[VRC] Support Pendle’s LRT PT Tokens as collateral on Venus Protocol

[gentyana]

Rationale

Restaking narrative has gained tremendous traction over the past month with various LRT protocols capturing significant liquidity, of which Pendle currently contributes approx $600M liquidity across various LRT pools.

Through supporting Pendle’s Principal Tokens (PT) as collateral, Venus Protocol can tap into Pendle’s LRT liquidity and capture borrowing demand from the rising restaking narrative.

Proposal Summary

• Support Pendle’s LRT Principle Tokens (PT) as collateral on Venus’s ethereum mainnet
• Delegate full discretion for Venus’s risk managers to decide which LRT assets on Pendle to support, including decisions on whether to include PT tokens in existing pools or creating separate pools for restaking related assets, and also parameters such as collateral factors, borrow limit etc.

Motivation

• Pendle currently contributes approx $600M of LRT’s overall TVL
• Principal Tokens (PT) held by users can be unlocked as liquidity if they are supported as collateral on money markets
• Current liquidity breakdown of floating PT-LRTs
  • PT-weETH (27 Jun 2024): >100,000 ETH (~$290M)
  • PT-rsETH (27 Jun 2024): >22,000 ETH (~$63M)
  • PT-ezETH (25 Apr 2024): >21,000 ETH (~$60M)
• Venus Protocol can be one of the first money markets supporting PT-LRTs as collateral
• Borrowing demand from these floating PT tokens will create attractive deposit yield for Venus’s lenders

What is Pendle

The Pendle protocol enables permissionless tokenization and trading of yield. Pendle allows anyone to purchase assets at a discount, obtain fixed yield, or long DeFi yield. The protocol enables this by taking yield-bearing tokens and then splitting them into their principal and yield components, PT (principal token) and YT (yield token) respectively, which allows them to be traded via Pendle’s AMM.

Pendle brings the TradFi interest derivative market into DeFi. In traditional finance, interest rate swaps are the biggest market in the world at >$500T. PT is the equivalent of zero-coupon bonds while YT is the equivalent of coupon payments. Pendle is positioning itself to become a core infrastructure for on-chain yield trading.

Principal Tokens Mechanics

PT is a non-rebasing token. PT represents the principal portion of the underlying asset and can be redeemed 1:1 for the underlying asset at maturity. Since the yield component (staking/restaking rewards and points accrual) has been separated, PT can be acquired at a discount compared to the underlying asset. The value of PT will approach and ultimately match the value of the underlying asset on maturity.

Due to its mechanics, the value of PT is tightly correlated with the value of its underlying asset. At maturity, the price of 1 PT is equivalent to 1 underlying asset.

Details on how PT is minted can be found here:
https://docs.pendle.finance/ProtocolMechanics/YieldTokenization/SY

Details of PT Oracle can be found here:
https://docs.pendle.finance/Developers/Integration/PTOracle

Details of using PT as collateral in Money Markets can be found here:
https://docs.pendle.finance/Developers/Integration/PTAsCollateral

Security and Audit

Pendle smart contracts have been audited by Ackee, Dedaub, Dingbats, and some of the top wardens from Code4rena. All of Pendle’s smart contracts are open source.

The complete list of audit reports can be found on our Github repo:
https://github.com/pendle-finance/pendle-core-v2-public/tree/main/audits

Risk Analysis

• Depeg of underlying LRTs: The value of LRTs such as eETH, rsETH and ezETH although pegged to an ETH value that can be redeemable, is still subject to market forces that might cause temporary depegs from its actual value. Arbitrageurs are fast to capture this inefficiency but nonetheless, this can cause liquidations to users as the price of LRTs and PT-LRTs fluctuates

• PT-LRTs price fluctuation: Historically, price of PT has shown low volatility and is tightly correlated with the price of its underlying asset. However, during extreme market conditions, the price of PT might be temporarily dislocated, potentially causing liquidation to users.

• Redemptions: PT-LRTs are redeemable for its underlying LRTs with a 1:1 ratio at maturity. Users that wish to exit their PT position before maturity can either sell into Pendle’s AMM or by matching their PT with an equivalent amount of YT to redeem underlying LRT. However, during extreme market conditions, the liquidity of PT-LRT pools might fluctuate wildly, potentially impacting users’ ability to exit their PT positions.

• Slippage: Based on current liquidity, slippage when selling $1M worth of PT-LRTs in a single transaction ranges between 0.05% to 0.1%. Note that the price-impact range will fluctuate based on the future liquidity of PT-LRT pools.

• Smart Contract Vulnerabilities: Although PT has been audited by top auditors in the space, there is always the risk of black swan events with vulnerabilities that were not found by the audits or exploited yet.

• Oracles: Any issues with PT’s price oracle might result in wrongful liquidations of users.

Reference

• Other money markets that has already supported Pendle’s PT or LP tokens as collateral include Stella, Dolomite, Seneca, Timeswap, Myso Finance, Teller Finance etc

[Gregor]

Same as before, I would be really cautious about the such tokens but let’s give it a try with not so big colleteral and limit.

[DomVSPM]

Another great partner… it will be interesting to see who else will join us!

[RicardoBullTraders]

Excellent Gran propuesta para avanzar en las integraciónes blockchain de Venus

[Tomm]

acceptable! I am glad that Venus protocol can cooperate with the restaking project!!
This cooperation reflects that the Venus project listens to the viewpoints of users.

[Frayst]

Pendle is a great partner for Venus! Let’s do this collaboration. CF, pools to be defined with Chaoslabs!

[mopgawka]

there are never many opportunities, definitely for

[chaoslabs]

Thanks for putting forward this proposal @gentyana
Chaos Labs will analyze this proposal and provide risk parameter recommendations for the community’s consideration.

[chaoslabs]

Overview

Chaos Labs provides risk parameter recommendations for the addition of PT-weETH 25DEC2024 to the LST pool on the Ethereum deployment, should the Venus community decide on its addition. Following are our analysis and risk parameter recommendations for the initial listing.

Liquidity and Market Cap

When analyzing market cap and trading volumes of assets for listing, we look at data from the past 180 days. The average size of the PT market since its inception is $6.3M.

Meanwhile, the underlying market cap of weETH has grown exponentially, reaching $4B, and averaging $1.04B in market cap and $25.8M in average daily volume. The limited historical data, alongside the asset’s rapid growth, highlight the need for a more conservative listing approach, as rapid growth driven by speculative incentives could lead to significant and sudden reductions in liquidity down the line.

Liquidation Threshold

Given the volatility and correlation of PT-weETH with ETH, we propose setting the CF (Collateral Factor) akin to the recommended parameters for WETH in the Core Pool, at 75%. This decision is informed by the fact that the PT token represents the principal portion of the underlying asset and can be fully redeemed 1:1 at maturity, leading to a natural convergence of the market-priced value of the principal to 1 weETH over time. Additionally, assuming the speculative points strategy is discontinued, rendering yield tokens valueless, the principal token will inherently be valued at 1.

weETH/ETH volatility

Supply Cap

Considering the limited historical data regarding PT-tokens as collateral and the liquidity of underlying weETH, we propose an initial supply cap calculation that differs from Chaos Labs’ usual approach. While the on-chain liquidity might support higher caps, we opt for a conservative stance initially to monitor user behavior and demand before optimizing the caps. If demand increases substantially, we will reevaluate and adjust the parameters accordingly.

Given the size of the Pendle weETH AMM pool, we suggest setting a supply cap of 1200 PT-weETH as an initial measure.

IR Curve Parameters

We recommend aligning the interest rate parameters with that of wstETH to ensure consistency across similar assets on Venus.

Pool Listing

Based on the analysis, it’s recommended to list PT-eETH in the LST pool due to its correlation with ETH. However, this move might raise borrowing rates and hinder wstETH looping if ETH supplier demand doesn’t grow as expected, possibly due to the asset’s newness. Although creating a separate pool for Pendle assets could improve alignment of incentives, it would fragment liquidity. Therefore, despite its novelty, listing in the LST pool is advisable initially due to its conservative parameters compared to other options.

Oracle Implementation

The implementation of the PT-token oracle involves aggregating data using the Pendle PT-eETH/eETH TWAP oracle over a 30-minute timeframe, assuming a uniform exchange rate of 1 eETH to 1 ETH, and incorporating the ETH/USD oracle.

Expiration Date

PT-weETH 25DEC2024 is set to expire on December 25, 2024, after which it will converge to the underlying at expiry, effectively transforming into an eETH wrapper within the pool. This transition will necessitate manual withdrawals by PT token holders, with the underlying oracle quoting the price of eETH.

Anticipating a surge in PT token withdrawals and ETH debt repayments post-expiration, we opt not to enable borrowing of the asset. This decision stems from the absence of a clear use case for borrowing, coupled with our foresight that users will likely prefer to withdraw PT tokens. Thus, we aim to mitigate potential tail risks associated with insufficient liquidity for withdrawals in case users borrow the asset. Furthermore, this transition entails deprecating the market upon expiration and subsequently launching a new one.

Recommendations

Following the above analysis, we recommend listing weETH with the following parameter settings:

Asset	PT-weETH25DEC2024
Collateral Factor	75%
Liquidation Threshold	80%
Supply Cap	1,200
Borrow Cap	Non-borrowable