Analysis of Pendle and the Pendle War it triggered

Author: Jaden, LD Capital Research

1. Current status of Pendle

Pendle Finance is a revenue strategy agreement deployed on Ethereum and Arbitrum. It will launch the v2 version at the end of 2022 and change the economic model, and then support LST assets and launch Arbitrum. For more fundamental information, view the LD Pendle Historical Report.

Photo: Pendle TVL

Source: Defillama, LD Research Its TVL will continue to grow from the end of 2022, and the current TVL has exceeded 126 million US dollars.

Figure: Liquidity Distribution (Million)

Source: LD Research The liquidity in the Pendle protocol mainly comes from LST assets, and GLP, stable coins and other tokens only account for about 30% of its TVL. The source of GLP's income is mainly 70% of the trader's profit and loss and agreement fees. The trader's profit and loss and agreement fees change every day, and the rate of return has higher game space and tradability.

The initial income of LST assets comes from ETH PoS, and there are differences in pledge amount changes, LSD protocol operating mechanisms, and platform fees. Therefore, there is a gap in the rate of return of each LSD platform, but the gap is not large. The rate of return is usually maintained at about 4%. The small change in elasticity also determines that the yield of LST assets is less tradable. The Pendle protocol adopts the veToken and Gauge voting model for liquidity mining, so the Pendle LST pool rate of return can reach 10%-30%.

Figure: Pendle protocol transaction volume

Source: app.sentio.xyz, LD Research According to historical transaction volume data, the daily transaction volume of the Pendle protocol is basically less than $1 million. The transaction volume of LSD assets accounted for 54.82% of the total transaction volume, and the historical transaction volume of GLP accounted for 24.09% of the total transaction volume. GLP transactions usually occur when the market is relatively active, so GLP accounted for 51.29% of the transactions in the past day. Combined with the LTV ratio of various assets in the agreement, there is more room for the game of GLP yield.

2. Pendle economic model

Token Distribution

Figure: Token Distribution

Source: Pendle Docs, LD Research At present, the team, consultant and investor parts have been unlocked.

In the part of liquidity incentives, 1.2 million are distributed every week for the first 26 weeks, and then reduced by 1.1% every week until the 260th week. After the 260th week, the final annual inflation rate is based on 2% of the circulating token supply, and the weekly liquidity release remains at a relatively stable level. According to the team's description, the weekly release amount in October 2022 is 667,705 (the 79th week release amount), which is currently between 113 and 117 weeks, and the weekly release amount is about 450,000. **PENDLE will be available for long-term release. **

Figure: PENDLE Weekly Release

Source: LD Research Pendle introduced the veToken model in November 2022, the main purpose of which is to improve the liquidity of the protocol. Pendle's lock-up period ranges from 1 week to 2 years. vePENDLE holders direct reward flow to different pools by voting, incentivizing liquidity in the voting pool. A snapshot of all votes will be taken at the beginning of each cycle at 00:00 UTC on Thursday, and the incentive rate of each pool will be adjusted accordingly.

vePENDLE main features:

1. The LST asset issuer has little incentive to bribe vePendle. As the leading DEX, in order to improve the liquidity of assets in this agreement in Curve, the asset issuer usually provides its own token mining rewards and bribes veCRV to vote to increase CRV liquidity mining incentives. The demand for vePENDLE mainly comes from LPs participating in mining, and lacks strong demand from asset issuers.

2. vePENDLE lockers can only participate in the distribution of pool transaction fees for voting.

3. vePENDLE holders can share 3% of the income generated by Yield Token (YT).

4. vePENDLE holders can share 80% of the transaction fees of the AMM pool they voted for.

Picture: PENDLE Pledge Status

Source: Pendle Finance, LD Research As of July 3, the locked amount of PENDLE is 37 million, and the average locked time is 392 days.

3、Penpie/Equilibria

Both Penpie and Equilibria are auxiliary agreements to increase LP income based on the Pendle veToken economic model. LP does not need to pledge Pendle to obtain Pendle mining boost income. There is not much difference between the two business models.

Penpies

The protocol currently supports Ethereum mainnet and Arbitrum.

Users can convert PENDLE to mPENDLE through Penpie, and the protocol collects PENDLE as pledge to vePENDLE to realize mining boost for LP. 83% of Boost income will be allocated to LP, 12% to mPENDLE holder, and 5% to vlPNP. The team plans to allocate 17% of the YT rewards in the vePENDLE equity to the Bribe market, but it is still not online.

Table: Income Distribution

PNP is Penpie's governance token, and users can obtain vlPNP at a ratio of 1:1 by locking PNP tokens. Holding vlPNP can earn agreement distribution income and participate in governance. Once users lock their PNP tokens into vlPNP, they will enter the default lock state, and the lock period is unlimited. Users must "start unlocking" to enter the 60-day cooldown period. During the cooldown period, vlPNP holders can continue to earn passive income but cannot participate in voting. After the 60-day period is over, users can fully unlock their vlPNP to PNP. The penalty cost on the first day of the cooling-off period is 80% of the total amount of PNP tokens locked by the user, and will decrease non-linearly over time.

Equilibria

The business model of Equilibria is basically the same as that of Penpie, and it also helps Pendle LP achieve mining boost without staking PENDLE. Once Pendle is pledged as ePendle, it is irreversible. Users need to lock EQB/xEQB into vlEQB to obtain protocol fees and voting rights. xEQB can be converted to vlEQB, and the team plans to integrate xEQB into other protocols, but there are not many use cases so far.

Figure: Equilibria architecture

Source: Equilibria docs, LD Research After the mining boost is realized through Equilibria, 77.5% is allocated to LP, 12.5% is allocated to ePendle holder, 7.5% is allocated to vlEQB holder, and Treasury gets 2.5%. The income ratio assigned to each role has its range set.

Table: Income Distribution

protocol data

Figure: PENDLE lock data

Source: dune.com, LD Research *Dune data is used as a reference (stopped on June 28), and there is a discrepancy with the current data on the official website of the agreement.

According to the official website data, as of July 4, the locked volume of Penpie PENDLE was 7.45M, and that of Equilibria was 7.54M. Although ePENDLE, mPENDLE and PENDLE are exchanged at a ratio of 1:1, Equilibria announced after June 19 that it will suspend the liquidity pool of ePENDLE/PENDLE. , the team has not yet given a definite time, and mPendle has launched Wombat, but the exchange ratio is about 1:0.72, which is seriously worn.

表：Penpie vs Equilibria

Source: LD Research Compared with Equilibria, Penpie allocates a larger part of the boost income to LP, which is more friendly to LP and reserves more income for LP. Under the same conditions, LP will be more willing to choose Penpie.

From the data point of view, the TVL of the Pendle protocol is growing steadily, and the fundamentals are gradually being consolidated. The risk point is that the current PENDLE tokens continue to be emitted. Neither the PENDLE protocol nor Penpie and Equilibria can maintain a high APR for a long time, so it is difficult to continue to attract users to pledge PENDLE. And at present, there are a large number of ePENDLE and mPENDLE that cannot be sold due to no pool or unanchored, which are all implicit selling pressure.