH form the core of Pendle's TVL and offer stable base yields enhanced by liquidity incentives. Assets like GLP can offer more variable and potentially higher yields due to their connection to trading fees and market volatility.