Thread by @ed_Nuward

One of the protocols that I appreciate the most and which is also one of the most technically complicated : @pendle_fi

I think a lot still don't understand the principle of this amazing protocol.

Let’s dive into it !

THREAD 🧵🧵🧵

@pendle_fi is a technically quite complex protocol, it took me a while to understand it.

In this THREAD, I will do my best to be as simple as possible so that as many people as possible understand.

There is 4 levels of understanding on @pendle_fi, at the end of this THREAD my goal is that you are at level 2.

I will probably do another THREAD to complete.

Let's GO!!

Yields are like any asset, they can fluctuate depending on the date, the context, the situation, etc...

An example image showing how Yield fluctuates over time.

Pendle is a permissionless DeFi yield-trading protocol, currently built on the Ethereum blockchain, where users can execute various yield management strategies.

Pendle gives you the option to split your token into two, a PT token (Principal Token) and a YT token (Yield Token).

By creating a yield market in DeFi, @pendle_fi unlocks the full potential of yield. Pendle enables users to execute advanced yield strategies, such as:

- Long assets at a discount
- Fixed yield for low-risk, stable growth
- Long yield
- A mix of any of the above strategies

Each PT and YT has an maturity date.

For PT, you can redeem the full underlying yield-bearing token after this date.

For YT, the yield of the yield-bearing token is only accrued up until the maturity date, after which YT has no value.

Notion of "Underlying asset":

The "Underlying asset" corresponds to the base token on which yield is generated.

For PT stETH for example, the "Underlying asset" is simply $stETH.

You have to understand that the PT (Principal Token) allows to exchange in 1:1 directly against the "Underlying asset" on the date of maturity.

While 1 YT entitles you to receive the return of 1 unit of the Underlying asset until the maturity date, claimable in real-time.

Let's give a picture example that you absolutely need to understand at this point!

Before maturity, you can mint 1 PT and 1 YT unit of the underlying asset.

Before maturity, you can redeem 1 unit of underlying asset from 1 PT + 1 YT.

Before maturity YT holders can claim any accrued yield in real-time.

After maturity PT holders can redeem underlying asset 1:1 without YT.

Important to know : You can buy and sell PT and YT on the open market using Pendle AMM at any time !

The Pendle AMM assure this logical relationship between their price :
PT Price + YT Price = Underlying Asset Price

If you understood everything I said above, then you have reached level 1.

The next part is level 2!

Like I said above, you can buy or sell Principal Token (PT) on the Pendle AMM.

PT price is determined by market demand and supply.

Exemple :
Peepo is buying PT for DAI staked in Compound, known as PT cDAI. Because PT cDAI does not include the yield component, PT cDAI will always be cheaper than 1 DAI.

This is true for all PT.

After buying 1 PT cDAI at a discounted price (0.9DAI), Peepo can redeem 1 DAI for his PT upon maturity. This is a fixed return, since the amount of DAI redeemable at maturity is fixed.

After 1 year Peepo can exchange 1 cDAI PT for 1 DAI, so he will have had a 10% gain!

After seeing this, now comes the understanding of when to buy a PT?

Intuitively, you should buy PT when it is cheaper, as you would get a higher fixed yield. But how can you tell that PT is selling at a cheap price?

There are two steps in your consideration:

1 - Your prediction of the average future yield from now until maturity
2 - Given your prediction, is the current fixed yield good enough to lock in?

For example, you predict that the average future yield until maturity for stETH is 5%, but PT stETH is priced at a 6% fixed rate => You should buy and hold PT stETH.

Instead of waiting until maturity to redeem the underlying asset, you can also choose to sell your PT prematurely

Final BIG exemple :

Let's say that there is a stETH pool in @pendle with a maturity of 1 year.
That means the holder of PT stETH can redeem stETH 1:1 after 1 year.

Peepo sees the following information from the Pendle Market page on 01 Jan 2023:

You can pay 0.94 stETH to buy 1 PT stETH now and redeem 1 stETH after maturity.

5 % est le Yield que tu peux générer directement en stakant sur Lido.

As you understand, you can therefore generate 6.4% by directly buying 1 PT stETH and keeping it for 1 year.

This is especially useful in turbulent markets when the yield can fluctuate, as you can fix your APY at a desirable rate and not need to worry about your returns at all.

I hope this THREAD has been clear, I will discuss in a future THREAD more details on the protocol and in particular the tokenomics.

I invite you to complete this THREAD with these THREADS from the master: @DeFi_Made_Here

https://twitter.com/DeFi_Made_Here/status/1628771658361196544?s=20

https://twitter.com/DeFi_Made_Here/status/1630939275662446592?s=20

https://twitter.com/DeFi_Made_Here/status/1636773703244562441?s=20

I hope you enjoyed it, don't hesitate to let me know in the comments, without forgetting to like and RT the first tweet of the thread!

Be strong 💪
#Cryptocurency #DEX #pendle #Arbitrum #RealYield #yield #blockchain #project #fees #earning

https://twitter.com/ed_Nuward/status/1637217113248079872?s=20