Many on-chain assets generate yield, such as staking tokens and deposit receipts from lending protocols. Pendle’s approach is to split these assets into their “principal” and “future yield,” and turn each into a tradable token: PT and YT.

$PENDLE is the token of the yield tokenization protocol Pendle. Current price: 2.118 (24h +1.78%).

■ First, split it into SY, PT, and YT

Pendle first wraps various yield-bearing assets into standardized SY tokens, then splits each SY into two parts: a principal token, PT (Principal Token), and a yield token, YT (Yield Token). The resulting PT and YT have the same quantity and maturity date.

Before maturity, equal amounts of PT and YT can be combined at any time to recover the original yield-bearing asset. Once split, the two tokens can be bought and sold separately on the market.

■ PT: Buy at a discount, redeem at maturity

At maturity, PT can be redeemed 1:1 for the corresponding underlying asset. Before maturity, it typically trades at a discount. That discount represents the fixed return you can earn by holding it to maturity; annualized, it is commonly shown on the page as the implied yield (fixed rate).

That’s why PT is often used to lock in a yield: as long as you hold it to maturity and nothing goes wrong with the underlying asset, your return is largely set when you buy. If you sell before maturity, the price will fluctuate with market interest rates and may be higher or lower than your purchase price.

■ YT: Buy the future yield

YT holders continuously receive the yield generated by the underlying asset until maturity. Any points associated with the yield-bearing asset generally also go to YT holders. After maturity, YT stops generating yield and its value falls to zero.

YT usually costs far less than a whole unit of the underlying asset, so you can gain exposure to the yield on the whole asset with less capital. But this also means that if the actual yield is lower than what the market implied when you bought, YT holders will lose money.

■ What are the risks?

Both PT’s fixed return and YT’s yield depend on the underlying asset. A depeg of the underlying asset, a vulnerability in the protocol it belongs to, or an issue with Pendle’s own contracts could all affect what you can redeem at maturity.

Also, the implied yield shown on the page is based on market prices; it is not a return guaranteed by anyone. YT becomes worthless at maturity, so before buying, work out roughly how much yield you could earn over the remaining term.

■ In closing

Yield tokenization turns “interest rates” into something tradable: those seeking certainty buy PT, while those willing to take on yield volatility buy YT. Understand the risks each side takes on before deciding whether to participate. Learn how it works before taking action, and don’t make decisions on impulse.

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