Pendle's Yield Tokenization Revolutionizes DeFi with Fixed Returns
Yield tokenization is a mechanism that separates yield from the underlying asset and turns both into tradeable tokens. Pendle, a leading protocol on Ethereum (ETH), allows users to buy fixed yield, speculate on variable yield, or provide liquidity using this concept.
The process involves splitting a yield-bearing asset into two tokens: Principal Token (PT) and Yield Token (YT). The PT represents the original deposit and can be redeemed at face value at maturity. The YT represents the future yield stream and trades based on market expectations of yield generation.
Pendle's automated market maker (AMM) prices yield assets with a time dimension, accounting for decay as maturity approaches. This prevents distortions that would occur if yield tokens were priced on a generic curve.