Term

Overview of term strategies

Term lending involves holding a position for longer than an 'instant' period. In DeFi these generally take two forms:

1. Lending to an overcollateralized position for a fixed-term, typically for a fixed-rate

2. Holding a Pendle PT token to maturity

Fixed-rate lending

The structure of an overcollateralized fixed-rate loan is functionally the same as with Repo, with the difference that the borrower accesses liquidity for a given period of time and the liquidity is not due until the loan matures.

This can create predictability both for the borrower, who is able to access a fixed rate free of the volatile interest rate model of instant repo loans, and for the lender, who is able to lock-in a rate similarly free of interest rate volatility for collection.

Being less liquid, both parties face a bit more risk:

Opportunity cost: The borrower may miss the chance to borrow at a lower rate and the lender may miss the chance to lend at a higher rate

Liquidity risk: The lender may face a liquidity need they are not able to meet prior to the loan's maturity

In Morpho, these fixed-rate markets will typically match borrower bids that are served by curators of vaults whose users are expecting some degree of duration (or maturity).

Pendle PT tokens

Principal Tokens (PT) tokens are a zero-coupon bond in DeFi. PT tokens represent one side of a trade that more or less represents an interest rate swap. They are created from the interaction of users that want to earn a fixed rate and users that want to earn a floating rate.

A yield-token (YT) buyer receives the claim to all of the variable rate that a principal token receives. In return, the PT token buyer is able to purchase a token for less than face value. The yield-to-maturity is displayed as 'annual percentage yield' equivalent realized, provided that the position is held through to maturity.

For example:

The PT buyer is able to purchase $100 worth of cUSD for ~$99.7 so, provided they hold it for 12 days of the remaining maturity, would generate ~$0.3 on the position over that period - or a 9.99% annualized return.

If repeated at regular intervals as PT trades mature, a strategy can generate a return consistent with the prevailing yields to maturity in these interest rate swap markets for PT tokens.

The reason some of these PT tokens have deeper discounts to par than expected (for e.g. cUSD is simply a dollar-referenced stablecoin anchored to $1 and has no native yield) is because they are often associated to 'airdrops', or the promise of future token distributions. By trading those away to users that value the airdrops, Pendle creates a market in their expected value.