Pendle (PENDLE): A comprehensive overview of the leading platform for on-chain yield

TL;DR & Thesis

With Pendle, on-chain yield becomes an asset in its own right. In just a few years, the protocol has established itself as one of DeFi’s leaders by introducing a radical idea: separating the income generated by an asset from its underlying capital, turning them into two distinct financial instruments.

In other words, Pendle transforms any yield-bearing asset, whether staked ETH, stablecoins deposited into a lending protocol, or restaking tokens, into two components: the principal and the stream of future yield. These two components then become tradable assets on a dedicated marketplace.

The idea is simple but powerful. In traditional finance, products allowing investors to convert variable rates into fixed rates, or speculate on interest rate movements, have long existed. In DeFi, nothing comparable was available. Pendle fills this gap by creating an on-chain interest rate infrastructure with its own market mechanisms.

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Background on Pendle

Over the past few years, one category of assets has concentrated a growing share of liquidity in DeFi: yield-bearing assets. Whether we are talking about liquid staking tokens for ETH, stablecoins deposited into lending protocols, or restaking tokens, all generate passive income.

Currently, staking and restaking assets tied to ETH alone represent more than 70% of total value locked (TVL) in DeFi on Ethereum. Yet for a long time, these assets had very limited use cases. It was impossible to:

• Lock in a fixed deposit rate on Aave
• Instantly sell future staking rewards
• Or speculate directly on on-chain interest rate movements

Example: the deposit rate for USDC on Aave (Ethereum) has fluctuated between 2.47% and 15.24% over the past year, without any way to lock in a stable yield.

In traditional finance, interest rate derivatives dominate the market, especially Interest Rate Swaps (IRS). An IRS allows two parties to exchange interest flows: fixed rate for variable rate. In other words, these instruments allow a company borrowing at variable rates to swap into fixed debt, or an investor to speculate on rate movements.

The IRS market is colossal: over 500 trillion dollars in outstanding notional according to the Bank for International Settlements (BIS), by far the largest share of the global OTC derivatives market.

In DeFi, no native equivalent existed. It was impossible to turn variable yield into fixed yield, or directly speculate on interest rates. This absence long hindered institutional liquidity, accustomed to sophisticated hedging tools.

Pendle filled that gap. Launched in 2021, the protocol established itself in three years as the leading infrastructure for on-chain rates, bringing to DeFi the equivalent of bond markets and interest rate derivatives in traditional finance.

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Key Numbers for Pendle (August 2025)

• TVL: 10 billion dollars (+60% over 30 days)
• Cumulative volume: 58 billion dollars since November 2022
• sUSDe: More than 50% of the sUSDe (Ethena) supply is locked on Pendle (~2.7B dollars)
• Staked PENDLE: 311 million dollars (35% of total supply)
• Annualized revenue: 76 million dollars

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How Pendle Works

The core of Pendle’s design is straightforward: any yield-bearing asset can be split into two distinct financial products, namely the principal on one side and the future yield stream on the other.

Standardizing Assets (SY Tokens)

The first step is to wrap any productive asset (for example wstETH, aUSDC, ezETH, sUSDe, etc.) into a unified format called a Standardized Yield Token (SY).

This format, which acts like a wrapper, ensures full compatibility between assets and the Pendle engine. The key point is that an SY always reflects the value of its underlying asset plus accrued yield. For example, 1 SY wstETH = 1 wstETH.

Splitting Yield Streams (PT / YT)

Once wrapped as SY, the asset is divided into two financial products:

• Principal Token (PT): represents the face value of the asset at maturity (the capital, without yield).
• Yield Token (YT): captures the entire yield generated by the underlying asset between acquisition and maturity (staking, lending, points, etc.).

The Principal Token corresponds to the “naked” form of the asset, excluding yield. It guarantees that at maturity, the user recovers their initial deposit, without the income it generated during the lock-up period.

Example: a PT-aUSDC represents a right to 1 USDC deposited on Aave, but only the base capital. The interest accrued over time is excluded and captured separately by the YT.

The Yield Token is inseparable from the PT. It captures all yield generated by the underlying asset from acquisition to maturity, whether staking rewards, lending interest, or even points from campaigns like those on Ethena.

Example: 100 aUSDC can be wrapped into 100 SY-aUSDC, which are then split into 100 PT-aUSDC (representing 100 USDC deposited on Aave) and 100 YT-aUSDC (representing the yield generated by that deposit).

However, the “1:1” redemption at maturity still depends on the actual underlying. For instance, a PT-rETH gives rights not to 1 rETH but to 1 ETH deposited via Rocket Pool. Since the value of rETH is not exactly 1 ETH, friction exists. By contrast, a PT-aUSDC is redeemable 1:1 for USDC on Aave, so there is no gap.

This distinction, often confusing for new users, is clearly explained in the Pendle interface.

By splitting assets into two products, Pendle opens the door to two complementary and novel markets. Conservative investors can buy PTs or sell YTs to secure a fixed yield in advance, while speculative traders can buy YTs to bet on higher yields or capture bonus rewards.

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Pricing (AMM)

Separating principal from yield would not work without a liquid market to trade them. To solve this, Pendle developed an Automated Market Maker (AMM) specifically designed for assets whose value changes over time.

Unlike traditional AMMs like Uniswap V2, which use a constant product model, Pendle’s AMM follows a log-normal curve with a built-in convergence-to-maturity mechanism:

• The price of a PT mechanically converges toward 1 as maturity approaches (since at maturity, 1 PT = 1 underlying).
• The price of a YT gradually decays to 0 as maturity approaches (since less time remains to generate yield).

In other words, YTs are time-decaying tokens: their value decreases over time until they reach zero at maturity. PTs are time-converging tokens: their value increases toward face value as maturity arrives.

By embedding this time dimension, Pendle ensures that regardless of initial liquidity, tokens always realign with their fundamental value at maturity.

Two key parameters structure liquidity within the AMM:

• scalarRoot: defines the implicit standard deviation of distribution. A high scalarRoot spreads liquidity across a flat curve, while a low scalarRoot concentrates it around equilibrium.
• minPrice: sets a floor for PT prices (for example, 4% of face value). If prices fall below this, the AMM blocks new sales to prevent manipulation, especially in low-liquidity markets.

This design does more than handle liquidity. It also enforces time-based pricing dynamics while protecting markets from malicious behaviors.

Liquidity Providers

As with any on-chain market, Pendle’s AMM requires liquidity providers. In this case, users deposit two distinct assets:

• the Principal Token (PT), representing the underlying without yield
• the SY token, the standardized wrapper for the yield-bearing asset

These deposits create a PT/SY pool, which acts as the counterparty for traders. The pool allows one side to sell future yield for upfront capital (by selling YT), or the other side to buy yield (by exchanging SY for YT).

Pendle integrates a full abstraction layer similar to “ZAP” functions on Beefy or Yearn. This ensures users can trade directly, without manually handling the wrapping and splitting. For instance, a trader can swap USDC directly for PT or YT-sUSDe. The SY standardization logic runs automatically in the background.

A unique feature of Pendle pools is their deterministic behavior over time. The PT price converges toward 1 SY as maturity approaches. At maturity, each PT converts into SY, meaning the pool consists entirely of SY tokens.

As a result, at maturity, liquidity providers hold exactly a 100% SY position. In other words, there is no impermanent loss at maturity.

LP Rewards

Liquidity providers are rewarded through two income sources:

• Trading fees: every swap generates fees. Twenty percent of these are distributed pro-rata to LPs in the pool, similar to other AMMs.
• Incentives: each week, vePENDLE holders vote to allocate PENDLE emissions to specific pools. LPs in the most-voted pools receive a larger share of rewards.

By combining organic income (trading fees) with PENDLE incentives, Pendle ensures that liquidity concentrates in the most useful pools, while structurally protecting LPs from impermanent loss.

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Use Cases

Pendle opens a new range of possibilities in DeFi centered around rate trading, hedging, and yield optimization. Users can use it to lock in a fixed rate, speculate on rate movements, or monetize their yield in advance.

Selling Yield in Advance (Selling YT)

A user who holds a yield-bearing asset (for example aUSDC) and wants to lock today the value of their future yield (in other words, obtain a fixed rate that no longer depends on the evolution of Aave’s lending rate) can wrap the asset into SY, split it into PT + YT, and then sell the YT on the market. The price received reflects the present value of the future yield until maturity.

Buying Fixed Rate (Buying PT)

Conversely, an investor can purchase only Principal Tokens (PT) at a discount. These PTs entitle them to a 1:1 redemption in the underlying at maturity, which makes it possible to calculate in advance the fixed yield of the operation.

Example: if a PT-stETH expiring in 3 months trades at 0.95 ETH, the fixed yield is about 5.3% over 3 months, or around 22% annualized (APY).

The origin of this discount lies in the possibility of resale before maturity. To attract buyers for a position that is illiquid until expiry, the market applies a discount to the PT. Mechanically, the price of PT converges toward 1 as maturity approaches.

Betting on Yield Increases and Capturing Points (Buying YT)

The purchase of a Yield Token (YT) is equivalent to taking a directional position on the future yield of the underlying asset, but also on any additional rewards associated with it (Renzo, Ethena, EigenLayer points, etc.).

Two main cases stand out:

• Betting on higher yield: if the average APY realized during the period exceeds the implicit rate paid at purchase, the position is profitable.
• Farming points: another common use of YTs is to capture additional rewards offered by Pendle’s partner protocols.

Let’s start with the first case. For example, on Pendle’s AMM, the APY of Ethena’s sUSDe was recently trading at 11.53%. If a user buys a YT today, and the average yield until maturity (34 days) is not 11.53% but 15%, then they will have made a net gain of 23.85% over the observed period.

On the other hand, if the yield associated with sUSDe on Pendle drops and averages only 6%, the loss over the period will be severe.

Pendle provides an integrated simulator directly in its interface, which allows users to estimate the viability of a YT position based on different yield scenarios.

Now, the second case: many protocols subsidize their YTs by associating them with point multipliers or extra rewards. This artificially increases the expected return, often as a way to prepare for future airdrops.

The logic is simple: by boosting the attractiveness of YT, protocols artificially raise the apparent yield of their asset on Pendle. This then attracts new users, this time interested in buying PT, in order to secure a fixed rate on an asset whose yield has been artificially revalued.

Leveraging Yield (Buying YT)

There is also an implicit leverage effect. Since the notional value of a YT often represents less than 10% of the underlying, a relatively small investment can give amplified exposure to yield variations or points. In other words, YT is an efficient tool for maximizing strong convictions.

Currently, by exchanging 10 dollars of GHO on Pendle, one receives 398 YT GHO, which means exposure to the yield generated by 398 GHO deposited on Fluid until maturity, corresponding to a leverage of nearly ×40.

This leverage explains the abnormally high gains or losses observed earlier in YT purchases.

Why Is There Price Impact When Buying YT?

Buying YTs on Pendle can create significant slippage, even in pools with several million dollars of liquidity. This phenomenon is explained by the implicit mint mechanism underlying each purchase transaction.

When a user buys YTs via the AMM, the tokens do not come from an existing stock: they are created ex nihilo at the time of the trade.

For example, let’s imagine a user initiating the purchase of YT-sGHO for 5,000 sGHO. The Pendle Router will use those 5,000 sGHO to generate new YTs according to the following process:

• Generate an equivalent amount of underlying sGHO (here, 905,000 sGHO).
• Split these 905,000 sGHO into two tokens, 905,000 PT and 905,000 YT.
• Deliver the 905,000 YT to the user.
• Immediately resell the 905,000 PT into the PT/SY pool (sGHO) to recover the difference (~900,000 sGHO retrieved to balance the transaction).

This immediate PT resale generates the slippage observed. The larger the order compared to PT reserves, the stronger the price impact. It should be noted, however, that this slippage can be avoided by using the order book, which allows users to buy existing YTs without minting or impacting the pools.

Mitigation (Order Book)

In addition to its AMM, Pendle integrates an RFQ/0x-style order book, allowing users to trade PT or YT directly peer-to-peer. The benefit is clear: in this mode, no new tokens are minted through the SY split mechanism. No sales occur on the AMM.

Thus, as explained above, there is no slippage even for large volumes. The price is determined by off-chain orders placed by buyers and sellers, like in a classic order book. This mechanism avoids the frictions tied to the implicit mint mechanism of the AMM.

Negative Yields

In some cases, it is possible to observe a negative yield when buying a YT. For example, Pendle’s interface recently showed that buying a YT-USDe offered an APY of -100%.

This phenomenon is explained by the gap between two notions:

• the implicit rate set by Pendle’s AMM, which is the yield at which traders can lock their position,
• and the Underlying APY, which corresponds to the real yield generated by the underlying asset.

In the example above, Pendle allowed locking an implicit yield of 13.78% on USDe, while the real market yield for this stablecoin was in fact 0%.

In other words, if the underlying asset generates no real yield but Pendle’s market values its YT as if it did, the buyer of YT mechanically ends up in a losing position.

One might then ask: why buy a YT in a situation where loss seems guaranteed? Why accept to pay a fixed rate of 13.78% when the underlying (USDe) yields 0%?

The answer lies in the points logic. In this case, buying YT-USDe gave access to a ×60 multiplier on the points distributed by the protocol.

Buyers were therefore not seeking traditional financial yield, but rather to maximize their chances in a future airdrop. Their bet is simple: the value of points converted into tokens will more than compensate for the implicit cost paid to hold YT.

Conversely, when the implicit rate displayed by the AMM is lower than the real underlying yield, YTs trade with a clear advantage for the buyer. In this case, the rate is said to be positive.

Example: rETH’s effective yield is 2.55%, while on Pendle, YT trades at 2.32%.

If the situation remains unchanged until maturity, the investor buying YT is guaranteed a profit, since they “pay” a fixed 2.32% while actually receiving 2.55% thanks to the underlying.

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Tokenomics and Economic Model of PENDLE

Initial Supply Allocation and Emission Curve

The PENDLE token was launched with a maximum supply capped at 235.8 million units, following a deliberately deflationary emission curve. At the start, distribution decreased by 1.1% per week, with a scheduled extinction in April 2026, roughly two years after the TGE.

As of 2025, more than 95% of the liquid supply is already in circulation. The remaining portion is mostly locked as vePENDLE, a concept we will explore in the next section.

vePENDLE: The Heart of Incentives (ve3,3)

At the core of Pendle’s ecosystem lies vePENDLE, a mechanism inspired by the ve(3,3) model, seen for example on Velodrome. Holders of PENDLE can lock their tokens for up to 2 years to receive vePENDLE, non-transferable tokens that grant access to three strategic levers:

• Voting power on gauges: each week, vePENDLE directs PENDLE emissions toward the pools of their choice.
• Bribes: third-party protocols can offer financial incentives to those who vote for their pool.
• Yield boost: LPs holding vePENDLE receive boosted returns on their deposits.

In parallel, vePENDLE holders also earn a share of trading fees (80%) generated by the pools they voted for.

On top of this, revenues come from matured PTs. When a PT (for example PT-aUSDC) is left unclaimed, the protocol converts the underlying (aUSDC) into stablecoins, collects the associated yield, and redistributes it to vePENDLE holders.

Note: The longer $PENDLE is locked (from 1 week to 2 years), the more vePENDLE the user receives, and therefore more voting power.

Today, about 20% of PENDLE is locked as vePENDLE, with an average lock duration of 375 days. The historical yield for vePENDLE lockers is over 23%.

Pendle Wars

As with Curve or Convex, a real battle of influence has emerged around vePENDLE: the “Pendle Wars”. Several protocols compete to accumulate vePENDLE in order to direct incentives toward their preferred pools and capture the maximum share of liquidity.

Two major players dominate today: Penpie and Equilibria, who together control about 50% of delegated vePENDLE. This governance mechanism creates ongoing competition where each protocol seeks to orient votes toward “its” pool to attract maximum liquidity and incentives.

This model has a structuring effect on the ecosystem because it helps stabilize TVL, makes the distribution of incentives dynamic and market-driven, and fuels a virtuous cycle: the more liquidity a pool concentrates, the more volume it can absorb, generating fees and attracting additional vePENDLE votes, which ensures it even more PENDLE emissions.

In practice, control over vePENDLE has become a major strategic stake. It determines not only where liquidity flows but also how ecosystem actors align over the long term.

Revenues and Redistribution

Unlike many protocols that rely mainly on inflationary emissions, Pendle generates organic cash flows. These revenues are fully redistributed to vePENDLE holders, through three main channels:

• Yield fees on YT (5%)

On each yield captured by a YT, whether from staking, lending, or points campaigns, Pendle takes a 5% cut.

For points, third-party protocols apply this fee directly at distribution, before conversion and redistribution to vePENDLE.

Currently, 100% of these revenues go to vePENDLE, with none kept by the treasury, although this could change in the future.

• Swap fees (AMM) + incentives

On swaps executed in the AMM, LPs receive 20% of the fees, while vePENDLE holders collect the remaining 80%.

In addition, $PENDLE emissions are directed by vePENDLE votes, aligning incentive distribution with the most efficient pools.

• Revenues from unclaimed matured PTs

When a PT reaches maturity, it becomes redeemable 1:1 into its underlying (for example, PT-aUSDC = aUSDC).

If the user does not claim it, the protocol automatically converts the underlying into stablecoins, collects the associated yield as revenue, and redistributes it to vePENDLE holders.

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Architecture and Security

Oracles

To ensure reliable pricing of its markets, Pendle relies on its own on-chain oracles. Their role is to determine the price of Principal Tokens (PT) and, by extension, the PT/SY pools, while remaining resistant to manipulation attempts.

Unlike other protocols, Pendle does not depend on external oracles for intra-pool pricing. The goal is to produce an internal TWAP (Time-Weighted Average Price) that is smoothed and robust against manipulation.

In practice, PTs trade directly against SYs within the AMM, and each market continuously maintains its own built-in TWAP. Instead of storing raw price points, the oracle continuously records the cumulative sum of the logarithm of the implied APY (a rate derived from the ratio between PT and the underlying).

From this data series, it calculates the geometric average APY over the chosen time period, which allows deduction of the corresponding average PT price.

Technical Governance

Pendle’s architecture combines immutable components with governable modules. The AMM core, including its pricing engine and fundamental invariants, is deployed as non-upgradable. This means once live, no modifications are possible, guaranteeing structural security and reducing the attack surface.

Other infrastructure components remain governable. This includes the router, factories, SY wrappers, oracle parameters, and eligible asset lists.

These modules are managed through a 2/4 multisig controlled by core contributors. This multisig holds important powers: deploying new PT/YT markets or SY adapters, restricting minting and burning of tokens, adjusting or freezing router and oracle parameters, and applying emergency measures such as caps, pauses, or freezes.

Audits and Bug Bounty

To secure this hybrid architecture, Pendle engaged several leading firms:

• Zellic audited the AMM engine and its built-in oracles.
• PeckShield focused on governance contracts and SY wrappers.
• Dedaub reviewed PT/YT mint/burn logic and the router.
• Runtime Verification conducted a formal verification of critical invariants, particularly those tied to the AMM and TWAP robustness.

These audits cover both the immutable core and the governable modules. In addition, Pendle maintains an active bug bounty program on Immunefi, offering up to 200,000 dollars for discovery of critical vulnerabilities in official deployments.

While the immutability of the AMM engine greatly reduces the attack surface, the governable modules remain exposed to implementation or configuration risks. For this reason, regular audits, reinforced transparency, and close monitoring of multisig actions are essential to the protocol’s security.

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Boros: On-chain Trading of Funding Rates

Launch and Positioning

With Boros, the Pendle team adds a new strategic component to its ecosystem. Initially deployed on Arbitrum, this module aims to open an entirely new market in DeFi: the trading of perpetual contract funding rates. The first two listed markets are for the most liquid pairs in the world, BTC/USDT and ETH/USDT, indexed to Binance funding rates.

To make these flows tradable, Boros introduces a new instrument called Yield Unit (YU). Each YU represents the variable funding flow tied to one unit of collateral until a given maturity date.

Two symmetric positions are possible. Investors who choose a Long YU pay a fixed rate and receive the floating rate, effectively betting on an increase in funding. Conversely, a Short YU position pays the floating rate and receives the fixed rate, allowing traders either to speculate on a decline in funding or to hedge the financing cost of an already open perpetual position.

Market Mechanics

The protocol queries an oracle directly to obtain the reference funding rate (for example, Binance Funding Rate BTC/USDT). This rate becomes the Underlying APR, which forms the market’s base. In theory, Boros is not limited to perpetual funding rates: any measurable yield flow could eventually be listed, whether on-chain (staking, lending) or off-chain (bonds, tokenized equities).

The price of a YU, expressed as a percentage, corresponds to the Implied APR, i.e. the market’s expectation of the future average rate until maturity. When a trader opens a position, this Implied APR becomes their Fixed APR, locked until expiration. The position’s value evolves based on the gap between the Fixed APR and the actual Underlying APR observed at each settlement, as well as subsequent changes in the Implied APR.

Settlements occur at the frequency of the underlying market (typically every eight hours in the case of Binance perps). At each settlement, the Long YU receives (Underlying APR – Fixed APR), while the Short YU receives (Fixed APR – Underlying APR).

Risk Management and Margin Requirements

To limit overly aggressive speculation at launch, Boros implemented strict parameters:

• Maximum leverage capped at 1.2x.
• Open interest limited to 10 million dollars per market.
• Initial margin requirements depend on notional size, Implied APR, and position maturity.
• Maintenance margin is set at 50% of the initial requirement and gradually decreases until it reaches a floor, the Margin Floor.

Two additional safeguards strengthen this framework: the Near Maturity Floor, which prevents residual margin from dropping too low near maturity, and the Low Implied APR Floor, which ensures a minimum margin level even if the implied rate becomes extremely low or zero.

Liquidations occur if the Net Balance (collateral + unrealized PnL) falls below maintenance margin, whether due to an unfavorable Underlying APR or an adverse move in Implied APR. As a last resort, a global deleveraging mechanism can force profitable positions to close against critical losses in order to prevent unrecoverable debt.

Liquidity Layer

Boros infrastructure combines an order book, where quotes are expressed directly in Implied APR, with dedicated Vaults for each YU market. These Vaults play a crucial role: they act as counterparties for market orders while capturing PENDLE incentives, swap fees, and potential gains from rising Implied APR.

Their profile is structurally Long YU, exposing them to impermanent loss if Implied APR falls after deposit. In other words, these Vaults are rewarding during periods of positive funding but carry risk if the market reverses.

Fee Structure

Boros’ revenue model relies on three channels. First, swap fees are collected when opening and closing positions. Second, open interest fees are charged at each settlement, calculated on the fixed rate and adjusted by position type (an extra 0.1% for Long YU, a 0.1% discount for Short YU).

Finally, operational fees are occasionally applied to cover gas costs, proportional to transaction volume.

Roadmap

Phase 1 of Boros focuses on real-world testing with open interest capped at 10 million dollars per market and leverage limited to 1.2x. The goal is to validate the robustness of the mechanics and margin system.

In Phase 2 (planned 8 to 12 weeks later), the protocol will roll out a referral program, progressively raise limits, and add new assets and maturities. Longer-term, the ambition is to expand into both on-chain and off-chain yields (staking, bonds, equities, RWAs) to establish itself as a core pillar of fixed/floating swaps in DeFi.

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Conclusion

Pendle has solved the challenge that held back its predecessors: how to turn complex financial engineering into a massive liquidity engine.

Where early pioneers like Spectra (ex-Apwine) suffered from lack of clarity and insufficient liquidity to support sustainable markets, Pendle built a robust model driven by refined technical design, well-calibrated incentives, and a secure infrastructure.

In just three years, the protocol has climbed into the top 10 DeFi projects by TVL and now stands as the reference for yield tokenization and rate markets. By standardizing yield tokenization and organizing an entire ecosystem around vePENDLE, it has created the conditions for a truly functional secondary rate market that attracts both retail users and third-party protocols.

With Boros, Pendle extends its reach by targeting the funding rate market, which until now has been confined to centralized platforms. This new component opens the door to innovative hedging and speculation strategies, while bringing DeFi closer to a truly global rate infrastructure capable of connecting on-chain assets and off-chain flows.

If current momentum continues, Pendle could ultimately become the primary venue where most DeFi rates are set, much like the role bond and interest rate derivative markets play in traditional finance. A reference infrastructure where fixed yield, variable yield, funding rates, and derivatives converge in an entirely on-chain framework.