Relationship Between Total Value Locked and the Yield Dynamics of Liquid Restaking Tokens

Abstract

This paper investigates the relationship between Total Value Locked (TVL) and the yield dynamics of liquid restaking tokens (LRTs), a key component of decentralized finance (DeFi). Using data from the Pendle protocol, we systematically explore how liquidity levels relate to fixed yields and implied annual percentage yields (APYs) across contracts. Statistical methods, including quantile analysis, Anderson-Darling, and Kolmogorov-Smirnov tests, reveal statistically significant disparities in yield distributions across TVL quantiles. We further assess economic significance via median differences and effect sizes, illustrating that these disparities are also practically meaningful. Our results demonstrate that lower TVL pools consistently offer higher yields, reflecting elevated risk premiums demanded by investors and the inherent risks associated with lower liquidity. These findings carry practical implications: investors can leverage these systematic yield differentials for arbitrage strategies, while protocol designers can optimize yield structures to enhance competitiveness and support sustainable liquidity. Additional time-series analysis confirms that TVL and yields share a stable long-term relationship, while Granger causality tests do not indicate a unidirectional causal effect. This study is among the first to systematically evaluate the relationship between TVL and yield dynamics in LRTs, offering insights into building more resilient and efficient decentralized systems.