Key Questions#
- How to calculate the split of SY tokens into PT and YT?
- What do the values on the Pendle trading interface mean?
- How to profit in Pendle?
- What factors affect the price movement of YT tokens?
How to calculate the split of SY tokens into PT and YT?#
Calculation of PT portion
Example 1: Let's take the example of cDAI generated by depositing DAI into Compound (cDAI and similar interest-bearing assets are encapsulated as SY in Pendle, for more details see EIP-5115)), that is, cDAI = PT cDAI + YT cDAI.
The price of PT cDAI is determined by the market, but PT cDAI will be cheaper than 1 DAI because it does not include the interest provided by Compound. This means that you may be able to buy 1 PT cDAI for 0.9 DAI, and assume that it can be redeemed for 1 DAI when it expires after one year.
Pendle Learn
Example 2: In the figure below, the price of PT stETH is 0.94 stETH, which means an APY of about 6.4%. Assuming an average stETH yield of 6% over the next year, buying PT stETH locks in a better yield.
Pendle Learn
Recalling the formula SY = PT + YT, when PT APY is high, the price of PT shares is low, and the price of YT is correspondingly high. In other words, YT always purchases the additional part of the PT price. It is best to express this in terms of the underlying asset's currency.
Calculation of YT portion (emphasis)
In the figure below, taking stETH as an example, 1 stETH (YT) is split into 1 PT stETH (0.96 stETH) + 1 YT stETH (0.04 stETH). The income generated by PT is determined at the time of purchase and is 4% APY. When YT stETH is split, it is worth 0.04 stETH. If the actual holding of stETH generates a yield of 0.05 stETH after one year, this part of YT will receive 0.01 stETH (25% yield).
Pendle Learn
The key factor here is how the market perceives the future yield. If the market prices the future yield at 5%, but it turns out to be 10%, then those who buy and hold YT will profit. The break-even scenario is Average future APY = Current underlying APY, which means that the market's pricing of the yield is correct. From this, we can also understand that the core competitiveness of Pendle's yield gambling is to more accurately price the future yield of interest-bearing assets than the market.
Calculation of actual yield from trading YT stETH
In the figure below, 100 YT stETH expiring after one year was purchased on January 1, 2023, for 4.3 stETH. The reason for this trade is the belief that the implied APY of 4.5% is too low and will rise to 5.5% in the future. So, if this prediction is correct, how much money can be made?
Pendle Learn
In the figure below, on April 1, 2023, the stETH implied APY rose to 5.5%, and the underlying APY increased from 5% at the time of opening to 5.2%. In this scenario, the aforementioned YT holder receives two types of income: 1) income from selling YT; 2) interest income from holding YT for 90 days. How should these two types of income be calculated?
Pendle Learn
- Income from selling YT: From the second figure, it can be seen that the price of 1 YT stETH is 0.0393 stETH (considering only the currency-based income). Therefore, selling 100 YT stETH can yield 3.93 stETH.
- Interest income from underlying asset stETH: Assuming an average annual yield of 5% during the holding period, holding 100 YT is calculated based on a nominal 100 stETH, which is . If it is cashed out as stETH at this time, the initial cost of 4.3 stETH can be cashed out as (additional costs such as transaction fees and slippage are not calculated here). This transaction achieved a return of over the 90-day period.
What do the values on the Pendle trading interface mean?#
The following are the values that appear on the Pendle Market page, which reflect different meanings. We should understand them as follows.
Underlying APY refers to the near seven-day yield (expressed as an annualized rate) of the underlying interest-bearing assets. When trading on Pendle, it is important to have an advantage in predicting this value.
Implied APY refers to the implied yield rate given to YT by the current market. When Implied APY > Underlying APY, it means that the market is pricing higher future yields. This value is important as it represents the market's views and pricing.
Long Yield APY (YT Price) refers to the yield rate of holding YT assuming that Implied APY immediately returns to Underlying APY.
Pendle Market 2023/9/20
Taking the red box in the figure above as an example, at that time, the annualized yield of stETH in Lido was about 3.66%, while the market priced PT/YT at 4.12%, which means that the market is currently pricing higher future yields.
Comparing the three different terms of stETH in the figure above, the market's implied view is that the average yield rate will increase within one year, but it will decrease to 3.58% for periods longer than 2 years, and then slightly increase to 3.8% for periods longer than 4 years. In other words, the market believes that the long-term stETH yield rate is approximately between 3.58% and 3.8%. The pricing of 4.12% yield rate in the red box can be considered as a slightly abnormal value, implying that the market has a richer view of stETH, which requires a basic understanding of the ETH Staking industry.
How to profit in Pendle?#
In summary, holding PT in Pendle means being bearish on the future yield rate of interest-bearing assets. For example, holding PT stETH means believing that the market's pricing of a 4.12% stETH yield rate will continue to decline. Holding YT means being bullish on the future yield rate of interest-bearing assets. For example, holding YT stETH means believing that the market's pricing of a 4.12% stETH yield rate will increase.
Factors affecting the price movement of YT tokens?#
The figure below shows the borrowing rates of various tokens on Compound, such as the Lending Rates of DAI, which represents the yield rate of cDAI as the underlying asset.
Pendle Learn
It can be seen that the yield rates of interest-bearing stablecoins on Compound increase during bull markets because lending out stablecoins allows for further exposure to BTC/ETH and more returns. The yield rates of different tokens are influenced by different scenarios and require specific analysis. Here are a few examples of interest-bearing assets in the DeFi field to help understand that accurately predicting the yield rate of interest-bearing assets is a difficult task.
- Staking interest-bearing assets, such as stETH;
- Borrowing interest-bearing assets, such as cDAI;
- DEX LPs assets, such as ARB-ETH (Camelot);
Taking the stETH expiring on December 26, 2024, as an example, trading YT/PT aims to obtain additional returns in terms of stETH. First, look at the market pricing, which only requires looking at one important value, the Implied APY. If I believe that the future APY will be lower than the Implied APY, then I buy and hold PT; if I believe that the future APY will be higher than the Implied APY, then I buy and hold YT.
Pendle Market 2023/9/20
In the figure above, the market price is 4.122%. The question we need to answer is: Will the future yield rate of holding stETH be greater than or less than this value? As for the Underlying APY and Long Yield APY provided on the interface, they are only reference values for us.
What knowledge do we need to judge the future yield rate of stETH?
First, we need to understand the sources of ETH staking income, which can basically be divided into consensus layer income and execution layer income:
- ETH consensus layer income: The amount of this income is mainly related to the number of Validators participating. As the number of participating Validators increases, the rewards from the consensus layer will decrease. The figure below shows the relationship between the number of Validators and the consensus layer APR, which can be calculated based on the numbers in the Ethereum Model table. Currently, there are over 800k Validators, and the consensus layer APR is about 3.2%.
Ethereum Issuance
- ETH execution layer Gas & MEV income: First, Gas income depends on the transaction activity on Ethereum, which is very dynamic and difficult to predict. However, we can track it in real-time based on the Gas situation. MEV income is even more dynamic and complex. In addition to judging the transaction activity on Ethereum, we also need to understand the bargaining power changes of various roles in the value flow of MEV (as shown in the figure below), such as the bargaining power and income increase of Searcher and Relayer, which may mean a decrease in the income of Validators and Stakers (holders of stETH). This is a difficult question for most people to answer.
Value Flows in the MEV Ecosystem
Therefore, we can speculate that as more ETH is staked, the income obtained by stETH from the consensus layer will gradually decrease. If about 50% of ETH is staked, the yield rate of the consensus layer will decrease from the current 3.2% to about 2.1%. The income from the execution layer is affected by the transaction activity on Ethereum, which is currently between 0.5% and 1.5%. If we believe that more ETH will be staked in the future and there are still many Validators queuing to participate, then the yield rate of stETH may continue to decline, and holding PT is a better choice. The figure below shows the continuous decline in the pricing yield rate on Pendle and the fluctuating downward trend of the actual yield rate.
Pendle Market 2023/9/21
In the case of borrowing interest-bearing assets, such as cDAI in the Compound protocol, the income actually comes from the interest paid by other users who borrow DAI, and judging the changes in the cDAI yield rate requires predicting the supply and demand of DAI in Compound.
Similarly, in the case of DEX LPs assets, such as the PENDLE-ETH pool on the Camelot exchange, factors affecting the yield rate include the number of LPs in the pool and the size of trading volume.
Finally, it is emphasized again that in Pendle, obtaining excess returns requires the ability to more accurately predict the yield rate than the market, thus discovering market mispricing. Before trading, ask yourself, do we really have an advantage in understanding the underlying assets? Do we really respect the counterparty? Is it worth taking on the contract risk and other costs for this expected excess return?