Curve Slope As Market State Indicator

Issue 86 Edition 2026-03-27 8 min read

General

Sources: 1 • Confidence: Medium • Updated: 2026-04-11 17:13

Key takeaways

The on-chain yield curve can slope downward (backwardation) or upward (contango), and December 2024 is cited as a backwardation snapshot while April 2025 is cited as a contango snapshot.
Over the past year, DeFi has developed on-chain building blocks that enable a tradable yield curve with meaningful depth rather than only backward-looking headline yields.
A large share of Ethena instruments has been traded on Pendle, with about 20–60% of supply represented there and several billion dollars of notional.
Implied yields on Pendle are described as almost always pricing at a premium to the underlying realized yield.
Ethena’s carry yield passed to sUSDe holders has historically been around 5–10% and has sometimes reached roughly 25%.

The on-chain yield curve can slope downward (backwardation) or upward (contango), and December 2024 is cited as a backwardation snapshot while April 2025 is cited as a contango snapshot.
Steep backwardation in the term spread is reported to precede the worst Bitcoin returns over the subsequent 90 days, while contango is reported to precede the best 90-day forward Bitcoin returns.
Nearly all contango observations are reported to have had positive Bitcoin returns over the next 90 days, while observations with term spread below about -7% are reported to have had almost no positive 90-day returns.
A strong positive relationship is reported between the term spread and the forward 90-day change in underlying yield, where backwardation precedes yield declines and contango precedes yield increases.
Contango is described as overrepresented in low yield regimes and backwardation as overrepresented in high yield regimes, implying an inverse relationship between yield level and term spread.
The front end of the on-chain yield curve is said to track current market conditions while the longer-duration back end reflects expected yield normalization, making the term structure a pointer toward mean reversion.

Over the past year, DeFi has developed on-chain building blocks that enable a tradable yield curve with meaningful depth rather than only backward-looking headline yields.
Pendle creates a yield market by splitting a yield-bearing asset into a principal token that behaves like a zero-coupon bond and a yield strip that claims variable yield until a fixed expiry.
Comparing implied yields across multiple Pendle maturities can be used to construct an on-chain yield curve reflecting the market’s expected path of yields through time.
A rolling term spread defined as back-month implied yield minus front-month implied yield provides a time series measure of curve slope, where positive indicates contango and negative indicates backwardation.

A large share of Ethena instruments has been traded on Pendle, with about 20–60% of supply represented there and several billion dollars of notional.
After Aave listed Ethena principal tokens as collateral during a high-yield regime last summer, collateral posted reportedly grew from zero to over $5B within months and utilization was multiples higher than the underlying sUSDe.
sUSDe principal tokens are claimed to have had the highest share of their supply posted as collateral among instruments listed on major on-chain money markets.
Flows into principal tokens or yield strips are expected to mechanically impact the on-chain yield curve’s slope because trading these instruments requires trading along the yield curve.

Implied yields on Pendle are described as almost always pricing at a premium to the underlying realized yield.
Yield strips are described as a liquid hedge for the carrying cost of levered long inventory financed via perpetuals or on-chain lending markets like Aave, and buyers are described as paying a premium for them.
Bond buyers on Pendle are described as being short the right tail of the underlying yield distribution above the implied rate and therefore demand a premium to give up that upside.

Ethena’s carry yield passed to sUSDe holders has historically been around 5–10% and has sometimes reached roughly 25%.
Ethena earns yield by deploying deposits into a mix of Treasury bills, stablecoin lending, and delta-neutral perpetual futures positions that capture funding/basis.

What is the exact methodology for computing Pendle implied yields by maturity (including fees, compounding conventions, and treatment of reward emissions if any), and can it be independently reproduced?
How deep and liquid are the relevant Pendle markets across maturities (slippage, market impact, and concentration of LPs/participants), and does that liquidity persist outside peak regimes?
Do the reported predictive relationships between term spread and forward Bitcoin returns hold out-of-sample across multiple market cycles and after controlling for obvious confounders (e.g., funding rates, volatility, spot trend)?
Do the reported relationships between term spread and subsequent changes in the underlying yield hold after decomposing yield into its components (Treasury rate, lending rates, perp funding/basis)?
What is the realized time series of (Pendle implied yield minus realized underlying yield) by maturity, and how does it change after fees, slippage, and roll costs?

On-chain curve slope may act as a market state gauge, where backwardation versus contango reflects expectations of normalization and could align with subsequent Bitcoin returns and later changes in underlying yield.
Persistent implied yield premia on Pendle may indicate structural demand to lock fixed yield and to hedge carry costs in leveraged long exposure, shifting right tail yield exposure to fixed rate sellers.
Integration of principal tokens as money market collateral may create feedback between credit conditions and yield curve shape, where collateral usage and flows between principal tokens and yield strips influence slope.

Independently reproducible methodology for implied yields by maturity, and a realized time series showing implied minus realized yield premia net of fees, slippage, and roll costs.
Out-of-sample tests across multiple cycles showing term spread retains association with forward Bitcoin returns and subsequent yield changes after controlling for funding rates, volatility, and spot trend.
Depth and liquidity evidence across maturities showing stable slippage and market impact outside peak regimes, plus transparent concentration metrics for liquidity providers and participants.

Replication shows implied yields are not consistently above realized yields after accounting for fees, slippage, compounding conventions, and roll costs, or the premium flips unpredictably by maturity.
Out-of-sample results show term spread relationships fail after controls, or are unstable across regimes and cycles, suggesting the slope is not a robust market state indicator.
Liquidity is shallow or episodic, with high concentration or large market impact outside peak periods, making the quoted curve unreliable for monitoring or inference.