Pendle Finance is a decentralized finance (DeFi) protocol that allows users to tokenize and trade the future yield of their assets, offering a novel way to manage and optimize yield. Users can deposit yield-generating assets such as liquidity provider tokens (e.g., stETH from Lido Finance) into Pendle, which splits these assets into two types of tokens:
Principal Tokens (PT): These represent the ownership of the underlying asset. PT holders have the right to redeem the asset’s full value at maturity. PT can also be traded before maturity, giving users the ability to unlock liquidity from long-term assets without having to sell the asset itself.
Yield Tokens (YT): These represent the future yield generated by the underlying asset until a set expiration date. YT can be bought and sold independently from PT. Since YT allows traders to gain exposure to yield fluctuations, it is often sold at a discount, offering a unique opportunity for users to speculate on future yield increases or lock in higher returns.
Pendle’s design provides greater flexibility for DeFi investors. For example, by selling YT, a user can lock in a fixed return from the future yield of their assets, while buying YT allows others to benefit from potential increases in future yields. This dual-token mechanism helps users hedge yield risks, unlock liquidity, and optimize yield management. Additionally, Pendle operates across several blockchains, including Ethereum, Arbitrum, and BNB Chain.
By separating principal and yield, Pendle introduces innovative strategies that closely resemble traditional financial instruments like bonds, where interest and principal can be traded separately. This approach opens new possibilities for both risk management and speculative opportunities within the DeFi ecosystem.
