Sun Yuchen, the founder of BitTorrent, has recently invested 33,000 ETH in Pendle PT tokens over the past two days, engaging in arbitrage operations with an annualized return rate of nearly 20%, sparking lively discussions in the community. This article will detail the sources of benefits from this operation, discuss related risks, and provide risk mitigation strategies for readers to reference.
Table of Contents
Sun Yuchen’s Arbitrage Method
Sources of PT Returns
Methods to Mitigate Price Risks: Borrowing and Short Selling
Yesterday (4th), Sun Yuchen, the founder of BitTorrent, made a large purchase of Pendle PT tokens, enjoying a low-risk arbitrage operation with a nearly 20% annualized return rate, becoming the focus of attention in the community. This article will explain where the benefits of this operation come from, discuss related risks, and provide risk mitigation strategies for readers to reference.
Firstly, according to online analysts Yu Jin and Ai Yi who monitor online addresses, Sun Yuchen’s recent operations are as follows (the following image shows Sun Yuchen’s position in Pendle):
Sun Yuchen’s Position in Pendle | Source: Ai Yi
Using Ether.fi as an example, this means that if Sun Yuchen holds until maturity, he can redeem weETH worth 20,208.93 ETH (please 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), and the exchange rate for weETH to ETH depends on market conditions. For simplicity, assuming a 1:1 exchange rate between weETH and ETH, Sun Yuchen can earn a 1% return within 22 days, equivalent to an annualized return of 17.33%.
By extension, the annualized return rate for Puffer investments is 18.93%; for Kelp, it is 14.33%. The total investment annualized return rate reaches as high as 17.54%.
Pendle’s Chinese community ambassador, ViNc, described Pendle’s PT as resembling short-term debt on the chain, with the characteristics of good liquidity, close to cash value upon redemption (if viewed in ETH terms), short duration, and a superior risk-reward ratio. So, where does the income 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 yield-bearing tokens into standardized yield tokens (SY, standardized yield tokens, such as weETH → SY-weETH, this packaging version is compatible with Pendle AMM), and splits SY into PT (principal token, principal token) and YT (yield token, yield token).
PT represents the principal portion of the yield-bearing tokens before the maturity date, and the right to receive income during this period is represented by YT and sold to other buyers. As the currency value of YT is separated, the principal portion (i.e., PT) can be sold at a lower price.
Pendle has three main ways to participate:
1. Buying PT: PT allows holders to redeem the underlying assets at maturity and can be sold at any time. For example, buying 1 PT-weETH for 0.9 ETH at the beginning of the period can be redeemed for weETH worth 1 ETH at maturity. The 11% increase between 0.9 ETH and 1.0 ETH is Pendle’s fixed yield strategy, which is the strategy Sun Yuchen adopted.
2. Buying YT: Allows holders to receive all the income and airdrop points generated by the underlying assets before the maturity date, and can also be sold at any time. For example, holding 1 YT-weETH means having the right to receive all the income and points generated by weETH until the maturity date.
3. Acting as a liquidity provider (LP): The earnings of LPs include PT returns + SY returns + ($PENDLE emissions + pool transaction fees).
Despite the attractive return rates, the risks associated with using Pendle mainly include smart contract risks, operational human risks, and price risks (in terms of U. If viewed in coin terms, the strategy of buying PT is profitable).
To further mitigate price risks, i.e., losses from price “declines,” one can try opening short contracts on exchanges to counteract them, but this requires consideration of liquidation risks and funding rates. If successful, fixed income can be achieved, as illustrated below:
Another method is the “break-even strategy” cited by Alvin (this strategy was recently reposted by the official Pendle), where one can attempt to borrow money to buy PT. In the same example:
1. Borrow 1 ETH from CEX/DEX
2. Use the borrowed ETH to buy 1.01 PT eETH
3. Redeem weETH worth 1.01 ETH at maturity and repay 1 ETH
4. The remaining ETH is stable income, estimated to be around 0.01 ETH, as explained above, depending on the market conditions between eETH and ETH.
This strategy needs to consider whether the stable income can exceed the borrowing cost, as losses are still possible otherwise.
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