The world of DeFi, or Decentralized Finance, was once a bit of the wild west. At the same time, early DeFi yields were mostly a function of protocol incentives, supply-demand imbalances, and other market inefficiencies. This new approach is a sharp departure from the old world of traditional finance (TradFi). In that universe, central banks, credit risk, and macroeconomic conditions set the interest rates. During those crypto gold rush days, hunting for the most stable yields in DeFi was a wild goose chase.

As DeFi grew up, so too did its financial instruments. Protocols began to take shape that allowed users to lend or borrow at predetermined interest rates. They provided defined terms like 3 months, 6 months or 1 year. That’s quite a win all-told, and quite a step forward! It is a more stable option than the asset backed DeFi lending markets that used to rule this space. As they did for traditional finance, these fixed-rate offerings brought an added level of predictability to the DeFi space. In turn, they courted a wider base of engaged users.

This expansion was a watershed moment. This was the big picture change — it represented a move away from the chaotic Wild West of early DeFi towards a more organized and dependable financial ecosystem. Going to fixed interest rates was huge. It bridged the traditional financial world with the dynamic, yet sometimes wild, universe of decentralized finance.

The Pendle Revolution: Separating Yield

Pendle transformed the world of fixed-yield DeFi by pioneering an innovative, game-changing principle. To address this, they divided yield-bearing assets into separate principal and yield components. This new, novel approach provided new tools for yield optimization and more importantly, helped form a de facto fixed income layer within DeFi. Users can more accurately trade and manage their yield with this advance technology. While this current advancement represents truly groundbreaking potential for conducting sophisticated investment strategies.

To make sense of this, let’s take the idea of zero-coupon bonds from conventional finance. A zero-coupon bond is a bond that pays no interest. Instead, it is purchased for less than face value. Investors profit from the bond because they purchase it at a discount to its face value at maturity. These bonds are very sensitive to interest rate changes, so they can be great to speculate with on movements in interest rates. In DeFi, these types of TradFi ideas can be adapted and utilized to develop fixed-income devices.

Throughout 2024, Pendle exploded in growth, increasing by 20x its size. It garnered more than 50% of Total Value Locked (TVL) in the yield sector. It quickly became one of the top yield protocols in the DeFi space. Today, it stands at more than $150 billion in open interest and $200 billion in daily volume across perpetual markets. This growth is a sign of the rising demand for fixed-yield products, and it’s a testament to the power of Pendle’s approach.

Pendle's Vision: Expansion and Institutional Adoption

Pendle isn't content with its current success. The protocol’s overall goals are to branch into innovative new markets and offerings. It does so with laser focus on crypto-native users and institutional capital. Next up is Solana, Hyperliquid and TON. We’re introducing a Shariah-compliant Citadel to reach the burgeoning global Islamic finance market.

Citadel Deployments

Pendle is taking a strategic approach to escape the Ethereum Virtual Machine (EVM) ecosystem. Council members are leading the charge to make this happen through their individual Citadel deployments. The protocol is positioned to tap into brand new pools of capital and users. This new move has the potential to greatly increase liquidity and expand its reach.

Boros Integration

A second notable advancement is the addition of Boros, extending Pendle’s influence into the world of perpetual funding. This market has built a reputation as the largest, most unstable source of yield in all of crypto. Pendle has incredible potential to greatly increase its market share by accessing this market. This strategic pivot brings in new user segments and cements its place to become the fixed income layer of DeFi.

Multi-Chain and Layer 2 Functionality

Moving forward, Pendle has set its sight on introducing cross-chain functionality, which will allow users to transfer their assets between various blockchain networks without complications. This would help drive up liquidity since it would smooth the experience of users being able to tap into Pendle’s platform from any chain. Pendle intends to go on with integrations with popular Layer 2 solutions. This will lower gas fees and create better user incentives for users to supply liquidity on the protocol.

The Institutional Interest

The growing sophistication of fixed-yield DeFi is turning heads through the institutional investor community. Fidelity Digital Assets reported on the results of a 2023 survey. Their analysis found that almost 81% of institutional investors think digital assets should be part of a diversified portfolio. This is indicative of the increasing mainstream acceptance and recognition of DeFi as a real, viable asset class.

Given inflation, macroeconomic uncertainty, and geopolitical tensions, institutional investors are hungry for alternative sources of yield as well. Moreover, with DeFi’s promise of juicy yields, it provides an enticing option to traditional fixed-income investments.

Institutional adoption of DeFi is contingent on navigating a few key hurdles. At the same time, there is an increasing call for more security and infrastructure. This applies to everything from custodial solutions to regulated products, like tokenized money market funds. Addressing these challenges can go a long way in easing apprehensions and spurring more institutional engagement. Increased institutional adoption would bring a new level of liquidity and market efficiency to the still inefficient DeFi market. This unique interplay between traditional and digital finance presents new opportunities to engage with and serve investors and institutions.