Sun Yuchen, the founder of the Tron Foundation, has recently invested 33,000 ETH in Pendle PT tokens over the past two days to take advantage of an arbitrage opportunity with nearly a 20% annualized return, sparking lively discussions in the community. This article will detail the sources of profit from this operation, explore the related risks, and provide risk mitigation strategies for readers to reference.
(Summary:
Comprehensive Analysis of Ethena Season 2 Point Strategy》After the Bonus Update, How to Break Through 1,100% APY
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(Background:
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Table of Contents:
Sun’s Arbitrage Method
PT Revenue Sources
Methods to Avoid Price Risks: Borrowing and Shorting
Yesterday (4th), Sun Yuchen, the founder of the Tron Foundation, made a large purchase of Pendle PT tokens, enjoying a low-risk arbitrage operation with a nearly 20% annualized return, becoming the focus of attention in the community. This article will explain where the benefits of this operation come from, discuss the related risks, and provide risk mitigation strategies for readers to consider.
First, according to online analysts Yu Jin and Ai Yi who monitored the on-chain addresses, Sun’s operations over the past two days are as follows (the following image shows Sun’s position in Pendle):
Using Ether.fi as an example, this means that if Sun holds until maturity, he can redeem a value of 20,208.93 ETH equivalent in weETH (note: this is not equivalent to 20,208.93 weETH tokens, the exchange rate between weETH and ETH is not 1:1, as shown in the image below), and the conversion of weETH to ETH depends on market conditions. For simplicity, assuming a 1:1 exchange rate between weETH and ETH, Sun can earn a return of 1% within 22 days if held until maturity, equivalent to an annualized return of 17.33%.
Similarly, Puffer’s investment has an annualized return of 18.93%; Kelp’s is 14.33%. The total investment’s annualized return is as high as 17.54%.
Vincent, the Pendle Chinese community ambassador, described Pendle’s PT as being like short-term debt on-chain, enjoying good liquidity, close to cash value upon redemption (if viewed in ETH terms), short duration, and excellent risk-return ratio. So, where does the revenue from PT come from? This requires an understanding of the basic operation of the Pendle protocol.
The exchange rate between weETH and ETH is not 1:1 (Source: 1inch)
Pendle is a permissionless yield-trading protocol that packages interest-bearing tokens into standardized yield tokens (SY, for example, weETH → SY-weETH, this packaging version is compatible with Pendle AMM) and splits SY into PT (principal token, principal token) and YT (yield token, income token).
PT represents the principal portion of the interest-bearing token until the expiration date, and the right to receive income during this period is represented by YT and sold to other buyers. Since the monetary value of YT is separated, the principal portion (i.e., PT) can be sold at a lower price.
There are three main ways to participate in Pendle:
Purchase PT: PT allows holders to redeem the underlying asset after maturity and can be sold at any time. For example, purchasing 1 PT-weETH for 0.9 ETH at the beginning of the period can be redeemed for an equivalent value of 1 ETH in weETH at maturity. The 11% increase between 0.9 ETH and 1.0 ETH is Pendle’s fixed yield strategy. This is the strategy adopted by Sun.
Purchase YT: Allows holders to receive all income and airdrop points generated by the underlying asset before the maturity date, which can also be sold at any time. For example, holding 1 YT-weETH means having the right to receive all income and points generated until the maturity date.
As a Liquidity Provider (LP): LP’s income includes PT income + SY income + ($PENDLE emission + pool transaction fees).
With the attractive return rates, the risks associated with using Pendle are mainly smart contract risks, operational risks, and price risks (in terms of U. If viewed in coin terms, the strategy of purchasing PT is profitable).
To further mitigate price risks, i.e., losses from price “declines,” one can try opening short contracts on exchanges to hedge against them. However, this requires considering the risks of liquidation and funding rates, but if successful, fixed income can be achieved, as exemplified below:
Another method is to use Alvin’s break-even strategy (which was recently reposted by the Pendle official account), which involves borrowing money to buy PT. Using the same example:
Borrow 1 ETH from CEX / DEX
Use the borrowed ETH to buy 1.01 PT eETH
Redeem the value of 1.01 ETH equivalent in eETH at maturity and
Repay 1 ETH
The remaining ETH is stable income, estimated to be approximately 0.01 ETH, which, as explained above, depends on the market conditions of eETH and ETH.
This strategy requires considering whether the stable income can exceed the borrowing cost, otherwise, losses may still occur.
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