Written by DaFi Weaver at BlockTempo, founder of TRON, Justin Sun, made a bold move by purchasing Pendle PT tokens to enjoy a low-risk arbitrage operation with a nearly 20% annualized return rate, attracting attention from 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 consider.
Justin Sun’s Arbitrage Method
Firstly, according to on-chain analysts Yu Jin and Ai Yi’s monitoring of on-chain addresses, Justin Sun’s recent operations are as follows (the image below shows Justin Sun’s positions in Pendle):
A total investment of 3,000 ETH, all invested in Ethereum re-collateralization projects expiring on June 27, as follows:
Ether.fi: 20,000 ETH bought 20,208.93 PT-weETH;
Puffer: 10,000 ETH bought 10,114.11 PT-pufETH;
Kelp: 3,000 ETH bought 3,025.91 PT-rsETH
Justin Sun’s positions in Pendle | Source: Ai Yi
Taking Ether.fi as an example, this means that if Justin Sun holds until maturity, he can redeem the value of 20,208.93 ETH worth of weETH (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 amount of ETH that weETH can be exchanged for depends on market conditions. For simplicity, let’s assume the exchange rate between weETH and ETH is 1:1, so if Justin Sun holds until maturity, he can earn a return rate of 1% within 22 days, equivalent to an annualized 17.33%.
Similarly, Puffer’s annualized return rate is 18.93%, and Kelp’s is 14.33%. The total investment annualized return rate reaches 17.54%.
Pendle’s Chinese community ambassador, ViNc, described Pendle’s PT as similar to short-term debts on-chain, allowing for good liquidity, close to cash value upon redemption (if viewed in ETH terms), short duration, and excellent risk-reward ratio. So, where does the PT’s income 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 PT income source
Pendle is a permissionless yield-trading protocol that packages yield-bearing tokens into standardized yield tokens (SY, e.g., weETH → SY-weETH, this packaging version is compatible with Pendle AMM), and splits SY into PT (principal token, representing the principal portion until the maturity date) and YT (yield token, representing the right to receive income during this period and sold to other buyers). Due to the separation of YT’s monetary value, the principal portion (i.e., PT) can be sold at a lower price.
Pendle has three main ways of participation:
Buying PT: PT allows holders to redeem the underlying assets after maturity and can be sold at any time. For example, purchasing 1 PT-weETH for 0.9 ETH at the beginning of the period can be redeemed for 1 ETH worth of weETH at maturity. An 11% increase between 0.9 ETH and 1.0 ETH is Pendle’s fixed yield strategy. This is the strategy adopted by Justin Sun.
Buying YT: Allows holders to receive all 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 income and points generated until the maturity date.
As a Liquidity Provider (LP): LP’s income includes PT income + SY income + ($PENDLE emissions + pool transaction fees).
Methods to Mitigate Price Risks: Borrowing and Shorting
With attractive return rates, the main risks of using Pendle are smart contract risks, operational risks, and price risks (in terms of USD. If viewed in crypto 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 as a countermeasure, considering liquidation risks and funding rates. If successful, this can result in fixed income, as illustrated below:
Buying 1 ETH at $3,800, on the market for Ether.fi expiring on June 27, can be exchanged for 1.01 PT eETH, resulting in a net profit of about 0.01 ETH at maturity.
To hedge against ETH’s price decline, one can open a short position worth 1 ETH on the exchange, and at maturity, close the short position and sell 1 ETH. This way, in addition to recovering the $3,800 cost, one also gains a stable income of 0.01 ETH.
Another method, inspired by Alvin’s capital preservation strategy (recently retweeted by Pendle’s official account), involves borrowing to buy PT. Using the same example:
1. Borrow 1 ETH from a CEX/DEX.
2. Use the borrowed ETH to buy 1.01 PT eETH.
3. Redeem 1.01 ETH worth of eETH at maturity and repay 1 ETH.
4. The remaining ETH is stable income, estimated to be around 0.01 ETH, depending on the market conditions of eETH and ETH.
This strategy needs to consider whether this stable income can exceed the borrowing cost, as there is a possibility of losses otherwise.
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