Principal & Yield Token

Principal Tokens (PTs) and Yield Tokens (YTs) are the core primitives and components of the Spectra protocol, also called as yield derivatives.

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.

👍 Users are presented with maturity (expiration) dates when interacting with the Spectra App.

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]

These are simplified scenarios. The actual outcomes may vary depending on factors such as maturity or liquidity available.

Yield Tokens can be sold, and their accrued yield can be collected anytime.