Users receive yield-bearing assets when they deposit funds into a yield-source. For example, DAI staked in Compound is represented as cDAI. ETH staked in Lido is represented as stETH.
cDAI and stETH are examples of yield-bearing assets.
In Pendle, yield-bearing assets are split into two components: Principal Tokens (PT) and Yield Tokens (YT). PT represents the principal of the underlying yield-bearing token, while YT represents entitlement to all the yield of the asset. YT and PT can be traded on Pendle.
What Pendle does is similar to bond stripping in traditional finance, where the principal and interest of bonds are separated. In this, PTs are equivalent to zero-coupon bonds, while YTs are the detached coupon payments.
Users can mint PT and YT by depositing the yield-bearing asset (e.g. stETH) into Pendle. Base assets (e.g. ETH) will be auto-converted into the yield-bearing asset before PT and YT are minted.
e.g. ETH → stETH → SY-stETH → PT-stETH + YT-stETH. This function can be found in the Pendle Trade after selecting one of the assets.
Usage of External Oracles
On L2s, external oracles are needed for sourcing the contract ratio of the accepted yield-bearing assets from Ethereum Mainnet. For that purpose, Pendle uses RedStone Oracles on Arbitrum to source the contract ratio of several markets.