# Principal & Yield Token Decentralized Finance (DeFi) is built on layers of protocols that enhance each other's functionalities. Spectra introduces a new financial layer to established protocols like Aave, Compound, or Yearn. **Take this as an example:** 1. MakerDAO mints DAI tokens. 2. Aave takes DAI and wraps it into its Interest-Bearing version, aDAI. 3. Spectra splits Aave's aDAI into Principal Token (PT-aDAI) and Yield Token (YT-aDAI). Principal and Yield Tokens are derivatives on top of Interest-Bearing Tokens (IBTs) supplied by liquidity providers.\ \ Below is a simplified illustration of how yield derivatives are minted on top of an interest-bearing token.

This is a simplification of how PT and YT derivatives are created.

This process, known as '**yield tokenization**', separates future yield rights from the initial deposit. It unlocks new financial possibilities beyond standalone Interest-Bearing Tokens, such as: * Yield Trading * Upfront Yield * Fixed Rate * Discounted Assets ### **Main Characteristics** **Principal Token:** * Represents the initial deposit, also known as the principal * Redeemable 1:1 for underlying at maturity; trading at a discount until maturity, provided no negative yield. * Adheres to ERC-20 token standard; freely transferable **Yield Token:** * Represents the right to future yield * Accrues yield for its holder * The value of the YT itself heads toward 0 until the expiry date * Adheres to ERC-20 token standard; freely transferable Expiries provide clear timeframes for when these tokens can be redeemed or their rights exercised, enabling more precise financial planning for users, traders, and liquidity providers. {% hint style="info" %} **👍** Users are presented with maturity (expiration) dates when interacting with the Spectra App. {% endhint %} **PT-Example:** \ A user purchases 1050 PT-aUSDC for 1000 USDC, with a maturity date of 6 months. At maturity, they can redeem 1050 USDC, thus securing a fixed profit of 50 USDC. \ \ That same user can also sell 1050 PT-aUSDC before maturity back to the pool. The amount they receive, however, depends on market factors such as available liquidity and prevailing market prices. **YT-Example:** \ Bob buys 1 YT-stETH for \~0.13 ETH at an implied 15% APY, with an expiry one year from now. Consider these scenarios after 1 year: * If realized APY is 10% -> Bob accrued 0.10 eth in yield, which results in a net loss of 0.03 eth \[0.13-0.10] * If realized APY is 15% -> Bob accrued 0.15 eth in yield, which results in a fixed-rate alike return of 0.02 eth \[0.15-0.13] * If realized APY is 20% -> Bob accrued 0.20 eth in yield, which results in a net gain of 0.07 eth \[0.2-0,13] {% hint style="info" %} These are simplified scenarios. The actual outcomes may vary depending on factors such as maturity or liquidity available. {% endhint %} Yield Tokens can be sold, and their accrued yield can be collected anytime.