Why a PT needs its own oracle
A PT is not listed on centralised exchanges; it trades mainly in Pendle's pool and Pendle's own limit-order book. Its value comes from two things: the value of the underlying in the accounting asset, and the discount for the time left to maturity. An oracle for a PT has to supply both, and the second is where the designs differ.
The market-rate oracle (TWAP)
Pendle's markets record their implied rate over time, and Pendle publishes an oracle that reads a time-weighted average of it (a TWAP, the geometric mean of the rate) over a window the lending market chooses, for example 15 minutes. The PT price follows the market: if the implied rate rises, the oracle price starts falling at once, and has fallen by the full amount once the higher rate has lasted a whole window.
Its strength is that it moves when the market moves, including when the market is right about a real loss. Its weakness is that a thin market can be moved by one large trade, and the oracle follows that move as faithfully as a real one. The window trades one against the other: a longer window is slower to follow a real move and harder to push.
The linear-discount oracle
The other design ignores the pool. It prices the PT at a fixed yearly discount that shrinks in a straight line to zero at maturity: a PT with half a year left and a 10% yearly discount is priced at 0.95, whatever Pendle's market shows. Trades cannot move it. Pendle publishes oracles of both designs.
Its weakness is the mirror image: it does not move when the market does. If the underlying really loses value, or the market rate rises for a lasting reason, the oracle keeps valuing the collateral at the old price, and the loss moves from the borrower to the lender. Some designs multiply the discount by a separate price feed for the underlying, so that a loss in the underlying still reaches the oracle.
Combinations
Some markets take the lower of a TWAP and a fixed curve. The price then follows the market when the market is lower and the curve when the market is higher: a move in the pool can still bring the price down, but cannot carry it above the curve.
What an oracle's description records
- Which design it is, and for a TWAP, the length of its window.
- What the PT's price in its accounting asset is then multiplied by: nothing, which values one unit of the accounting asset at exactly one unit of the loan asset, or a price feed for the accounting asset or the underlying.
- Who can change it, and with what delay.
These three facts decide what moves the collateral's value, and so what can liquidate a loop against it.