PT instruments

Some basic terminology:

• base = the main asset you’re longing or shorting

• quote = the asset your pair is quoted against

Example: PT-sUSDe/USDC:

• base = PT-sUSDe

• quote = USDC

Overview

Trading PT instruments on leverage feels like a mix between perps and dated futures, as one leg of your trade earns a fixed yield, and the other leg pays a variable borrowing cost. Given their nature, PT instruments are meant for long-term trades, where you hold your position until maturity. Here’s a detailed explanation of how these instruments work and what to expect when trading them.

As a reminder, Principal Token (PT) represents the principal portion of an underlying yield-bearing asset. Upon maturity, PT can be redeemed at 1:1 for the accounting asset, which appears in brackets at the end of each PT name on Pendle. For instance, 1 PT sUSDe (USDe) is equal to1 USDe staked in the Ethena protocol at maturity.

Since they’re stripped of their variable yield component, PTs can be acquired at a discount (read: with a fixed yield) compared to the underlying asset. Like zero-coupon bonds, the value of a PT will approach and ultimately match 1:1 the value of the accounting asset at maturity. You can find more info directly on Pendle docs.

PTs have been made available as collateral on lending markets such as Aave, Euler, Morpho. Users can thus lever up on the fixed yield of PTs by recursively borrowing a quote asset, converting it to more PT and lending it to amplify their exposure. This is called looping.

Instead of doing it manually, Contango automates this process in just 1 transaction, but the idea remains the same: by using some margin you get a leveraged exposure to a PT fixed yield.

The position you open on Contango or any other looping mechanism has two components:

• Lending: on one hand, as a base currency you’re lending a PT token which normally earns you nothing in interest, but has an intrinsic fixed yield.

• Borrowing: on the other hand, you’re borrowing a quote currency at a variable rate.

The difference between the two is what Contango displays as ROE when opening a position.

Your profit comes from the yield on PTs minus the cost of borrowing, though exit liquidity, price impact, and fees also affect your final PnL. To fully capture the advertised ROE, you typically need to hold until maturity — since PTs act like zero-coupon bonds and only redeem at face value on expiry — assuming the borrowing rate on the quote asset remains stable and you can exit without significant price impact.

Indeed, lots of variables come into play when trading PTs.

For instance, here’s a brief recap of what plays in your favour:

• Fixed yield of the PT

• Leverage on the fixed-yield

• PT price appreciating towards 1:1 at maturity

• Borrowing rate remaining lower than the PT fixed yield over the lifetime of the position

• Quote and base currencies are the same

Here’s what plays against you:

• High borrowing rate that eats into your profit

• YT speculation driving YT price up (due to points farming) and PT price down

• Market impact on any spot swap (due to a liquidity crunch or an exotic trade)

• Quote and base currencies are different

• Contango fees

• Depeg events

Below we delve deeper into some of these points to help you craft your next PT trade.

1️⃣ Base asset selection

First, choose your instrument wisely. There are many layers to a PT trade, so pick something you have deep knowledge of. Don’t blindly ape into assets you have never heard before.

For instance, if you decide to loop PT-sUSDe, you need to have a deep understanding of Ethena protocol, and think about all the layers that go into this trade:

• USDe (Ethena’s stablecoin)

• sUSDe (the staked version)

• PT-sUSDe (the yield-stripped version of the latter)

So you gotta ask yourself:

• How is USDe built? Can it depeg?

• How’s the yield on sUSDe generated? Is it sustainable?

• What variables influence the fixed yield of the PT?

• What’s the spot liquidity of all these assets?

• What’s the available liquidity to borrow?

• Are borrowing rates stable on average?

• Is there any unstaking delay?

• How easy is to unwind this loop?

In other words: you need to research and study the asset you’re trading beforehand.

2️⃣ Quote asset selection

Choosing the right quote is also key. As a reminder: Contango (or any looping widget of money markets) opens and closes a trade by flash-loaning, swapping, lending and borrowing — all into a single atomic transaction. The swapping part is the tricky bit: every time you cross the spot market you’ll face a bid-ask spread. That’s why, right after opening, your PnL is often in the red.

What usually makes it worse is leverage, as everything is amplified: a 0.1% spread on an exotic swap can easily turn into a big 1% loss at 10x leverage.

Also note: if you enter the trade with something that’s not the PT or its quote currency, you might need to lower the leverage, as the execution might fail due to the 2 slippages.

When opening a position on Contango you’ll be quoted a spot price (with a ✅ next to it). This entry price can be above or below the mark price. Make sure you’re OK with that price before proceeding. A bad entry is normally equal to a bad trade.

When closing, you should — again — consider market impact on the swap, which depends on whether or not the PT is being quoted against the same underlying asset. For instance, a PT-USDe that is quoted against USDe (so PT-USDe/USDe) does not incur in any market impact post-expiry as Contango just redeems and repays, and no swap is needed. Conversely, a PT for USDe quoted against DAI (so PT-USDe/DAI) needs swapping to repay debt after redeeming, and will thus incur market impact.

Also, please make sure you understand the difference between slippage and market impact. The former is the thing you set on the app; the latter depends on your trade size! Here is a good explainer by 1inch.

2️⃣ Pricing and duration

PTs behave like zero-coupon bonds. The closer they are to maturity, the lower the implied yield and the higher the price. But that’s not often the case on Pendle: sometimes the yield spikes and produces attractive ROEs, which often led users to ape into a trade closer to maturity.

In theory, this yield increase might seem counterintuitive given the nature of zero-coupon bonds (where price goes to 1 and yield goes to 0), but in practice there can be other forces at play, putting a downward pressure on the PT price. For instance: 1) speculators tend to purchase YTs closer to maturity, which drives down the respective PT price and increases its yield; 2) some PT loopers tend to exit before maturity and this can increase the yield due to selling pressure on the PT price.

So be very mindful of both YT speculation, often driven by points campaigns, and early PT exits from loopers: both can affect the displayed ROEs of new positions and the PnL of existing ones. Also note: YT speculation driving PT price down is beneficial when you’re trying to enter a PT loop, as you’ll get a lower price — but it’s detrimental to your PnL if you’re already into a position.

As a rule of thumb, longer durations are generally safer, since market impact and PnL fluctuations can be absorbed over time. With shorter maturities, even if the annualized ROE looks high due to a temporary spike, the actual yield (after fees, spreads, and costs) may be much lower. If you choose to enter a PT trade expiring in less than a month, ensure that the potential upside truly outweighs the risks.

3️⃣ Expiry and early exit

After expiry, the PT of your position won’t yield anything, but you will still pay for borrowing the quote currency which eats into your profit — so it is recommended to close your position. That said, leaving the position open for a few extra hours typically won’t have a significant impact.

Upon expiry, you are required to manually close your position; Contango does not offer automatic closure. When you click close, Contango will unwind the position by redeeming the underlying assets and repaying any outstanding debt.

However, around expiry, high volatility is expected as many participants will likely want to exit their PT loops. This could lead to thin liquidity in the spot markets, increasing market impact if your quote asset differs from the underlying. Temporary depegs for yield-bearing assets have also been observed during such periods.

That’s why some users exit early. Remember that in this case you’ll be subject to the ongoing market price, which, as mentioned, is not guaranteed to be linear. Here’s a few scenarios to consider in case your exit price isn’t great:

• You can repay your debt by bringing extra capital (use Modify on the advanced screen and slide the leverage slider down, it will ask you to deposit) so that you can either fully withdraw your PT or reduce your borrowing costs while you wait for a better exit price.

• Wait until the exit price improves, and keep paying borrowing fees — which might eat into your profits.

• Migrate your position to another market — if available.

On your open position, Contango shows the exit price using a quote from spot markets, to provide the most accurate pricing and ROE. However, the actual exit price will be the one you see when you simulate closing on the Close or Modify dialog with a ✅ icon next to it.

4️⃣ ROE computations

There is a difference between the ROE of your existing position and the ROE of new positions.

When opening, the ROE on Contango is shown using mark (read: oracle) price. This is because it’s literally impossible to show a firm entry price in advance, across hundreds of instruments. As you enter your trade details, Contango recomputes everything and shows you the actual expected ROE, given you actual entry price (the one with a ✅ next to it). Triple-check all metrics before submitting.

The Advanced (above, left) and the Simplified (right) interfaces both show the entry price with a green checkmark.

The ROE shown on Contango when opening is based on two things: 1) the difference in price of the PT you bought vs the price at expiry and 2) the ongoing borrowing rate. So, that ROE value is going to hold true if: you ride this position to maturity; the borrowing rate on the quote asset stays, on average, at the same level; you can close your position without major price impact.

The ROE shown on the Open Positions list is specific to your position, as it reflects the PT’s fixed lending rate at the time of opening, based on the actual entry price you received. As a result, it may differ from the ROE of positions that have not yet been opened.

• If you hover over the ROE field in the Open Positions list on the Advanced page you’ll be able to see what lending rate you’ve locked in on your trade.

• If you hover on the PnL column of your position, you’ll see a breakdown of what you owe in interest (for borrowing) and what would be the PnL on the PT price movement alone. What is shown on the table is the sum of both.

If you use other looping mechanisms, make sure to understand what values are displayed before and after placing a trade.

4️⃣ Oracles

Oracles have an impact on your liquidation. There are 2 types of oracle feeds, market and exchange rate feeds.

To avoid potential liquidations, it’s advisable to steer clear of market rate feeds. Even minor depegs, where secondary markets trade below the real asset value, could lead to the underlying money market deeming your position eligible for liquidation. Unfortunately, not all money markets surface this information easily and you might have to dig this info by yourself. An excellent thread by Stephen from Defi Dojo shows you how to find the oracle type across different money markets.

5️⃣ MEV attacks

If you’re trading on mainnet and don’t use MEV protection, you’re gonna get sandwiched.

We’ve seen whales losing fat spreads to MEV bots, and then complaining about their PnL being down. Don’t be that guy and 1) use tight slippage when trading and 2) use an MEV blocker, like this one from CoWSwap.

More resources:

• How to check if you got sandwiched

• How to avoid getting sandwhiched

Conclusions

Often PT trades result in a poor experience (read: loss) for uneducated users.

So the TLDR is quite easy: make sure to understand all forces at play before trading. If you don’t, avoid PT-trading all together. Contango strives to display the most accurate metrics at all times, given the current limitations of DeFi infrastructure; but the rest is up to you, brother. So:

1. Pick the right base

2. Pick the right quote

3. Pick longer maturities

4. Watch out for market impact

5. Consider an early exit if you can’t handle hectic markets at maturity

6. Know your oracles

7. Watch out for MEV attacks