Where it starts: a yield-bearing token
Many tokens earn while they are held. A staked ether token grows against ether as validator rewards arrive; a savings dollar grows against the dollar as interest is paid into it; a vault share grows as its strategy earns. Pendle calls such a token the underlying asset, and the unit its growth is counted in the accounting asset: ether for a staked ether token, the base dollar token for a savings dollar.
SY: the same token in a standard wrapper
SY (standardised yield) holds the underlying asset and represents it through one interface, proposed by Pendle's team as EIP-5115 (still a draft), so that the rest of Pendle can treat every yield-bearing token the same way. The wrapper is a contract of its own, and with it comes the question of who can change that contract.
PT and YT: the split
An SY can be split into two tokens that run until a fixed date, the maturity: a principal token (PT) and a yield token (YT). Splitting SY worth one unit of the accounting asset gives one PT and one YT. Before maturity, one PT and one YT can be merged back into SY worth one unit, unless the SY's exchange rate has fallen below its earlier high, in which case they return less.
The PT is a claim, at maturity, on the underlying worth one unit of the accounting asset. Before maturity it trades below that value, and the gap is what the market charges for waiting: a PT bought at 0.95 and held to a maturity a year away returns about 5.3% in the accounting asset.
The YT is a claim on the yield the underlying earns on one unit of the accounting asset from now to maturity, together with any rewards or points the issuer attaches, less the fee Pendle keeps on them. At maturity it stops earning; its whole value is the yield it collects on the way.
The two prices are tied. Before maturity, the price of a PT plus the price of a YT equals one unit of the accounting asset: when one rises, the other falls by the same amount.
LP: a share of the pool
PT and YT trade in Pendle's automated market maker. Each market is one pool holding PT and SY, and a liquidity provider (LP) holds a share of it. YT trades through the same pool: Pendle's router builds a YT trade from a PT trade in the pool and a split or a merge (a flash swap), so one pool prices both. Beside the pool, Pendle runs a limit-order book for PT and YT, and its router fills trades from both.
An LP position earns a share of the swap fees (Pendle keeps the rest), the yield of the SY it holds, the fixed yield of the PT it holds, and any incentives the pool receives. It holds both sides of the pool, so its value moves as traders move the price.
What each one is exposed to
- PT: the value of the underlying at maturity, measured in the accounting asset. If the exchange rate the underlying's own contract reports falls below its earlier high, through a loss in its strategy or a hack written into that rate, the PT redeems for less than one unit.
- YT: the amount of yield until maturity. If the yield falls or stops, the YT is worth less; at maturity it is worth nothing more.
- LP: both of the above in the pool's proportions, plus fees and incentives, plus the price moves of trading.
- All three: the underlying asset itself, its issuer's contracts and keys, the SY wrapper, and Pendle's own contracts. The asset pages of this encyclopedia describe the first two of these for each asset.