Every now and then, I get back into the defi world and most of the time the reason is no other than being pitched a new thing by my friend @ph1102... It was the same this time around. Following his lead, I invested some money in rate-x, a defi platform on Solana. Well it is a very small position but to be honest, I invested more in order to optimize points for a potential airdrop than for any other reason. While doing that, I did something that I strongly advise against, namely to invest into something that I don't understand... Well I tried to mend this by learning after the facts. I decided that I needed to understand how this platform works. What I found is actually pretty interesting and I thought it was worth a post.
We probably have all had our more or less satisfying experiences with the Defi world. For me, there were not many positive experiences to be honest. If I say that this is different, I might say otherwise a couple of months or years down the road. So before investing anything, make sure that you do your own research first.
The concept of yield tokenization
This concept was first put in place in 2021 by what would become Pendle. I needed quite a lot of time to understand how this works and I'm not sure that I can explain it in a satisfactory manner but I will try none the less.
You start with a token that has an internal yield. Typically it could be a liquid staked token that has an intrinsic yield. It means that the token gains value while you keep it. We will call it sYield token just for the sake of this example.
What yield tokenization does is splitting this token in two. There will be a PT token and a YT token of sYield. In other words we create two tokens, one bearing the principal (PT) and one bearing the yield (YT) of the underlying asset (sYield). There is always a maturity that is defined for these products, an end date.
The holder of the PT token owns the principle and the holder of the YT token, holds the yield. Let's say that sYield has an APR of 10%. When the contract starts 1 PT + 1 YT = 1sYield. This means that if the duration is 1 year, 1 PT would be worth 0.9 sYield and 1YT would be worth 0.1 sYield.
At the end of the maturity, 1 PT would worth 1 sYield and 1 YT would be worth zero since there are no yields generated anymore. Again 1 PT + 1 YT = 1 sYield.
Why would you invest in something like that?
Imagine that I want to have a fix, stable income for a whole year and not depend on market movements. I would purchase 1 PT at 0.9 sYield and get 1 sYield at maturity, one year later. I would have earned 10% just by holding this token. Whether the yield of the token goes up or down. It's a fix return for a fix duration. This is the perfect tool for rent seeking people.
But what about the YT? Why buy it. The YT token is a speculative token. You can profit from market variations and profit from huge leverage effects. If you can find a cheap YT, you can earn more from the yield than what you have paid for. However, if the yield decreases, you might lose some money. It's also perfect if you want to farm points for airdrops. It's the owner of the YT token that collects them all. With relatively little money, you can generate a big amount of points.
What can you earn?
For PT tokens, according to the underlying asset, it's possible to earn from 5 to 25% APR. For YT tokens, there are almost no limits. There are plenty of strategies how to trade with these tokens and I have just started to understand how things work. If you want to learn more about these strategies and get a better explanation of how things work, I encourage you to read the education resources at Pendle.
Platforms that offer yield tokenization
Pendle - Ethereum, EVM's
Exponent – Solana
Rate-X – Solana
With @ph1102, I'm running the @liotes project.
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Defi is just risky, and I prefer a more stable way of earning profit. Passive income just sounds way better.
That's actually what you exactly get with the PT token. You buy it and keep it until maturity and you will get exactly the APR that you started with. Therefore it's an interesting construct in my opinion.
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