Rapture #267: Yield Speculation with Pendle

As I mentioned in Rapture #265, now that I am far less confident that the bear market continues, I have deployed a bit of capital into select altcoins in addition to ETH, which I am staking.

I already discussed my rationale behind investing in DESO, but today I wanted to touch on two others: PENDLE and LIT. LIT was my largest allocation out of these 3 altcoins and is also performing the best (approximately a 2.5x from where I bought just under two weeks ago).

When it comes to these sorts of plays, I am looking to at minimum 10x hit. I have had quite a few misses in these low cap type of plays (SWM, RARI, ZORA) that are now effectively zeros, but just hitting one of these low caps in a bull market dramatically makes up for the losses of the others (AXS in the last cycle).

So, let me briefly discuss some of the reasons why I deployed capital into PENDLE in this newsletter. I will hit on LIT in the next.

Pendle tokenomics

First, from a valuation perspective, PENDLE is definitely low cap at a $20 million fully diluted valuation and roughly $8.4 million market cap. Yet despite its low valuation, Pendle has already attracted more than $21 million in TVL, which means its punching way above its weight class.

Furthermore, the project utilizes the vetokenomics modal for, requring users to lock up PENDLE to get vePENDLE in in order to claim rewards and vote. This token sink has proven to be incredibly effective in other crypto projects in terms of accreting value to the token and reducing dumpage from farming.

Use case

Pendle enables users to split the yield from a yield-bearing asset and consequently allows those users to then sell the different pieces up to a certain maturity date. For example, aUSDC (USDC being lent on AAVE) can be split into YT-aUSDC (a token representing the yield of aUSDC up to maturity) and PT-aUSDC (represents the principal of aUSDC up to maturity).

The user can sell either the YT or PT at any time. Since there is a maturity related to the tokens, the PT tokens are sold at discounts. In order for that user to reach par value for that token, they must hold it until maturity.

The most interesting discounted token right now on Pendle is APE, which can be purchased at a 28.9% discount to current prices and matures in 153 days. If I wanted to be a long term buyer of APE, without a doubt I would opt to use Pendle in order to accumulate a position.

Additionally, users are able to speculate on the change in yield by purchasing the YT tokens. The YT tokens will fluctuate in value based on how the variable rate changes.

This allows for new areas of speculation to occur that are built on the existing DeFi primitives. Since nearly all rates in DeFi are variable, giving users the ability to speculate on that yield change increases DeFi's viability.

Other points

While I don't weight this type of factor much when putting on a long term trade, Pendle is backed/used by some of the leading crypto funds, from CMS to Mechanism Capital to Spartan.

They really need to up their twitter and narrative game though, because their competitor, Timeless, is doing a much better job of targeting the crypto twitter audience.

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