Markets
New twist on old bond market strategy draws billions into crypto project
(Bloomberg) — One of the hottest projects in decentralized finance involves attracting billions of dollars by combining a long-term bond market maneuver with one of the hottest crypto marketing strategies popular this year.
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The project, Pendle Finance, splits yield-producing cryptocurrencies into two tokens, in the same way that paying principal and interest has been a mainstay of the bond market for more than half a century. Until recently, the total value locked or staked on the app had remained below $250 million since its launch in 2020, despite the high yields of 30% or more offered on many discounted tokens, according to the data tracker. DeFiLlama.
Demand remained relatively subdued until Pendle began integrating airline-like loyalty point programs in January, prompting traders to rush to the platform to speculate on the new rewards, believed to have little intrinsic financial value. Around $6.4 billion in assets are now tied to the protocol, which has effectively become a secondary market for trading crypto points and yields.
Loyalty points programs took off late last year when many crypto projects started offering them as a reward for participating instead of handing out more tokens. Although projects offering these programs remain vague about the value of the points, they have become popular among traders who traditionally bet on airdrops or token gifts used to stimulate activity on new blockchains.
This is where Pendle comes in. By connecting platform users who want to accumulate points and those who want to earn higher returns, Pendle has created a marketplace for buying and selling points.
“I would maybe liken it to something like a lottery ticket,” said TN Lee, co-founder of Singapore-based Pendle Finance. “Except it’s a lot less about gaming, and more about getting a feel for how the protocol or token would work.”
Although critics warn that this combination exacerbates many of the risks inherent in DeFi, Lee said the company was looking to meet demand for a product that could add some clarity to the returns paid by borrowers of cryptocurrencies in presenting a declared return over a defined period. .
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“If money continues to flow into the crypto sector, the need for certainty will only grow,” Lee said. “Because from a fund manager’s perspective, or most other people’s perspective, they would want to have certainty on their APYs,” or annual percentage returns.
Interest-bearing cryptocurrencies became popular after the Ethereum blockchain completed a software upgrade dubbed Merge almost two years ago, allowing Ether token owners to “stake” the coins to help validate transactions and secure the network in exchange for rewards. Projects like Lido Finance offer a staked Ether-derived token that can be used elsewhere for trading, lending, and other activities, increasing the promised returns. These derivative tokens are considered interest-bearing because they represent both the underlying Ether tokens that are staked and the returns that will be earned through staking.
The pricing of principal and yield tokens is based on the concept that the combined value of the two is always equal to the market value of the underlying cryptocurrency. The idea is that when there is more demand for the yield token, its price increases and the price of the main token decreases, and vice versa. Lee said that in the event there is no demand for both, the total value of the two tokens would still equal the underlying asset, based on the mathematical formula designed for Pendle.
One of the main catalysts for the industry collapse two years ago was the collapse of the Terra algorithmic stablecoin project, in which two so-called compensation tokens were supposed to maintain a constant value until as demand for both evaporates.
Pendle Finance’s ultimate goal is to take on much larger traditional assets, such as the fixed income market, and integrate them with blockchain, according to Lee.
“It’s a really powerful growth opportunity for them if they can start tapping into traditional finance,” said Matthew Potts, senior liquidity analyst at digital assets firm CoinFund, which has invested in projects whose markets are listed on Pendle.
Yet Pendle’s financialization of crypto loyalty points has faced criticism from the DeFi industry. Some observers have expressed concern that pricing a product like points only makes the sector even more speculative and risky.
Earlier this year, Pendle found itself at the center of controversy when EigenLayer announced plans to distribute tokens based on the points users received in the takeover project. While many traders had accumulated a large number of points through Pendle, EigenLayer initially excluded users from the platform before reversing its decision after an outcry.
“There are a lot of speculative factors, because if you do a points campaign and maybe they drop 20% of the supplies to people with points, or maybe 5%, or maybe it is acquired,” said Zaheer Ebtikar, founder of the crypto fund. Divided capital. “There are so many things you speculate on. They are all like future versions of abstraction of what the symbolic price should be.
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