Yield Token (YT)

A Yield Token is a wasting asset whose value decays to zero as it approaches its expiry date. This is because it represents a finite stream of future yield. Its price is influenced by:

• Time to expiry: Longer duration generally means more potential yield to claim.
• Expected yield rate: Higher projected yield from the underlying vault or strategy increases value.
• Discount rates: Market demand and risk assessments affect the present value of future cash flows.

The core function of a YT is to entitle the holder to all yield generated by the underlying Principal Token (PT) until expiry. This yield is typically:

• Automatically claimed: Via integrations with protocols like Aura or Convex for boosted rewards.
• Paid in the vault's deposit asset: For example, a stETH PT YT would distribute ETH yield.
• Separable from principal: This allows for distinct markets to form around yield expectations versus guaranteed principal redemption.

YTs create a pure market for yield expectations, decoupled from principal risk. Traders use them to:

• Express a view on future yield rates: Buying YTs is bullish on yield; selling or shorting is bearish.
• Hedge yield exposure: Protocols can sell YTs to lock in a fixed yield rate.
• Capital efficiency: The value of a YT is typically a fraction of the underlying asset, allowing leveraged exposure to yield movements. Trading occurs on decentralized exchanges (DEXs) and specialized AMMs like Pendle's market.

Every YT is minted alongside a Principal Token (PT) from a single unit of collateral (e.g., 1 stETH). This process, known as tokenization, occurs in a vault. The system ensures:

• Full collateralization: The PT is redeemable for 1 unit of the underlying asset at expiry, guaranteeing principal.
• Non-custodial ownership: The YT/PT holder always retains ownership of the underlying asset's smart contract rights.
• Protocol examples: This mechanism is pioneered by Pendle Finance, and similar structures appear in Element Finance (Principal Tokens) and Sense Finance (Divider).

YTs are not yield generators themselves; they are claims on yield from integrated underlying vaults or strategies. Common sources include:

• Liquid Staking Tokens: Yield from staking rewards (e.g., stETH, rETH).
• Yield-Bearing Stablecoins: Interest from lending markets (e.g., USDC in Aave).
• Liquidity Provider (LP) Tokens: Trading fees and incentive rewards from DEXs.
• Restaking: Points and rewards from protocols like EigenLayer. The YT's value is directly tied to the performance and security of these integrated protocols.

All YTs have a defined maturity date. Upon expiry:

• Yield claims cease: The YT becomes worthless as its income stream ends.
• Principal Tokens mature: Each PT becomes redeemable 1:1 for the underlying asset.
• No automatic rollover: Users must actively redeem PTs and, if desired, deposit into a new vault to mint tokens for the next period. This creates a cycle of discrete, tradable yield epochs.

The core function of a YT is to give its holder a claim on the accrued yield of the underlying asset. Key mechanics include:

• Yield Accrual: YTs continuously accumulate yield redeemable from the underlying vault.
• Expiration: YTs have a maturity date, after which they expire worthless as all yield has been distributed.
• Tradability: Their value is derived from the Net Present Value (NPV) of future yield, making them sensitive to changes in market yield expectations.

YTs enable sophisticated financial strategies:

• Yield Speculation: Traders buy YTs to gain leveraged exposure to increases in a protocol's variable APY.
• Fixed Income: Lenders can sell their YTs to lock in a fixed return on their principal upfront.
• Hedging: Protocols or DAOs can buy YTs to hedge against declining revenue from their treasury's yield-bearing assets.

The inseparable counterpart to a Yield Token. A Principal Token (PT) represents the right to receive the underlying asset's principal value at maturity, stripped of its yield. Key traits:

• Zero-Coupon Bond Analog: Trades at a discount to its face value, with the discount representing the yield sold via the YT.
• Price Stability: As maturity approaches, its price converges to the underlying asset's price.
• Combined Value: PT + YT = Full value of the underlying yield-bearing asset at any time.

A Yield Token (YT) is a derivative token that entitles its holder to the future yield generated by an underlying asset deposited into a yield-generating protocol. It is typically minted alongside a Principal Token (PT) when a user deposits into a vault like Pendle Finance. The YT is a claim on the variable yield, while the PT is a claim on the principal at maturity. This separation allows users to trade or hedge future yield streams independently.

Yield Tokens enable several key DeFi strategies:

• Yield Speculation: Traders can buy YTs to gain leveraged exposure to future yield rates without locking up principal.
• Yield Hedging: Liquidity providers can sell YTs to lock in a fixed yield, protecting against future rate declines.
• Capital Efficiency: Protocols can use YTs as collateral in lending markets, as they represent a future income stream.
• Composability: YTs can be integrated into other DeFi protocols to create structured products or automated yield strategies.

Several major DeFi protocols have pioneered and popularized the Yield Token model:

• Pendle Finance: The leading protocol for tokenizing and trading future yield, using an AMM for YT/PT markets.
• Element Finance: Introduced Principal Tokens and Yield Tokens for fixed and variable yield separation.
• Sense Finance: Allows for minting Yield Tokens against yield-bearing assets like aTokens and cTokens.
• APWine: Enables users to tokenize and trade future yield from various vaults and liquidity pools.

The value of a Yield Token is derived from the net present value (NPV) of its future yield stream. Key factors influencing price include:

• Underlying APY: The current and projected yield of the source vault.
• Time to Maturity: The duration until the YT expires and stops accruing yield.
• Discount Rate: The market's required rate of return, often influenced by broader DeFi rates and risk perceptions.
• Market Liquidity: Trading volume and depth on YT/PT automated market makers (AMMs).

While powerful, Yield Tokens carry specific risks:

• Impermanent Loss (for LPs): Providing liquidity in YT/PT pools can lead to losses if yield rates move unexpectedly.
• Protocol Risk: Dependence on the security and solvency of the underlying yield source and the tokenization protocol.
• Yield Volatility: YT prices are highly sensitive to changes in the underlying asset's yield, which can be volatile.
• Liquidity Risk: Some YT markets may have low liquidity, leading to high slippage on trades.

Understanding Yield Tokens requires familiarity with adjacent DeFi primitives:

• Principal Token (PT): The companion token representing the underlying principal amount, redeemable at maturity.
• Yield Bearing Token (e.g., aToken, cToken): A token that automatically accrues yield, often serving as the input for YT/PT minting.
• Automated Market Maker (AMM): The decentralized exchange model used to facilitate trading between YTs and PTs.
• Fixed Rate Protocol: Protocols like Notional Finance that offer fixed-rate lending, an alternative yield management tool.

The underlying asset whose future yield is tokenized into a YT. Common examples include:

• Liquid Staking Tokens (LSTs): stETH, rETH, cbETH.
• Lending Market Tokens: aTokens (Aave), cTokens (Compound).
• Yield-Generating Vault Shares: Yearn vault tokens, Convex cvxCRV. The YT entitles its holder to the variable yield generated by this underlying asset over a specified period.

The process of separating the yield component from an interest-bearing asset to create a tradable derivative (the YT). This is a core DeFi primitive that enables:

• Yield Trading: Speculating on or hedging future yield rates.
• Capital Efficiency: Allowing users to sell future yield for upfront capital.
• Custom Yield Exposure: Isolating pure yield risk without principal risk. Protocols like Pendle, Element, and Sense automate this process through smart contracts.

A yield strategy facilitated by Yield Tokens. A user can achieve a fixed return by selling their YT for an upfront premium. For instance, a user holding stETH can tokenize its future yield, sell the YT on a market, and lock in a known, fixed yield on their principal. The YT buyer, in turn, gains leveraged exposure to variable yield, betting it will exceed the implied fixed rate they paid.

The origin mechanism that generates the yield for the underlying asset. This defines the YT's risk and return profile. Key sources include:

• Staking Rewards: Protocol inflation (e.g., ETH staking via Lido).
• Lending Interest: Borrowing fees from money markets (e.g., Aave).
• Trading Fees: Revenue share from DEX liquidity pools or vault strategies. The YT's value is directly derived from the performance of this source.

The specific timestamp when the Yield Token (YT) ceases to accrue further yield and the associated Principal Token (PT) becomes redeemable for the underlying asset at par. This date is set at the token's creation and is critical for pricing. After expiry, the YT has no value, as its claim on future yield has ended. Markets for YTs are most active leading up to this date.