# 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.\
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Below is a simplified illustration of how yield derivatives are minted on top of an interest-bearing token.

<img alt="image (4)" src="__img0" />

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** [#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.

<Callout type="info">
  **👍** Users are presented with maturity (expiration) dates when interacting with the Spectra App.
</Callout>

**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.  \
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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]

<Callout type="info">
  These are simplified scenarios. The actual outcomes may vary depending on factors such as maturity or liquidity available.
</Callout>

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