Many on-chain assets generate yield, such as staked tokens and deposit receipts from lending protocols. Pendle takes the “principal” and “future yield” of these assets and splits them into separately tradable tokens: PT and YT.

$PENDLE is the native token of the yield tokenization protocol Pendle. Current price: 2.039 (24h -1.55%).

▍First, let’s break it down: SY, PT, and YT

Pendle first wraps various yield-bearing assets into standardized SY tokens, then splits the SY into two parts: principal tokens (PT, Principal Token) and yield tokens (YT, Yield Token). The number of PT and YT tokens created is the same, and they share the same maturity date.

Before maturity, equal amounts of PT and YT can be merged back into the original yield-bearing asset at any time. 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 denomination asset. Before maturity, it usually trades at a discount. That discount is essentially the fixed return you can earn by holding it to maturity, expressed as an annualized rate—the implied yield (fixed yield) commonly shown on the page.

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

▍YT: Buying future yield

YT holders continuously receive the yield generated by the underlying asset before maturity. Any points associated with the yield-bearing asset generally also go to YT holders. After maturity, YT no longer generates yield and its value drops to zero.

YT usually costs far less than a whole unit of the asset, giving you exposure to the yield on that entire unit with less capital. But that also means YT holders can lose money if the yield they actually receive is lower than the level implied by the market when they bought.

▍Where are the risks?

Both the fixed return on PT and the yield on YT depend on the underlying asset. A depeg of the underlying asset, a vulnerability in its protocol, 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 trading prices; it is not a return promised by anyone. YT drops to zero at maturity, so before buying, work out roughly how much yield you could receive over the remaining term.

▍A final thought

Yield tokenization turns “interest rates” into something that can be traded: people who want certainty buy PT, while those willing to take on yield fluctuations buy YT. Understand what each side entails before deciding whether to participate. Knowing how it works can help you avoid pitfalls, but it’s no substitute for risk management.

Have any of you misunderstood this point before?