【WEB3 Founders Real Talk EP06 Recap】Pendle: Building Products that Ride the Wave

Host: Blair Zhu, Brand Director of Mint Ventures

Special Guest: TN Lee, CEO of Pendle

Youtube: WEB3 Founders Real Talk with Pendle

Podcast: WEB3 Founders Real Talk with Pendle

Blair: Hey everyone, welcome back to Web3 Founders Real Talk. Today we have TN, the CEO of Pendle. He will be sharing some inspiring stories, revealing their triumphs and challenges plus offering priceless insights that may have you itching to join the Web3 revolution. Welcome TN!

TN: Thanks for having me.

Blair: Well…would you mind telling us a little bit about yourself and your project?

Background Intro of Pendle

TN: Sure, so um…I’m TN Lee, uh, I started out in crypto relatively early on…, and this was me when I was still back in the school serving as a research assistant to a professor and was tasked to look into different business models within the Fintech sector, and I think I personally got it inspired by a business that utilizes Bitcoin as a tool for money remittance, and the outcome of it was that… it was able to lower… the same kind of service at a fraction of the cost compared to the other incumbents, so that got me really interested in blockchain technology and also just cryptocurrency in general. And so, I took a deeper dive into it, and I mean coincidentally, this was also around 2014, 2015 period…, so there was a round of hype around…a round of hype around the Ethereum communities, because they were looking to do in ICO and that whole notion about being a supercomputer and having small contract features um…excites me because I thought there were a lot of possibilities that could be enabled as a result of that…so again, like going deeper into it.

But for me personally, because I wasn’t, I wasn’t a technical person and I wanted to be involved in a movement, so I had to figure out ways to get myself involved. The way I went about it was to help out and set up Ethereum Singapore community and aggregated resources that we can…we could share with community members, and at that point in time there weren’t that many people who were first and uh… knowledge about cryptocurrency, so it was a very small community but it opened some doors for me, and it had me connected with Roy, who is the founder of Kyber Network.

And at that point in time he was a Ph.D. student at a local university, so I got connected with him and became friends shortly after. So, when he started Kyber, he asked if I wanted to join the team as one of the founding team members to lead the business development unit. So I did, it was…I think it was definitely one of the most important decisions for me personally, because it basically…it was a training point for me to establish myself professionally in that crypto sector. So I was in Kyber from 2017 all the way through 2019.

And in 2019 I felt that I needed to move on because I wanted to gain more perspective across broader crypto space, so I left the company and had a few other people who are now co-founders of Pendle to set up a new shop just to explore different product verticals within crypto space. So one of the first products we built was mining software that utilizes FPGA(Field-programmable gate array) to mine private coins, so the product itself works, but it wasn’t very scalable and we weren’t able to make it a profitable operation.

So we moved on from there, but generally speaking right between 2019 and 2020, we had a string of very unsuccessful ventures, but it was a good time. It was tough, but it was a good time because I think um…during those years, my co-founders and I stuck with each other because we have an aspiration to try to build something that could be useful and impactful to that great community. And I think that um…aspiration kept us going…, so you know fast-forward we…we were farming like a lot of FoodCoins in 2020. This was around the August/September period of 2020 DeFi summer and all this…a, a lot of these FoodCoins were offering 10,000 percent-20,000 percent APY and as much as we enjoyed the APY, we were also keenly aware that the APY was fleeting, but there was no way for us to lock in the rates at our desired APY, and that really triggered us to think about a product solution that could cater to our innate needs for certainty and predictable outcome. So that was the primary motivation of just thinking about fixed-rate products.

And also I think at a point in time… like the thesis was that if money continues to flow into the crypto space, right? Then naturally there would be a growth in fixed-rate products. Because when we look at the numbers of fixed-rate products, they are one of the most important components of any financial sector. And we don’t have to look too far to see that recently a lot of people value certainty. So having the ability to know your income, I believe there is a very natural demand for that. That’s how we came up with the solution around Pendle.

Simply put, Pendle is a venue for the tokenization and trading of yield. Users can deposit assets into Pendle, and at the end of maturity, they can draw more assets. On the other side, there are traders who are more adventurous and speculate on yields.

Blair: Thank you for sharing all those stories. I especially like how you built your team because it sounds like you guys are a bunch of people who are really fixated on crypto things. You are serial entrepreneurs and early adopters. And you mentioned that Pendle has its own niche in yield tokenization. I assume that you will probably encounter some challenges or resistance, given the on-chain market is actually still very nascent, right? So are there any challenges or pushback you encountered during the journey?

Challenges During the Founding Journey of Pendle

TN: Plenty, I think. Um… so at least from our perspective, the top-of-the-line challenge that we are currently facing is just user education. Because the product category that we operate in is still very nascent, and it’s still developing. We have to spend quite a fair amount of resources and effort to educate users about the yield opportunities of Pendle. I think that’s definitely not the easiest thing to do because, first of all, Pendle is a derivative product, and to be able to appreciate what the protocol offers requires a pretty deep dive into the mechanics and design of the protocol. But, of course, I think this is also a challenge for us because we definitely need to improve the user experience and the instructional materials. I think there’s a lot of room for improvement for us to make our use cases, case studies, and documentation simpler for users to understand.

I think beyond just the product-level kind of challenge, we… I think hiring is always difficult because to hire well, you probably have to go through many, many different candidates before you come across someone. And generally, at this stage, we’re looking for someone who is resourceful and someone who is reasonably native to crypto and DeFi. And a lot of people have… there are a lot of people in crypto now, but people who are very capable and appreciate the product that we’re building, I think they’re still quite few and far between. So we really have to think about ways and maybe explore somewhat unconventional ones to identify these people. And that means relying not solely on referrals and headhunters, but really getting creative with how we can identify some of these candidates. Maybe we have to set up a presence at hackathons and reach out to individuals, and at other times, be present at networking events for headhunters just to get to know some potential candidates. But I mean… I keep a scorecard of individuals that I encounter, and then hopefully, not a credit scorecard, but just note down people who impress me and have a direct connection.

So in the event that you know, further down there is an opening or an opportunity, then at least I have some candidates that I can go back to and ask if they would be interested in joining our team.

Blair: That’s the way you’re managing your own candidate pool, but that’s actually pretty interesting. That’s actually pretty impressive, especially, I can definitely feel you that I personally would find some of the DeFi protocols will be really overwhelming for new beginners because you know the barrier is actually there. I guess the next step is always gonna be if we want to board more people into this world, then somehow we want to make things easier and intuitive for people to use and more handy. Well, thank you for sharing that!

The next question would be one of the go-to questions to all Web3 entrepreneurs because maybe we all are aware of how challenging it could be for all Web3 entrepreneurs because the dynamic of the environment has been very challenging for all players since there are so many uncertainties, and dynamics in the markets, and we may need to stay on top of all those trends. And entrepreneurs may need to digest all those kinds of things really well to keep their projects not only surviving but also thriving. So what specific traits you will consider as a “Must Have” from your journey because you’ve been keeping building up the project, you must know what could be the… what will be the winning recipe for you?

“Must Have” Traits for Web3 Entrepreneurs

TN: Yeah, I can share from my experience, um… but I think it really varies from individual to individual. Um… so I think at the core of it, to at least um… to be able to stand out in the crowd. It’s important to have entrance acknowledges about how the space and the technology work. I think this is… if you’re going to operate a Web3 product, then you need to know at least how the underlying technology that you’re building upon works. Um… it’s regardless of whether you’re building a DeFi product or GameFi, NFT project, right? So… because I think when you know the details of these technology components, then you can ideate around some of these aspects. So, for instance, every chain, every Layer, I think they have their own unique propositions, and it is up to you to design a product around these technology propositions. So maybe some chains have lower block space, and if you want to execute a more complex strategy in that, that could fit within the block space, you would have to optimize your contract here and there to try to fit into that, and I think sometimes these little optimizations can make a difference to the product and to the user. That means you don’t have to pay as much gas. But at the same time, it allows you to execute something more complex and sophisticated that very few people can operate, and of course, like the protocols that have very bloated codes and contracts, they won’t be able to do it as efficiently as your optimized contract, and I think this is… this is where the leaders and everyone else separate.

And I think beyond that, at an individual level, it’s also very important to know the strengths and weaknesses, like for example, I think I’m just not a very good developer and I wouldn’t attempt to do it. I’m also not a very good designer, I don’t attempt to do it. But, um… so like this is where I think it’s important to have co-founders and teammates who can complement skill sets, and I think that… it’s basic awareness, but it’s extremely critical, especially when building out the company.

I think one other thing is I realize over time that it’s very, very, very critical to have the openness and the willingness to learn because we are operating in a very fast-changing environment, and you could know this, right? Over the course of the last… even just the last couple of weeks, there have been so many changes, the trends around meme coins just came and went. And now I think it’s cooled down, but drastically, and then people are looking for new narratives. So I think that attitude for learning is certainly very critical, and that means from an employer standpoint, I think we can afford to hire people who are very flexible and strategic and way less on experience. Because in a fast-changing environment, having experience but without the attitude to continuously learn, it can actually be a burden. So I think these are, again, from my experience. These are just some of the more important things that I’ve come to realize.

Blair: Yeah, definitely. Well, I spoke with a lot of entrepreneurs, and everyone was like, “Wow, I do find this industry could be really fast-paced, and sometimes we may lose track, even you know, something happened. It’s always something new emerging, and everyone basically has a steep learning curve to always catch up on new things.”

So definitely, the eagerness for new things would be really critical for those early startups. Well, since you mentioned Pendle, this protocol for yield tokenization could be really challenging for people to learn. So let’s just talk a little bit about your product today, and we do know you have the V2 version, right? In the second version, Pendle was mainly focused on stablecoins as the underlying assets. But with the newest version, Pendle started to bring more LSD assets. And there are some other new types of assets like Ape Coin and GLP. Why did you guys make this strategic movement? Why did you guys just make this switch? And what are all those advantages of LSD assets and GLP compared to stablecoins like cDAI given that LSD is one of the new narratives?

Pendle and LSD Narrative

TN: Yeah, so I think fundamentally Pendle is a yield tokenization protocol, and we are able to support a wide range of different assets. And of course, I think maybe in V1, we had a bit more prioritization for stablecoins because stablecoins are very common, and the TVL for USDC, USDT, there are very, very big even… the same for today as well, right?

I just want to take a step back, right? I think today most people when they hear Pendle, they associate Pendle with the LSD trend, and I think it’s, of course, a very deliberate attempt to go with the LSD narrative, but it is also an outcome of an experiment, like a series of experiments on the narratives. So we actually tried many different narratives, but the one that stayed after a few months of trial and error is LSD. So we thought that there was a very strong demand for LSD assets given the current market, and it makes sense for us to continue to invest resources and set up new pools. So to begin with, when we launched V1 at the end of last year, we actually had a stablecoin pool, we had a more experimental pool in the form of LooksRare, and then shortly after we supported Ape Coin and stETH.

In terms of interest, we saw more organic traction around the ETH Pool, and then at the start of this year, we also launched a market with Aura, Balancer, and Rocket Pool. So the project pools collectively announced a relatively interesting market, and the APY was relatively decent, so that caught on. That was the first time we saw serious traction around a market. And then we deployed the same kind of strategy around a few other LSD assets, and they continued to do pretty well. So that’s, in short, how we were thinking about it. It’s both push and pull. We tried some narratives, and the community feedback to us was that LSD assets are more interesting to them, so we continue to double down on that.

So again, I don’t think that one product, as a category, is more important than the other. In fact, our largest pool is actually GLP, which has a little more than a billion dollars in liquidity, and in terms of trading volume, GLP is certainly more active than many other pools. But it’s just a different kind of narrative, and I think influencers and thought leaders, when they write about Pendle, they typically associate it with LSD.

Blair: Yeah, I mean, I can tell you guys are trying to master the user intention a lot. You mentioned that users are interested in LSD, so that’s why you bring the assets on board.

And here’s my next question: In the whole market landscape, the narratives constantly change over time. Does Pendle have any other strategies to really maintain the product, to keep it innovative, to keep it appealing to all of the community users?

Key Pillars of Pendle Product Strategy

TN: So from our perspective, I think we are still in the process of constant learning, but I can share with you our experience so far.

This year, now that the product is out, right? And I think that initial attraction is relatively encouraging. We want to continue to build on top of that. So this year, our focus is going to be to grow the trading activity on the protocol and to grow the TVL. And to achieve that, it is important for us to stay on top of trends. Basically, we need to acquaint ourselves with the whole concept of yield trading and fixed rate, and whenever people think about either of these two concepts, they think about Pendle. So from there on, we start to think about different tactics that we could implement to achieve this particular objective, right?

So I think what comes to mind is that we need to definitely stay on top of trends, which is why keeping a close eye on what Twitter talks about is certainly very important. Look, I wish we had the scale, I wish that our protocol is scalable enough to support PEPE coin because if we were able to list a token and establish the yield market for this token when it was really, really hot, I think we would be able to leverage on that trend and grow our protocol revenue and grow the awareness. But this is still a feature that we’re implementing because we need to certainly make our listing process a lot more robust. But hopefully in the future, we can capture these waves much more timely, crafting narratives and working with thought leaders to share our product proposition. I think that is also another very important step that we’re taking to ensure that we are staying on top of trends.

So, you see how we are acquainted with the LSD narrative and then some other influencers associate us with Arbitrum, like a series of Arbitrum projects, and then moving forward. We’ll have to continue to explore different narratives and acquaint ourselves with these narratives.

And I think the second part is also very important, and that is to be really disciplined about the opportunities because, with crypto, the fact is there are always opportunities. It’s really important to select and commit to a particular direction. It wouldn’t make a lot of sense. For example, today we are LSD, and then tomorrow we just ditch LSD altogether and go with another, like say, stablecoins, right? I think not that it would have worked, but it’s just very difficult. Because there is already a mindshare of Pendle and some narratives.

Moving forward, we really have to be very selective with the kind of trends and narratives that we associate ourselves with. And one of the most important ways that I think we can set ourselves apart from other people is really just to identify… so first of all, identify the path that we want to work towards and then identify the partners that we can work with to solidify this direction. So again, we identified ourselves to be a players in the LSD sector. So first, the most important thing is to support as many LSD assets and then work with protocols that are also LSD-centric and come up with features that could really benefit users.

Blair: Well, that’s very impressive. I mean, there are a lot of distractions and buzzwords all over the place, especially in this industry. And I feel you have to be strategic and selective on those trends and be able to leverage on this would be really tricky or challenging for founders, for someone in your position. But yeah, definitely, I’m siding with you on this one hundred percent.

But here’s my next question: you mentioned that you have to stay on top of the trend, but it may also be really risky, especially for early DeFi projects. There are so many risk elements… well… (fingers crossed it’s not going to happen). But for example, security concerns may occur, given that Pendle is pretty much relying on other projects’ underlying assets, and also you guys were talking about… I know you guys are talking about wanting to be really strategic in your asset class, so those determinations could be very tactical. Is there any particular contingency plan for Pendle given that there is some risk management that should be performed within a protocol?

Contingency Plan for Risk Management

TN: Yeah, sure. So with regards to security, security is definitely the priority of the protocol, and so internally what we do is to have the core contracts audited and make them non-upgradable. Once they’re reviewed, we can make small changes, but we shouldn’t be able to make changes to the entire infrastructure unless we do a complete rewrite, which means we’ll have to get it audited.

So, yeah, with regard to the contracts, the Pendle contracts have been audited by a number of auditors, and today the V1 core contracts have been audited multiple times by different individuals and firms. And in my opinion, these are really reputable and solid groups of people, so hopefully, this is our commitment to the protocol’s security, right? And on top of that, every time we write a new contract, we will get it audited by an auditor that we have on retainer. So, again, we don’t want to take chances with contracts, so we want to make sure that every time we write a new contract for a new asset, it’s safe for people to deposit.

And of course, aside from the auditors, we also have an open bounty program with Immunify, so anytime anyone in the community identifies areas that we could improve on, they can suggest it to us. We take a look at it, and if it makes sense to us, we have bounties to reward the report. So this is another one.

And the third one is actually insurance. I think insurance is a very important infrastructure for DeFi. It’s a very, very difficult piece to resolve, but I think it’s absolutely essential, especially if we want to attract more liquidity into the space, and this is an area that we are actively working on to set up. So yeah, getting more venues to list $PENDLE so that protocol users can acquire coverage through multiple different avenues.

Blair: Wow, actually… what a relief! So it’s really good to see that you have a comprehensive plan to mitigate risks and even… well, here we go, we have insurance. I think it’s just… It’s actually pretty rare to see that people would have such a thoughtful strategy for risk management. Well, that’s definitely really amazing.

We did notice that Pendle is integrated with Arbitrum right now, so what do you think of Layer 2? And I know you guys had the deployment on Avalanche, but somehow changed to Arbitrum. And what would you consider the most when integrating with a new chain or like Layer2? Why did you make this decision?

Layer 2 Integration

TN: So, I think Layer 2 is definitely a very important piece of the whole crypto ecosystem because gas fees on the Ethereum mainnet are prohibitive. Just to give you an example, during the last couple of weeks when meme coins really took over DeFi and crypto in general, the gas fees were very high. As a result, no one traded on ETH or on the Pendle deployment on the Ethereum mainnet. The only trading activities that happened were in Arbitrum. Because of the lower cost of executing transactions on Layer 2, I think Layer 2 has a natural role to play here in lowering the barrier for people to participate in different activities.

Regarding the question about Avalanche, we had an implementation on Avalanche for V1 back in 2021. But from our standpoint, as a second-order derivative, when we consider new ecosystems to deploy Pendle on, there are primarily two considerations.

Firstly, we need to make sure that the primitives like AMMs, bond markets, and vaults are reasonably established because otherwise, there’s no point in having $PENDLE. Secondly, the total value locked (TVL) has to make sense. We are a second-order derivative, so out of the millions or billions of dollars in the first-order derivative, only a fraction would go through the Pendle protocol and contribute to our TVL. If the TVL on a chain is very small, for example, $10 million, and we only capture 10% of that, we’re looking at a $1 million TVL for Pendle, which might not be worthwhile for our effort to deploy a Pendle implementation on that chain. Instead, we go for chains with larger TVL counts. For example, if a chain has a TVL of $1 billion, even if we capture 10% of that, that’s still a healthy $100 million TVL for us. So, these are largely our considerations.

Arbitrum made sense to us because they were gaining a lot of traction, and the TVL on Arbitrum justified having an implementation there. Yes, we are on a constant lookout for opportunities beyond just Ethereum and Arbitrum. Again, when we look at all the ecosystems, we consider the same considerations: the primitives and the TVL. At this stage, there aren’t many chains that have the same kind of influence as Arbitrum, so the chains we’re currently looking at are Avalanche, Polygon, and the Binance Smart Chain. However, we haven’t decided which one we want to move forward with yet.

Blair: Looking forward to seeing more innovations or big announcements from Pendle. Thank you for sharing all of this, and let’s wrap up today with one last question. We discussed LSD and Layer2 today, and these narratives are under the spotlight as the newest innovations in the crypto space.

So, my question is: What are your overall thoughts on LSD? It seems to be a win-win game for all stakeholders in the ecosystem, as it helps investors diversify their rewards and improve capital efficiency. Additionally, staking can contribute to stabilizing the whole network. It sounds like a perfect solution for everyone, but are there any potential upsides or downsides that we should be aware of regarding this narrative?

The Future Outlook of LSD Narrative

TN: I definitely think very highly of the LSD narrative, especially after the Shapella (Shanghai and Capella) Fork for ETH. LSD has proven to be even more essential these days. Looking at numbers, Lido is now the single largest protocol anywhere, hitting their all-time high not too long ago in terms of deposits. The great thing about LSD is its capital efficiency.

From a user standpoint, they don’t have to make a decision, and the opportunity cost is eliminated. They don’t have to choose which venue to deposit their assets into. Now they can ensure the security of the protocol and also use that asset to earn additional rewards on top of what’s given out from the underlying protocol, which is suddenly very attractive.

So, I expect to see even more interest in LSD moving forward, especially now that the fork has happened and has proven to be quite successful. People can deposit assets into all these different LSD protocols with peace of mind, knowing that they can actually control their assets if they want to. Having that optionality and flexibility is critical, and I do expect to see the TVL for LSD assets to grow.

Blair: Wow, it’s definitely going to be something fun to watch in the near future. Thank you so much for your time. It has been really insightful, and I’m impressed. I’m looking forward to seeing more innovations and stories from Pendle. Thank you again for your time, TN. I really appreciate it!

TN: Likewise, thanks for having me!