Markets
New Twist on Old Bond Market Strategy Draws Billions to Crypto Project
(Bloomberg) — One of the hottest projects in decentralized finance is attracting billions of dollars by combining a long-term bond market maneuver with one of this year’s most popular cryptocurrency marketing strategies.
Bloomberg’s Most Read
The project, Pendle Finance, splits yield-bearing cryptocurrencies into two tokens, similar to the elimination of principal and interest payments that has been a mainstay in the bond market for more than half a century. Until recently, the total value locked or staked on the app has remained below $250 million practically since its launch in 2020, despite high returns of 30% or more offered on many of the tokens that pay stripped yields, according to the cryptocurrency tracker. data. DeFiLlama.
Demand remained relatively weak until Pendle began in January to integrate airline-like loyalty programs, prompting traders to flock to the platform to speculate on the new rewards, which are assumed to have little intrinsic financial value. Around $6.4 billion in assets are now staked on 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 participation rather than donating more tokens. Although the projects offering the programs have been vague about the value of the points, they have become popular among traders who have traditionally bet on airdrops, or giveaways of tokens used to stimulate activity on new blockchains.
That’s where Pendle comes in. By connecting platform users who want to accumulate points and those who want to earn higher yields, Pendle has created a marketplace to buy and sell points.
“I would liken it perhaps to something like a lottery ticket,” said TN Lee, co-founder of Singapore-based Pendle Finance. “Except it’s much less about gambling, but more about having a vision for how the protocol or token would work.”
While critics warn that the combination exacerbates many of the risks inherent in DeFi, Lee said the company is seeking to meet demand for a product that can add some clarity to the returns paid by cryptocurrency borrowers by presenting a stated yield over a given period. .
The story continues
“If money continues to flow into the crypto sector, the need for certainty will only increase,” said Lee. “Because from a money manager’s perspective, or most other people, they would like to have certainty about their APYs.” , or annual percentage returns.
Interest-bearing cryptocurrencies became popular after the Ethereum blockchain completed a software update called Merge nearly 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 promised returns. These derivative tokens are considered interest-bearing as they represent both the underlying Ether tokens that are staked and the yields that will be earned through staking.
The pricing of core and yield tokens is based on the concept that the combined value of the two always equals the market value of the underlying cryptocurrency. The idea is that when there is more demand for the yield token, its price rises and the price of the core token falls, and vice versa. Lee said that in the scenario where there is no demand for both, the total value of the two tokens will still be equal to the underlying asset based on the mathematical formula designed for Pendle.
One of the main catalysts for the industry-wide collapse two years ago was the collapse of the Terra algorithmic stablecoin project, where two supposed clearing tokens were supposed to maintain constant value until demand for both evaporated.
Pendle Finance’s ultimate goal is to handle much larger traditional assets like the fixed income market and bring them onto the blockchain, according to Lee.
“It’s a really powerful growth opportunity for them if they can start bringing in traditional finance,” said Matthew Potts, senior net analyst at digital asset firm CoinFund, which has invested in projects with Pendle-listed markets.
Still, Pendle’s financialization of crypto loyalty points has faced criticism from within the DeFi industry. Some observers have expressed concern that pricing a product as points will only make 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 from the reinstatement project. Although many traders accumulated a large amount of points through Pendle, EigenLayer initially excluded users from the platform before reversing the decision following protests.
“There are a lot of speculative factors because if you are doing a points campaign and maybe they pitch 20% of the supplies to people with points, or maybe 5%, or maybe they get acquired,” said Zaheer Ebtikar, founder of crypto fund Divided Capital. “So many things you are speculating about. They are all like future versions of the abstraction of what the token price should be.”
Bloomberg Businessweek Most Read
©2024 Bloomberg LP