In-Depth Analysis: Justin Sun Spends 33,000 ETH to Buy Pendle PT with a Near 20% Return - What Are the Strategies and Risks?

On the 4th, TRON founder Justin Sun made a significant purchase of Pendle PT tokens, enjoying a low-risk arbitrage operation with a nearly 20% annual return rate, becoming the focus of community attention. This article will explain the source of the profits from this operation, explore related risks, and provide risk avoidance strategies for readers' reference.

Justin Sun’s Arbitrage Method Firstly, according to on-chain analysts Yu Jin and Aunt Ai monitoring on-chain addresses, Justin Sun's recent operations are as follows (the image below shows Sun’s position in Pendle):

Total investment: 33,000 ETH, all invested in Ethereum re-staking projects maturing on June 27, specifically:

• Ether.fi: 20,000 ETH to buy 20,208.93 PT-weETH;
• Puffer: 10,000 ETH to buy 10,114.11 PT-pufETH;
• Kelp: 3,000 ETH to buy 3,025.91 PT-rsETH.

Taking Ether.fi as an example, this means that if Sun holds until maturity, he can redeem weETH equivalent to 20,208.93 ETH (note: this is not equivalent to 20,208.93 weETH, as the exchange rate between weETH and ETH is not 1:1, as shown in the image below). The amount of ETH that weETH can be exchanged for depends on market conditions. For simplicity, assuming a 1:1 exchange rate between weETH and ETH, if Sun holds until maturity, he can earn a 1% return in 22 days, which translates to an annualized return of 17.33%.

Similarly, the annualized return on Puffer investment is 18.93%; for Kelp, it is 14.33%. The overall investment’s annualized return rate is as high as 17.54%.

Pendle's Chinese community ambassador, ViNc, described Pendle’s PT as on-chain short-term debt, enjoying characteristics such as good liquidity, near-cash value upon redemption (if viewed in ETH terms), short duration, and excellent risk-reward ratio. So, where does PT's yield come from? This requires understanding the basic operation of the Pendle protocol.

Sources of PT Yield Pendle is a permissionless yield-trading protocol that packages yield-bearing tokens into standardized yield tokens (SY, such as weETH → SY-weETH for compatibility with Pendle AMM) and splits SY into PT (principal token) and YT (yield token).

• PT: Represents the principal portion of the yield-bearing token before maturity, while the right to earn yield during this period is represented by YT and sold to other buyers. Because YT’s monetary value is separated, the principal portion (i.e., PT) can be sold at a lower price.
• YT: Allows holders to receive all yields and airdrop points generated by the underlying asset until maturity, and can also be sold at any time.
• Liquidity Providers (LP): Their returns include PT yields, SY yields, and ($PENDLE emissions + pool trading fees).

Risk Avoidance Methods: Borrowing and Shorting

Despite the attractive return rates, using Pendle carries risks mainly from smart contract risks, operational human errors, and price risks (in terms of USD. From a token standpoint, buying PT strategy is guaranteed).

To further avoid price risks, namely losses due to "price drops," one can try opening short contracts on exchanges as a countermeasure, but this requires considering liquidation risks and funding rates. If successful, it can lock in the fixed yield, as shown in the example below:

• Example: Buying 1 ETH at $3,800, exchanging it for 1.01 PT eETH in the Ether.fi market maturing on June 27, resulting in a net profit of about 0.01 ETH after maturity. To hedge against ETH price drops, open a short position worth 1 ETH on the exchange, and upon maturity, close the short position and sell the 1 ETH, thus securing the $3,800 cost and gaining 0.01 ETH as stable income.

Another method, cited from Alvin’s capital preservation strategy (recently reposted by Pendle’s official account), involves borrowing to buy PT. For example:

• Borrow 1 ETH on CEX/DEX.
• Use the borrowed ETH to buy 1.01 PT eETH.
• Upon maturity, redeem the equivalent of 1.01 ETH eETH and repay 1 ETH.
• The remaining ETH is the stable income, estimated at about 0.01 ETH, depending on the market condition of eETH and ETH.

https://t.co/xA7f7ezTb8
— Alvin (@trader_alvin1) June 3, 2024
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This strategy requires considering whether the stable income can exceed borrowing costs, otherwise, losses might still occur.