Author: Bing Ventures; Source: Medium
With the advancement of technology and the adaptation of the market, DeFi is expected to further change the traditional financial market structure and provide market participants with more efficient, safer and more transparent trading options. This Bing Ventures study looks forward to the possible continued impact of DeFi technology in the future, especially its potential contribution to improving market inclusiveness, reducing transaction costs and enhancing market efficiency, with a particular focus on cases in Pendle and pre-market trading.
Pendle introduces traditional interest rate trading and financial derivatives to the blockchain through tokenization, and innovates financial products that separate principal and income, such as PT and YT. In this way, Pendle not only provides a flexible interest rate trading method, but also promotes the liquidity and efficiency of the DeFi market. Pendle's technical practice separates principal tokens and income tokens, allowing investors to independently manage assets according to their risk preferences and market forecasts.
In traditional stock markets, premarket trading is usually limited to large institutional investors and high net worth individuals. In the context of Web3, Premarket has changed this model. Through smart contracts and decentralized trading platforms such as AEVO and Whales Market, a wider group of investors can participate in pre-market trading. This reform not only increases the transparency and security of the market, but also improves the efficiency of capital use and the overall liquidity of the market.
In the traditional financial market, interest rate trading has always been one of the important financial tools. It not only affects the money supply and market liquidity, but also directly affects the formation of the interest rate curve. In Web3, with the development of blockchain technology and the rise of the DeFi ecosystem, interest rate trading is undergoing a thorough transformation. DeFi interest rate trading will no longer be limited by the cumbersome procedures and geographical restrictions of traditional financial institutions, but will be carried out on decentralized platforms through smart contracts, bringing users more efficient and flexible financial services.
In the emerging field of DeFi interest rate trading in 2024, Pendle is undoubtedly one of the pioneers leading the trend. Pendle tokenizes income assets into SY tokens, such as packaging stETH into SY-stETH, and then SY is divided into principal and income components, namely PT (Principal Token) and YT (Yield Token), to achieve flexible management and optimization of interest rate income.
With the rise of the concept of Restaking and the growing scale of synthetic stablecoins, the interest rate swap market has also ushered in more new ways of playing, and has expanded the growth space of the interest rate swap market. We will take Pendle as an example to explore these derived PT/YT new ways of playing, as well as their impact on the DeFi interest rate trading ecosystem and future development prospects.
Take Pendle, the largest interest rate market, as an example. In 2021, Pendle became popular for a short time in the interest rate market. At that time, no one understood how Pendle's interest rate swap could be used in the blockchain market. Today in 2024, LRT is flourishing and ETHENA has emerged. Pendle seems to have found a path that suits it best.
According to defillama data, Pendle's current TVL has reached $86.884B, ranking 7th in Defi protocols. In the past month, Pendle's TVL has increased by 91.62%.
Source: defillama
According to the products within the protocol, most of the TVL growth comes from the tokens of the LRT protocol and the synthetic dollars of Ethena. Pendle is well connected with them to amplify the benefits of users. Behind the growth of TVL is the points bonus of Eigenlayer, the top narrative Restaking track in this round of bull market + PT/YT gameplay + high returns of Ethena.
Source: Pendle
Based on the above content, it can be found that the key factor in whether the Pendle interest rate market can continue to increase is whether LRT and ETHENA can obtain more market funds in the future, thereby promoting the growth of Pendle.
In the past, Pendle's main business was to serve users with interest-bearing assets, such as users who staked ETH on Lido to get their satisfactory returns through the characteristics of PT/YT.
Now, Pendle can generate new ways to play PT/YT through the Eigenlayer Points+ income and the high returns of the synthetic dollar protocol Ethena:
Point swap: Eigenlayer and the synthetic dollar protocol Ethena both have high return rate airdrop expectations, and staking assets (such as ETH) to obtain points is the core standard of airdrops. Through the cooperation of various project parties that issue points on Pendle, point swaps can be realized. Large funds can see reliable PT to provide liquidity, and small funds can bet on greater returns. The point swap gameplay also allowed Pendle to gain huge TVL in this bull market.
a) For example, after staking ETH to Eigenlayer, you can get eETH + points rewards. Pendle divides eETH into PT (principal token) and YT (yield token). Buying YT means buying all the points rewards to obtain potential airdrops in the future.
b) Take Ethena's current interest rate on Pendle as an example: When using sUSDe to participate in Pendle
i) If you exchange sUSDe for YT sUSDe, you can get 466x Pendle points
ii) If you exchange sUSDe for LP sUSDe, you can get APY 46.15% (floating interest rate) and points for holding sUSDe
iii) If you exchange sUSDe for PT sUSDe, you can get an APY yield of 54.09%
c) Large funds see reliable PT to provide liquidity, and small funds can bet on greater returns. As the scale of Ethena grows, it will drive the growth of Pendle.
d) The cooperation between Ethena and Pendle can also be used in the LRT protocol, giving users more options to increase their returns. At the same time, the development of the Restaking ecosystem will also promote the growth of Pendle.
Funding Swap: Assuming that the future funding scale of the synthetic stablecoin protocol can continue to expand in the context of a bull market, for example, the number of users using ETHENA continues to increase, there will be a lot of sUSDe on the market, and then sUSDe will be split into YT sUSDe and PT sUSDe through the interest rate swap protocol. When judging the general direction of the market, users can judge the trend of future funding fees and make profits. For example, if you judge that the market will turn from bearish to bullish, you can buy YT-sUSDe at a lower APY when the market is bearish (the APY of stablecoins in bearish markets is low), and sell it at a premium to realize profits in bullish markets, which increases more opportunities for gambling.
Diverse strategies: In the exchange of PT/YT, investors with different risk preferences can use different investment strategies. You can use Pendle to realize operations such as bullish returns, risk hedging, and discounted long positions.
a) If it is speculated that market returns will increase, traders can buy YT accordingly to gain profit exposure. When returns rise, traders who are long on YT will benefit.
b) On the other hand, if the market speculates that returns will decrease, traders can hedge risks by selling YT and collecting advance payments.
Premarket often refers to "pre-market trading" in the stock market, which refers to trading activities that begin before the official opening of the market. This type of trading mainly occurs in electronic trading systems rather than traditional stock exchanges. In pre-market trading, investors can buy and sell stocks, but the trading volume is relatively small and the price fluctuations may be large. The purpose of this kind of trading includes taking advantage of the impact of important news or events released by the company to obtain better trading prices before the official trading begins.
When the pre-market method is applied to Web3, it is used by investors to find investment opportunities in advance through over-the-counter transactions before the token TGE of high-profile projects. Most of these transactions are mainly airdropped tokens that have been confirmed by the project party, and are traded in the form of shares or points.
Source: https://edition.cnn.com/markets/premarkets
Source: https://www.racent.com/blog/man-in-the-middle-attack
In the earliest OTC transactions, mainstream social platforms, such as Discord, Telegram, and WeChat, were common places for transactions. At this time, the trading method was mainly to match orders with the role of a "middleman", and at the same time find buyers and sellers, trade with margin, and complete the transaction when the two parties are delivered. The "middleman" takes different rewards.
However, this method obviously has a lot of problems. The most common one is that the "middleman" does evil, because all transactions are matched by the "middleman", and the real buy and sell prices are carried out in a black box. It is very likely that the transaction price is far away from the actual seller, and there is a situation of RUG after the middleman collects the margin.
In the second stage, after everyone knows that the middleman may do evil, KOLs and bloggers with a certain fan base begin to endorse their own credibility and become the "middleman" to continue to match transactions, and pull the buyer, seller, and middleman into the same group chat to ensure the openness and transparency of prices. This stage is also the most common over-the-counter trading method before the emergence of the on-chain Pre-marketplace.
The second stage of transactions lasted for a long time, but there were still many problems, such as low transaction efficiency, problems that may arise from pure manual work, and potential risks of the "middleman" role. As a result, two of the most representative on-chain Pre-marketplaces were born: AEVO and Whales Market.
AEVO: AEVO is a decentralized options platform that focuses on options and perpetual trading. It currently supports Optimism, Arbitrum, and Ethereum. AEVO was often used for perpetual trading on the chain in the past, and recently launched the Pre-Launch Tokens section, allowing users to trade before the token TGE. a) Trading process: Users can select relevant tokens for perpetual trading in the Pre-Launch Tokens section. Most tokens support 1-2X leverage. The actual operation process is the same as the normal perpetual trading process. Different strategies of shorting or longing can be adopted.
b) Platform data: As can be seen from the figure, the current price of $SWELL, the token of the Restake protocol Swell, on AEVO is $2.1, and the 24-hour trading volume has reached $973,762, which is also the first in the 24h volume in the current Pre-Launch Tokens section.
c) Platform features:
i) Compared with the traditional OTC trading method of social platforms, the trading process of AEVO is more formal, transparent and secure.
ii) Support users to conduct 1-2X short or long operations to obtain profits.
Whales.Market: Whales.Market is an OTC trading platform built in the Solana ecosystem. It uses smart contract technology to provide a safe and trustless environment for trading pre-TGE allocations, tokens and NFTs. Unlike AEVO, Whales.Market can trade not only tokens, but also Points and NFTs, and will open NFT whitelist transactions in the future.
a) Trading process: Users can choose different targets for trading in Whales Market, and can clearly see the purchase quantity, unit price, total price and other related data on the purchase page. During the process, the buyer and seller execute the on-chain point-to-point transaction, and the margin is locked in the smart contract and released to all parties after the transaction is successfully settled. The process of determining whether the transaction is completed mostly requires manual review. It simplifies the transaction process, makes the price transparent, and greatly reduces the risk of financial loss caused by fraud.
b) Platform data: Taking $SWELL as an example, the Total Volume in the Whales Market on the same day was $242,394. However, the OTC targets supported by the Whales Market far exceed AEVO.
c) Platform features:
i) Security: Open and transparent matching orders through smart contracts to ensure the safety of users' funds.
ii) Asset diversity: Supports a variety of different target transactions, such as NFT and protocol points.
iii) Better experience: When a large order appears and a user cannot purchase it, he can choose to purchase a certain amount of shares and place an order with other buyers.
The evolution from the high-risk OTC trading method guaranteed by the middleman to the current platform completing transactions through smart contracts is a crucial step for the entire premarket, but we still cannot ignore the current dilemma.
Source: People Matters
Liquidity crisis: Most of the current Pre-Launch Tokens are facing the risk of insufficient liquidity. Even Swell, which has the largest trading volume on AEVO, has a trading volume of less than $1M in 24 hours. Low liquidity brings about large fluctuations in token prices, which is extremely risky. On the other hand, it also prevents whales with strong funds from participating in the trading of the token with large positions. Theoretically, the higher the total transaction volume, the closer the price is to a reasonable value.
Risks brought by some centralized mechanisms: Take the Whales Market as an example. In the recent transaction of a popular BTC NFT "RuneStone", the risk brought by centralization appeared. Due to the huge transaction volume of the NFT and the transfer on the BTC chain, a lot of manual review is required to verify whether the NFT has arrived and whether the GAS fee used for the transfer is sufficient. In addition, the airdrop arrival time of the NFT itself is different. During the delivery, many users said that they encountered problems. Under the influence of these multiple factors, the process of completing the order has become more tortuous, and there are still problems with centralized review.
High risks of premarket: There are many uncertainties in the transaction process of premarket. These factors may come from sellers, platforms, and changes in the airdrop standards of the agreement, which may cause your losses. In addition, investors need to face challenges higher than those of secondary market transactions, and need to have superb professional capabilities in token pricing, which is extremely risky.
Low efficiency in fund use: In the process of over-the-counter transactions, it is often necessary to pledge margin to lock orders, and the actual delivery date of most projects is still some time away from the order locking date. During this process, the margin needs to be locked all the time, which greatly affects the efficiency of fund use.
Although DeFi has been questioned countless times in the past bear market, we believe that this track is still full of infinite possibilities and opportunities in the future. With the continuous emergence and innovation of new gameplays of protocols such as Pendle, Ethena, and Eigenlayer, DeFi will further expand its boundaries and provide users with more diversified services and more flexible asset management tools. At the same time, with continuous innovation, we will see more gameplay based on PT/YT. This good cooperation with LRT has also opened up a higher ceiling for the interest rate swap market.
We look forward to seeing more and more applications of interest rate swaps, and to a future where everything can be swapped, bringing more innovative products and services to users. However, we still need to pay attention to risks. There are still risks behind LRT's continuous nesting of dolls to obtain returns, because the liquidity correlation between most protocols is extremely strong and the volume is huge, and the impact caused by hacker attacks or protocol abuse is also very terrible. DeFi's continuous innovation subdivision track is a fertile ground, and interest rate swaps are precious seeds on this fertile ground, full of possibilities.
Pendle's model provides investors with a new way to flexibly manage and optimize interest rate returns in a bull market by separating financial products (PT and YT) that separate principal and returns. This innovative practice not only improves market liquidity, but also introduces a new way of changing hands, that is, asset management and trading through smart contract automation. Although it provides an efficient trading mechanism, this model also places higher demands on the expertise and risk management capabilities of market participants. For example, the separation of PT and YT may lead investors to invest without fully understanding their structure, increasing the speculation and instability of the market.
Through decentralized platforms such as AEVO and Whales Market, Premarket trading has introduced pre-market trading in the traditional stock market to the Web3 world, allowing a wider group of investors to participate in token trading of high-profile projects. This trading method not only improves the accessibility and transparency of transactions, but also reduces the intermediary risk in traditional over-the-counter transactions. Although on-chain platforms reduce the risk of middlemen doing evil, new technical challenges and the possibility of operational errors still exist. For example, vulnerabilities in smart contracts or operational errors may lead to the loss of funds, especially when complex transaction logic and high amounts of funds are involved.
In this round of bull market, we have seen many projects issuing coins when the market liquidity is sufficient, and this phenomenon will continue to occur as expected. The trading process before TGE is also indispensable. The gameplay of Premarket will be known to more people. At the same time, we can also expect good development in the subsequent Premarket:
source:RISMedia
Higher decentralization: As the platform continues to improve its rules, in the future Premarketplace may place more emphasis on decentralization. This means that Premarketplace will continue to reduce the number of links that require human participation, increase transaction speed and become more decentralized.
Wider asset coverage: Premarket in the future may support more types of asset transactions and create more diverse asset transactions, just as Whales Market began to support asset transactions such as protocol points and NFTs. This will provide investors with more diversified investment options and promote the liquidity and trading activities of more assets.
Smarter trading experience: PremarketPlace in the future may use smart contracts + AI to provide a smarter trading experience. For example, through AI functions to value the price range of projects, use AI to lower the user's participation threshold, provide personalized trading suggestions, etc., so as to improve transaction efficiency and user experience.
Based on the current innovation trends of Pendle and Premarket, the following interesting and innovative gameplays can be derived, which are closely linked to the existing trading mechanisms and market structures:
1. Dynamic Interest Rate Swap Protocols
Pendle's PT and YT mechanisms can be further developed into dynamic interest rate swap protocols, allowing users to dynamically adjust their interest rate swap contracts according to market conditions. This protocol can combine real-time market data and AI prediction models to automatically adjust interest rates, allowing users to obtain the best interest rate returns in market fluctuations.
Core mechanism: Through the combination of smart contracts and AI models, real-time monitoring of market changes and automatic adjustment of interest rates.
Advantages: Improve the flexibility of investment returns and reduce the tedious operations of users manually adjusting interest rates.
Risk management: High-precision market prediction models and sound smart contract codes are required to avoid prediction errors and contract loopholes.
2. Decentralized Cross-Platform Arbitrage Tools
Using Premarket’s on-chain trading platform, decentralized cross-platform arbitrage tools can be developed. These tools allow users to conduct arbitrage transactions between different DeFi platforms, automatically identifying and executing price difference transactions through smart contracts, thereby achieving risk-free arbitrage.
Core Mechanism: Use smart contracts to monitor price differences across multiple trading platforms and automatically execute arbitrage transactions.
Advantages: Improve market efficiency, reduce price differences, and provide risk-free profit opportunities.
Risk Management: Real-time data synchronization and low-latency transaction execution are required to prevent arbitrage transactions from failing.
3. Smart Contract Insurance Mechanism
Introduce smart contract insurance mechanisms in Pendle and Premarket transactions to provide users with transaction insurance services. When a smart contract fails or the market fluctuates abnormally, the insurance mechanism can automatically compensate users for losses and ensure the safety of users' funds.
Core mechanism: Set insurance conditions through smart contracts, and automatically execute compensation when specific events are triggered.
Advantages: Increase user confidence and encourage more users to participate in DeFi transactions.
Risk management: Adequate insurance fund pools and clear compensation conditions are required to prevent abuse and insufficient funds.
4. Multi-Layer Staking of Synthetic Assets
Based on Pendle's PT and YT mechanisms, a multi-layer staking mechanism can be developed to allow users to stake income assets at multiple levels and obtain different levels of income and rewards. This mechanism can attract more funds to participate in staking and improve overall market liquidity.
Core mechanism: Users can pledge assets at different levels, each level corresponds to different returns and rewards.
Advantages: Provide diversified investment options to attract investors with different risk preferences.
Risk management: Clear level division and return calculation methods are required to prevent management difficulties caused by complex pledge levels.
These cases reveal how new trading mechanisms improve efficiency and transparency in the cryptocurrency bull market, but also bring new risks and challenges. The Pendle and Premarket cases show that the integration of DeFi technology and traditional markets is driving financial product innovation, such as intelligent trading systems combined with AI, which can provide more personalized and efficient trading strategies.
The growth expectations and potential shown by Farcaster will accelerate the implementation of the decentralized social protocol ecosystem, and I am personally very optimistic about it.
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