1/23

One of the newer small caps I've been wanting to cover recently is $PENDLE ( @pendle_fi).

I think they are one of the only new projects I've seen that I think creates an entirely new category of market in the defi space.
2/23

At the end of the day all of fintech and finance products create this thing we call a market.

Warren Buffet said it best that the fundamental thing that all markets do is move money around from the impatient to the patient.
3/23

That's about it.

Finance is all about different methods of either getting liquidity today, getting profit tomorrow, or better capturing value today.

There are a lot of complex subproducts that help us achieve those goals, but they are pretty much the same.
4/23

We've seen a number of categories emerge in defi that help achieve this:

-DEXs
-AMMs
-Lending Markets
-Synthetic Assets
-Insurance
-Farming

The list goes on.
5/23

When reviewing startups though, there is an interesting trend that 80% of the value capture comes when a new category is created and is captured by two contestants at the top.

1. The top brass.
2. The long tail.
6/23

The top brass is *usually* the first service in that category, it is an innovation machine, defines a new playbook, instills confidence and rigor and is the more trusted name in the category.

The long tail moves fast, expands feature listing & focuses on UX > innovation
7/23

It is the:

-Coinbase vs Binance
-Uniswap vs Sushiswap
-Compound vs Aave

While the rule doesn't evenly apply, (i.e. Aave still does lots of innovating) its true that these pairs often capture nearly all the bulk of the category as there are few other vectors to compete on
8/23

So that brings us back to looking at $PENDLE and the new market it creates.

To understand why it is going to be such a big deal, you first need to understand how the big players deal with spot vs futures.
9/23

Money is weird.

The present day value of cash, is always worth more than the future value of that same cash.

Simply because it presents opportunity.
10/23

In crypto that comes in the form of providing you leverage collateral, and being able to essential long the rates on quarterly futures.

But, to do that you need cash reserves.

And while money today is more valuable than money tomorrow, nothing is worse than idle cash.
11/23

One of the ways to solve idle cash is in the lending market which Compound and Aave currently dominate at a combined $10B.

You can drop in your spot or cash and start to get a return on your money.

The only problem is that it is a *future* return.
12/23

So imagine the market drops >15% and big players are hungry to buy, and as you've seen in the big threads by @cmsholdings and @AlamedaTrabucco its time to get cheap cash for longs.

So how do they do that *if* they were in a lending market?
13/23

They'd have to sell the underlying spot, and do so at a discount, which sucks.

But, in these drops and recovery periods, stablecoin lending rates tend to dramatically rise.

Easily hitting a 5x of the regular rates.
14/23

And this is where $PENDLE comes in.

Pendle is an AMM, similar to Uniswap, but instead of regular LP tokens it allows you to buy or sell the future interest on your lending positions from @AaveAave and @compoundfinance
15/23

Their platform lets you mint tokens using your Aave or Compound as collateral and set an expiration date.

Sellers aim to lock in high yields on a position now for current cash (or access liquidity without selling spot)
16/23

Buyers aim to get exposure to rates without underlying assets, and the market is most likely balanced out by arbitrageurs playing the rates of smaller less capital efficient lending markets and opportunities.
17/23

This is an entirely new market concept for defi.

It's as if we were always trading spot stocks and someone came along and invented futures or bonds. It defines a new sector creating additive value to the space without competing for marketshare.
18/23

More importantly I think it actually reinforces value for $COMP and $AAVE by creating a new market driver for their volume, and likely systems like $YFI that can help users manage complex strategies in systems like this.
19/23

The governance protocol itself has an emission model that aggressively rewards liquidity incentives (something that is increasing rare in this market) and so regular active participants in the ecosystem can actually take part and retain their early value
20/23

When we look at the dilution schedule and comparable DeFi valuations, we see a pretty healthy curve.

A $300M valuation for Pendle, which would put it in the same bracket of projects like Linear, Rocketpool or Kava, would land it at $9.68 in the first quarter.
21/23

If it reached a $1B valuation in the first 6 months (which puts it in the bracket of Uma, BNT, Fei, and CRV) then it'd be looking at a $20.93 price point.

If long term it does create a new market sector like $COMP did, even if it took 2 years you'd still see $15.93
22/23

These numbers assume there is no fee distribution, no farming returns, no LP rewards, etc which help balance the upside.

There is still plenty of downside risk, but unlike a lot of launches we're seeing these days, $PENDLE actually has a working testnet product.
23/23

It's also backed by some pretty big names, including a number of trade desks, which is a clear sign that they are on to something here given that unlocking yield and liquidity is a big part of their value prop.
Standard disclaimer: Like all posts this is not financial advice. It's research on the startups and markets in the defi space.

I'm also bias, as I only write about things I hold.
In this case however, I've not been able to buy much $PENDLE OTC since there isn't a ton of sellers and there are some big buyers at the moment.

If you happen to have a SAFT lockup on it where you wanted to sell a portion at a mark up for liquidity -reach out!
You can follow @adamscochran.
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