The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Mining the DeFi “splitting magic”, the revenue tokenization agreement is or the next blue ocean track.


It is similar to the coupon stripping in the bond market, that is, the separation of the yield from the underlying asset; if this concept is introduced into DeFi, it will be possible to use tokens to separate the two. The principal and interest separation agreement (or the income tokenization agreement) is dedicated to solving the liquidity of users’ positions, and innovating the current low-capital efficiency positions, enabling users to trade their future income within the time period selected by these agreements. Users will no longer face any liquidation risks while maintaining asset liquidity. The same gameplay can also be used for income farms or liquidity pools, where the return can reach thousands of percentage points. The revenue tokenization agreement will enable users to guarantee their revenue and not be affected by price changes during the period of their choice.

Similarly, when people choose a fixed interest rate, users can purchase principal tokens and obtain asset returns or principal leverage exposure without liquidation risk.

The projects listed below all store various types of tokens (such as PoS assets, income farms, LP tokens, etc.) on their platforms, and generate principal tokens and income tokens through pledges to exchange the principal with The income is separated, providing users with more capital flexibility and interesting gameplay. For the convenience of explanation, we call the principal token PT and the income token YT.

Note: The usage cases in this article are provided by Element, Sense, Pendle and other related teams

  • Principal Token (PT): Represents the principal position locked by the user. PT is the asset ownership certificate deposited by the user and has a lock-up period. When you want to withdraw your assets from the platform, you need to burn these PTs.
  • Yield Token (YT): Represents a right that can request the basic rate of return of assets stored in the platform. Unlike PT, they are uniquely related to a given period. Example: For monthly futures, there may be YT in April, YT in May, and so on.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

One year’s loan interest rate change data source: DeFi Pulse

The three major elements of traditional structured financial products are: linked targets, basic financial assets and financial derivatives. So we can use these three elements to better understand these revenue tokenization agreements, among which:

  • Linked subject: LP token return rate
  • Basic financial assets: OT tokens
  • Financial derivatives: YT token

From the perspective of income, fixed-income assets are purchased at a certain percentage. As time goes by, fixed-income assets continue to grow at a fixed interest rate, and finally reach the initial principal level on the maturity date.

Two types of revenue tokens

Drag YT tokens: The income of Drag YT tokens will continue to accumulate and cannot be redeemed until the expiry date. YT holders are fully repaid on the maturity date or later, which are similar to principal tokens with floating redemption values.

Projects using Drag YT design mechanism:

  • Element
  • APWine
  • Time

Collect YT tokens: Collect YT tokens can redeem the accumulated interest before the expiry date, that is, interest will be distributed during the income accumulation period. They are similar to coupon bonds, with a continuous flow of coupons.

Projects using Collect YT design mechanism:

  • Commute
  • Swivel
  • Sense

Special fixed income

The practice of splitting the income and principal of LP tokens through an agreement, and selling the income tokens. Compared with buying traditional fixed-income products, the same thing is that the principal is locked and can only be retrieved after maturity; the difference is that compared with traditional fixed-income products, the proceeds can only be redeemed after maturity. , The revenue tokenization protocol allows users to get revenue in advance, which greatly increases the user’s capital efficiency. In order to realize this advantage that traditional fixed income products do not have, a market with sufficient liquidity support is needed to transfer the risk of this volatile return rate.

But if it is just as an ordinary fixed-rate product, it is no different from the fixed-rate loan agreement we are familiar with (for example, 88mph, Yield). This is not the main game that it respects, but it is the easiest way to participate for users who don’t want to spend their energy (although this is not as good as going to mainstream fixed-rate agreements to save money and earn interest).

APY plus size, another Lego brick

Let us summarize the classic process of DeFi gameplay. Assuming that the user Mora has some ETH in his hand, he can do this:

  • Stake ETH to MakerDAO → Lend DAI [Earn an APY]
  • DAI mortgage to Compound → get cDAI【Earn an APY+COMP】
  • Mortgage cDAI to Curve → get crvDAI [Earn higher APY+Curve; you can also deposit DAI directly into Curve, and Curve will help you put DAI into Compound]
  • Part of crvDAI is mortgaged to Element → get PT tokens and YT tokens [Split the tokens]
  • A part of crvDAI is paired with the aforementioned PT tokens and YT tokens to provide liquidity for Element → Obtain LP tokens [Earn an APY]
  • Pledge LP tokens in Element (currently Pendle provides this function, Element has not yet provided it, here is a hypothesis) [Earn an APY + a token incentive (Element currently does not have a native token, there is a token model for analogy here) s project)】

I believe you have seen the infinite charm of the DeFi Lego module from the above display. Revenue tokenization projects can be divided into a level with fixed income projects. They further reduce the risk (trading PT principal tokens) and increase leverage (trading YT tokens) in the original DeFi ecosystem.

Strategy at a glance

Basic strategy

PT principal token

  1. Transaction: Redemption of principal early

The PT tokens generated by the pledge can be redeemed in advance, but the redemption amount will be less than the original pledge (as a penalty for early redemption fees).

  • PT sellers: If you need money urgently, this method can release your funds in advance. And because PT is separated from YT, you still retain the income position of this interest rate product.
  • PT buyer: Because you helped the PT seller release the funds in advance, you, as a buyer, enjoy the benefits of buying PT at a discount (equivalent to buying a zero-coupon bond). After the expiration, the principal pledged by PT can be exchanged 1:1.
  1. Casting: Sell YT and guarantee PT

Buy ETH at a discount (discounted long position): The so-called “discounted price” discount is actually a time cost, that is, users can sell YT and hold the corresponding OT until maturity to establish a leveraged position on the underlying asset (no liquidation risk) :

Sell ​​YT + hold PT until maturity = buy at a discount

for example:

  • Suppose there are 1,000 US dollars of funds in the Compound ETH pool, and the APY is 40%. Assuming there is no discount rate, the transaction price of a 1-year YT is 0.40 USD.
  • The user deposits cETH on the platform and casts them into YT-cETH and PT-cETH.
  • The user immediately sells YT and holds the PT until it expires. After the expiration, the target can be redeemed within 1 year.
  • Assuming that the price of ETH remains unchanged, one year later, users can redeem $1,000 of ETH with only $600 of funds. This is equivalent to 66% of leverage without liquidation risk ($1,000 deposited-$400 sold).

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Pendle provides case illustrations

  1. Stake in the AMM pool

Users can put PT on AMM and increase their fixed interest rate income through transaction fees.

  1. As a trading tool

From the perspective of a swing trader (1, 2 weeks or one month positions), PT is a better trading tool: it can generate a higher rate of return without increasing trading risks. example:

  • Spot trading: Assume the following parameters:

Annual fixed rate of return: 10%

Assets to be traded: 1 month, PT- BTC

BTC current price: 50,000 USD

BTC transaction price target: 55,000 USD

Transaction period: 1 month

USD transaction volume: 200,000 USD

Users can choose a trading position between 2 and 4 weeks. If the value of BTC at the end of the month increases by 10% and reaches the price target of 55,000 USD, the user will redeem his PT 4.033 BTC at a price of 55,000 USD per BTC.

So when the transaction is completed, the total user assets are $221,815. If the user chooses a BTC position instead of a PT-BTC position, the total assets will be 220,000 USD. By using PTs as its main trading tool, users can obtain additional profit in the form of fixed income on the basis of traditional trading profits.

YT revenue token

  1. Transaction: risk swap
  • Conservative ordinary players: If users want to participate in farming with high APY, but are afraid of large fluctuations in APY. Then users can pledge lp tokens to generate PT and YT, retain PT and sell YT in time to lock in revenue in advance. When users sell YT, they are essentially capturing the current income and converting the future yield of a floating interest rate into the present value of a fixed interest rate that the market believes has an appropriate discount.

Example: After depositing your DAI in Compound, you can lock your cDAI in the platform for a week, and trade in advance the income they will generate this week.

  • Risky experienced players: Experienced users can evaluate YT’s market price to determine when and whether to buy or sell.

For example: here we take a YT (ETH)=10% APY

During the one-year period, users consider the average APY to be 10%. This means that users believe that 1 YT (ETH) can be exchanged for 0.1 ETH at the end of the period. If the discount of YT on 0.1 ETH exceeds 10%, the user will buy YT as a buy signal; if the discount is less than 10%, the user will sell YT as a sell signal.

Therefore, for experienced players who observe the discount transaction value of the main token and the premium transaction value of the income token, they can arbitrage between the fixed interest rate and the variable interest rate by minting and trading YT tokens.

Therefore, we can regard the discount/premium of YT price as an indicator of market sentiment:

  • The market’s view of future earnings levels.
  • The market’s perception of the time value of DeFi.
  1. Casting: Sell PT and guarantee YT

Compared with ordinary lending agreements, the advantage of revenue tokenization: the ability to maintain basic asset growth exposure while generating revenue is one of the main forces currently driving loan agreements. Many DeFi users loan to maintain ETH exposure, and at the same time, they also want to use a stable token pair or high APY provided by other tokens to make their investment portfolio more profitable. The following is a more detailed example:

Traditional operation

If users believe that ETH will grow substantially in the coming year. However, the user also found that he can get 30% APY by staking stablecoins (such as DAI). The user does not want to exchange the ETH he owns for DAI to obtain income, because he believes that the future growth of ETH will exceed the APY he obtains by collateralizing DAI. So the user will do the following:

  • Loan or mortgage method
  1. The user took over-collateralization and borrowed DAI.
  2. Then he pledged his borrowed DAI to a position with a 30% return rate.
  3. If the price of ETH increases, users can borrow more DAI and gain more revenue exposure.
  4. If the price of ETH falls, the user will have to add additional collateral to avoid being liquidated and losing his 150 ETH.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

The user kept his ETH and also received DAI revenue.

But this process has certain risks:

  • If the price of Ethereum drops sharply, users may be liquidated and lose their ETH;
  • In addition, due to the need for over-collateralization, users can only obtain 200,000 DAI income exposure, and at the same time mortgage the value of 300,000 DAI;
  • The last point is that the user lacks capital efficiency because he cannot use or pledge his 150 ETH to obtain any additional income.

Operation of revenue tokenization

If the market conditions are correct, users can still maintain exposure to ETH or its preferred underlying asset, but there is no liquidation risk or excessive mortgage is required. Users can also gain capital efficiency and freely use most of their preferred assets.

Users do not need to borrow to maintain risk exposure, they only need to cast PT and YT for the asset, and then exchange the PT back to the priority basic asset. However, users still have to maintain a certain balance in their priority basic assets.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

  1. The user has 150 ETH, and he exchanges 150 ETH for 300,000 DAI.
  2. The user generates PT and YT by staking DAI, namely 300,000PT-DAI and 300,000 YT-DAI.
  3. The user sold his 300,000 PT in exchange for ETH and obtained 148.5 ETH.

As a result, the user now owns 148.5 ETH and maintains an exposure of 300,000 DAI earnings.
The user can now use his 148.5 ETH in any way he wants-these ETHs are not locked; the user has no liquidation risk, and can now pledge his 148.5 ETH on any platform to obtain income to make up for the decline. He obtained an additional 100,000 DAI income exposure that he could not get by following the traditional route.

Stake in the AMM pool

Users can put YT on AMM and increase their fixed interest rate income through transaction fees.

We will find that both OT tokens and YT tokens can be pledged in the AMM pool to provide liquidity, so there will be a user’s own choice. Take Element as an example: whether to choose to directly put it in the Yearn machine gun pool to earn income or It is uncertain which of lp is more profitable in Element. Below I use a picture to show:

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Advanced strategy

YT compounding

YT Compounding: The process of repeatedly selling principal to re-deposit and further gain exposure to income (multiple compound interest stacking).

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

For simplicity, the calculation in this example does not consider gas fee, slippage or transaction fees

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

After 10 rounds of YT compounding, the user’s return rate is 6.5 times his initial balance.

In the last round, we can see that, assuming 20% ​​APY, this kind of operation can eventually produce:

Income 13.02 ETH + principal 3.87 ETH = total 16.9 ETH

If he invests 10 ETH in the traditional way, he will have 12 ETH at the end of the year. (Pure value-added 4.9ETH)

Therefore, the problem with this use case of element is that it does not consider whether the increase in revenue obtained from multiple operations can cover the gas fee and transaction fee to be spent, as well as the loss and slippage of selling PT, but it can be solved in the following way.

Use flash loans to increase leverage

YT compounding can be realized more effectively through Flash Loans. In the above table, the remaining available capital of 3.87 ETH in the 10th cycle of compound interest. This means that the difference is the total capital expenditure, which is 6.13 ETH. Therefore, Element Finance indicated that these 10 compound operations can be realized with a flash loan of 6.13 ETH. Spend 6.13 ETH to get a gain of 65.1 ETH, effectively providing 10.6 times leverage without liquidation risk.

Fixed Rate Yield Ladders

The fixed-rate income ladder product can provide users with continuous liquidity because it continues to compound different proportions of user assets into various/different terms. At the end of the term, unless the user chooses to withdraw, the asset will automatically roll to the next fixed interest rate position set subsequently. If users need funds, this will provide users with more frequent liquidity instances. [That is, automatic compound interest reinvestment]

Principal Protection Products

This is a more risk-averse structured product, which can guarantee at least the rate of return on the deposit principal, because the deposit will be held until maturity. This design is to protect investors from adverse market cycles, and the compound interest period is short enough to allow users to exit the strategy and take a different position when the market improves.

The user buys at a discounted price and the lock-up period is 3 months PT, and the remaining balance (discount difference) enters the leveraged variable income position. Every 3 months, as the PT expires, this discount difference will be carried forward to an additional leveraged variable income position.

This mechanism provides users with continuous liquidity, while the two components of the product (PT and YT) remain interchangeable to allow users to withdraw at any time.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Structured products consist of a combination of fixed-income products and options. Structured products have fixed-income components to reduce risks and strengthen returns through options to become products with a good balance of risks and returns.

User role

Interest rate traders

Yield traders are a group of people who have their own keen judgments about market fluctuations. They predict whether the expected target interest rate will rise or fall. They buy YT tokens to represent long future yields, and to buy OT tokens represent shorts (that is, they believe that the current fixed yields maintained by OT are higher than the floating yields in the market for a period of time in the future. At this time It is profitable to buy OT tokens and then wait until the future rate of return drops to sell).

Fixed income person

Some users pursue a fixed rate of return within a certain period, so they buy OT tokens and hold them to maturity to lock in the fixed interest rate of their underlying assets.

Liquidity provider

Liquidity providers will pledge their underlying assets (such as various supported LP tokens) in the agreement to earn transaction fees, so they will generate new PT or YT tokens and add liquidity to the two pools separately Sex injects new energy into this market, and users redeem their assets after maturity (of course, they can also be redeemed in advance).

Fixed rate lender

If borrowers hold certain floating rate loans on platforms such as Maker, Compound, Aave, but are afraid of huge market fluctuations, and want to convert some or all of their loans to fixed loan interest rates, they can choose to buy and hold There are YT tokens to hedge against fluctuations in interest rates for fixed-term borrowings.

For example: Mora borrowed 10,000 DAI on Compound, and the interest rate was 5%. Mora feels that the borrowing interest rate will rise in the future, and he will be able to purchase 10,000 DAI corresponding YT tokens in the tokenization agreement. If the borrowing interest rate rises to 10%, Mora can sell YT tokens in his hand to earn income, offsetting the risk of rising borrowing interest caused by rising interest rates.


When the total value of YT and OT in the market deviates from the corresponding underlying asset, arbitrageurs can make the difference by casting, burning and trading OT and YT tokens to make the difference and maintain the market price within the normal range.

For example: a value of $1 can be minted to generate a YT and an OT. If the price of a PT + the price of a YT on the market is> $1, the price of YT is overestimated. If the arbitrageur finds this opportunity, he can immediately “mint + sell” YT tokens to make a profit. The risk is the time difference and gas fee when the arbitrageur performs a series of operations.

Comparison between agreements

First sight: Alchemix

Speaking of the revenue tokenization protocol, we must introduce the Alchemix project. This is a DeFi lending product built on YFI. Unlike ordinary lending, Alchemix claims to “let time help you pay off your debt”, that is, use interest to repay the loan. Once DAI is deposited in the contract, the contract will regularly use the money earned to repay your debts until all the user’s debts are paid off. Because the stable currency collateral is used, there is no liquidation risk.

For example: the user pledges 1,000 yuan of DAI and lends 500 yuan of alUSD. 500 alUSD is about 1,000 DAI in three years of interest, so you can get back 1,000 DAI after three years; you can also withdraw the deposit in advance.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Alchemix protocol flow chart

So what does this sound like? This is the method of “sell YT tokens to protect PT tokens” in the income tokenization agreement, lock the income in advance and then hold the principal to redeem it at maturity.

In terms of settlement, unlike other DeFi protocols, the model of “borrowing A tokens must return A tokens” is that Alchemix debt can be repaid at any time using DAI or alUSD, and any combination between them (as long as the user accumulates The amount exceeds the debt owed).

For example: Mora pledged 1000DAI in Alchemix (that is, there is a debt of 1000DAI), and he found that the price of alUSD is only 0.9DAI. Then Mora can buy 1000alUSD at a discounted price and use this to repay his debt. Alchemix has always equated the price of alUSD with DAI. This can help Mora save money, and his buying of alUSD can help the price of alUSD return to the anchor price. The reverse is also valid. If the price of alUSD is higher than the anchor price, Mora will sell alUSD to buy DAI, reducing his debt.

Formed form: APWine and Swivel


APWine has built a decentralized exchange based on the 0x protocol, and users can trade FYT in this market. The market provides limit order and market order functions, which are similar to ordinary exchanges. Users can also put these FYTs in AMM-based DEX to provide liquidity, and use AMM to further reduce transaction friction. Either way, as long as these income rights can be traded separately, the pricing of the income rights itself can be promoted.

status quo

In APWine, the principal token is called PT, and the income token is called FYT; currently there is only the Beta version as shown below (in this version, PT and FYT cannot be staked at present, and FYT can only be traded through order book), According to the team, the official version of V1 will be launched soon. If there are any new developments and innovations, I will follow up and update the content in real time.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

APWine Beta version of TVL and three products currently available



Swivel implements the orderbook model to provide all market participants with customizable + significantly enhanced capital efficiency. Swivel and Pendle have similar interest token mechanisms, but Swivel pays more attention to promoting professional transactions. Orders on Swivel are matched on a centralized limit order book, and it only requires 100% similar collateral (instead of the common collateral rate in DeFi that requires >100%). In Swivel, the revenue token is nToken, and the principal token is zcToken.

status quo

Recently deployed on the Rinkeby testnet, two products “DAI-355 Days” and “USDC-19 Days” have been opened, which can be traded with DAI and USDC respectively:

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Whether it’s from UI design (Fixed Yield and Floating Yield) or official case descriptions, it can be seen that Swivel has highlighted the effect of its product risk classification, and the order book model is indeed true in the revenue tokenization protocol. Unique and more suitable for professional traders.

detailed analysis

The revenue tokens issued by Swivel are called nTokens, which are optimized in two ways:

  • nTokens includes interest generation and tracking functions in its transfer function (to reduce the overhead in Element’s YT design).
  • Swivel automatically mints tokens when the order is completed (reducing inventory requirements and transaction overhead).

In other words, like Pendle’s YT, Swivel’s nToken transaction is much more expensive than Element’s YT, considering the costs associated with calculating the marginal interest generated between each user’s transfer.


Like most other derivative AMMs, Element and Pendle’s AMMs do not take into account the broader factors involved in standard derivative pricing. This means that the LP of any agreement will continue to give the recipient (that can analyze the pricing from the outside) an advantage. In addition, like most AMMs, its capital efficiency is very poor because there is very little capital allocated at market prices.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world


Although we are optimistic about the continued development of these factors, the loss experienced by LP may be huge (as seen by Hegic LP in the figure above). This may mean LPs with higher risk and lower capital efficiency, which leads to the need to permanently subsidize LPs with agreement tokens to maintain a competitive spread.

For this reason, Swivel believes that their order book model is currently a necessary part of the interest rate derivatives market.

How to play: risk classification

  • Conservative fixed-income player: Alice has 1,000 USD in USDC, and she wants to lend out at a fixed interest rate of 5% for 1 year.
  • Risk appetite player: Bob has 50 USD USDC, and he wants to go long on Compound USDC interest rate (currently 8%).

Both Alice and Bob deposit funds (Alice’s $1,000 and Bob’s $50) into Swivel, and then pool them into Swivel’s smart contract until the end of the term. During the validity period of the contract, the funds will be deposited into Compound.

If the 12-month contract interest rate remains at an average of 8%, Alice will eventually get back $1050; Bob will get back $84: Investing $50 and getting a return of 68% is equivalent to Bob’s leverage on interest rate exposure.

The three main design features of Swivel are:

  1. Does not rely on price oracles
  2. User assets will not be liquidated
  3. Swivel takes advantage of the liquidity of Compound and Aave.

The Birth of Two Heroes: Element and Pendle


status quo

Element Finance launched the mainnet on July 1, 2021. As of September 3, 2021, Element now supports 7 pools including WBTC v2, 3Crypto v2, etc. After the user pledges the underlying assets, Element will put the user in the Year machine gun for the user. Living in the pool. Different from users directly earning interest in Year, Element will give users a fixed annual income.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Element.Finance APP page

lp operation process

  1. Obtain PT and YT-two ways:

Put Curve lp tokens into Element to mint PT and YT: (As you can see here, 10 lp tokens can only generate 10 YT and less than 10 PT)

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Use Curve lp tokens to buy PT or YT directly. (It can be seen here that 10 lp tokens can buy more than 10 PTs, which is equivalent to purchasing an agreed fixed-rate product)

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

  1. Provide liquidity-paired with lp tokens, PT and YT can be pooled separately:

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world


The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Pendle implements time devaluation AMM for revenue tokens, allowing liquidity providers to avoid theta decay. Pendle’s unique AMM can potentially be extended to many other future derivative primitives. In Pendle, the principal token is called OT, and the income token is called YT.

Pendle generates YT by including the interest tracking function in the token transfer function. Therefore, in Pendle, no additional deposits are required to be minted.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

In addition, as shown above, the cost of trading YT is about 2.75 times higher than standard ERC-20 tokens, which means that it requires more calculations.

Pendle AMM

In order to take into account the time decay factor, Pendle has designed an AMM that can satisfy all assets with time decay characteristics. After the initial liquidity pool is created, the AMM curve is similar to Uniswap ‘s constant product curve. However, when subsequent exchanges occur and time passes, the AMM curve will move at the equilibrium point and adjust itself to solve the problem of time decay of assets.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Pendle AMM curve changes with time

The curve movement will artificially reduce the price of time decay tokens. The behavior of the curve shift is controlled by a pricing model that decays over time, and this model is inspired by the bond or option pricing model, and the rate at which the value decreases over the contract period tends to accelerate.

Pendle’s AMM effectively breaks the hard-coded link between the value of the liquidity pool and the value of its basic token. The value that changes over time is kept in the liquidity pool, otherwise the value will be robbed by arbitrageurs on the constant product curve AMM. Assuming that the balance point of AMM has not changed, then LP will not suffer any time-related losses.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Time-related impermanence loss (Pendle vs Uniswap)

About Pendle Token and (Pe,P)

Compared to Element no token distribution model, Pendle project has its own native tokens, but here we discuss more about its innovative way of IDO (interested readers can read the following link ), and here I would like to introduce a plan for Pendle The method used when the value of its own native token is injected into energy.

A key asset that Pendle launched on August 18 is the PENDLE / ETH Sushiswap pool, referred to as Pe for short.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Situation of OT and YT pools on September 12, 2021

Users can provide liquidity for OT-Pe and YT-Pe, and trade with PENDLE as the basic asset. This will generate trading pairs: OT-Pe / PENDLE and YT-Pe / PENDLE (ie (Pe,P)). Therefore, (Pe,P) can achieve three things:

  • Continue to incentivize deeper $PENDLE liquidity.
  • Provide effective liquidity for the Pendle Agreement.
  • Reward those who are most tied up with the benefits of this game.

Revenue and pricing of OT tokens (take sushiswap-cDAI as an example):

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

YT token revenue and pricing (take sushiswap-cDAI as an example):

There are three types of incentives:

  1. Provide liquidity to the YT / baseToken pool (you need to pledge LP tokens to be eligible for rewards)
  2. Provide liquidity to the PENDLE / ETH pool on Sushiswap
  3. PENDLE token pledge (auto-compounding)

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

The cost of using Pendle:

  • Forge Fees: 3% of the interest generated by YT will be directly transferred to Pendle Treasury.
  • Swap Fees: AMM charges a 0.1% swap fee for transactions. 0.85% is allocated to LP and 0.15% is allocated to Treasury.


Vesting schedule:

  • The rewards generated from the LPing YT / base Token pool have a vesting schedule of 5 epochs, which are released linearly (20% is released at the end of each epoch); the rewards never expire and will not be lost.
  • The incentives obtained through Pendle / ETH and Pendle unilateral pledge on Sushiswap can be obtained at any time.
  • One epoch is 7 days.

Why does the YT of the pendle decay with time?

The difference between Pendle and Element is that the pendle’s income token YT can be exchanged before expiry, and the element can only be exchanged on the expiry date. Then the author will borrow the explanation ideas provided by the Sense team, as shown in the following figure:

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Disassemble YT again: PY is the confirmed income that has been obtained (for example, for a five-year period, I hold YT to the third year, and the income has been confirmed in the three years); FY is the floating interest that has been undetermined for the remaining two years , So what decays with time is FY in YT.

Pendle regularly distributes dividends to users during the accumulation period, so the value of YT will definitely decrease.

cDAI is an interest-bearing token, so how to calculate the value of OT-cDAI?

cDAI is the certification token of Compond. Over time, the interest of cDAI is generated by increasing the value of the redeemable DAI of cDAI at maturity. In Pendle, 1 OT-cDAI only represents 0.021475 DAI, and its accumulated interest is calculated into YT-cDAI.

Emerging forces: Sense, Tempus, Prism


The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

The Sense team is a team that the author believes is very deep in the research on revenue tokenization (I am also very grateful to the Sense team for their help with the content of this article). Before launching Sense Finance, led by Kenton (a former MakerDAO engineer), the team wrote a lot of research articles on revenue tokenization, which has a high gold content and is suitable for beginners. Here I put a link to its research articles translated by the smell chain, interested readers can click into reading

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

At present, the product is still under development, and only the white paper released by it is available for research, and the content is very comprehensive. In Sense Finance, the principal token is called “Zeros” and the revenue token is called “Claims”, which uses the same collect revenue token mechanism as Pendle. Here the author will not repeat the parts that have been introduced in the previous article. The following are only the areas that the author thinks are innovative or key:

Sense AMM

The Sense V1 version of AMM will adopt Uniswap V3. Two passive LP strategies will be deployed for each series of a specific Target, one for the Zero / Target pool and the other for the Claim / Target pool. Both LP strategies will enforce price ranges that are conservative and practical for the relevant Target.

New user roles: Series Actors

The task of Series Actors is to maintain the term structure of the underlying asset in Sense, which includes three roles: Series Sponsor (initiator), Series Settler (liquidator) and Series Roller (trader)

Series Sponsor (Sponsor)

Sponsor can choose any underlying assets it holds to build a pool and then set a certain grace period (grace period), and pledge a certain amount of stablecoins in it. These stablecoins will become part of the settlement reward (this part of stablecoins also It can be called MEV). Sponsors also have the privilege of being the liquidators of the first batch of series, so before Sense opens the pool to the public, sponsors can liquidate their underlying assets within a short grace period.

Series Settler (Liquidator)

If the underlying asset is not liquidated on or near the expiry date, Settler will liquidate the underlying asset and receive a reward. They are motivated by the liquidation reward, which is composed of the stablecoin pledged by the initiator and the accumulated issuance cost of the pool. After the grace period of Series Sponsor expires, the clearing function will be available to all users.

It should be noted that the existence of the stable currency pledge mechanism is to encourage the liquidation of series whose issuance costs are lower than expected, and it cannot act as an incentive for series liquidators by itself.

Series Roller (Trader)

Series Roller is a role that transfers liquidity from an expired series to the next unexpired series. Roller is actually an external participant of Sense (as opposed to Series Sponsor and Series Settler), they will interact with the Zero / Claim liquidity pool (such as Uniswap v3).

And this process is not automatic-Series Roller needs to be willing to spend gas fee on behalf of LP to transfer their liquidity.

A Target’s term structure

The term structure of Target in Sense is composed of all active series of a given Target, and its form is defined by the configurable parameters of Sense Governance. In an ideal world with unlimited liquidity, the term structure of the underlying asset does not need to be subject to any restrictions, and users can freely interact with any market on the yield curve. However, in the early stages of project development, Sense Finance did not have such ideal liquidity conditions. Therefore, in order to alleviate liquidity segmentation without such conditions, the Sense V1 version will set the following restrictions:

  • Three active series are set for each underlying asset.
  • The expiration date must be set at the beginning of the month, 00:00 UTC

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world


gCalims is a great design in my opinion. It is an AMM interface launched by the Sense team for revenue tokens. We have already mentioned this problem in Pendle. Because of the setting of the YT token decay mechanism, YT tokens cannot be traded on ordinary AMM (such as Uniswap, Balancer or Curve). To solve this problem, Sense introduced Grounded Claims (gClaims ). Like packaging tokens, gClaims wraps Collect Claims and abstracts the accumulation of past revenue behind a single contract in order to simulate the design of Drag through the value of a single gClaim. With gClaims, LP can provide liquidity for ordinary AMMs (such as Uniswap V3). Doesn’t it sound cool?


The Terra ecosystem recently launched a revenue tokenization project officially incubated by Terraform Labs: Prism Protocol. The token split design continues the basic route of the projects listed above. In this project, the revenue tokens and principal tokens also use the universal names of “YT” and “PT”.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

The composition of its product design is as follows:

  • CT: Guaranteed tokens generated when profitable assets are submitted to the Prism vault
  • PT: The main token generated when using CT to mint PT and YT
  • YT: The revenue tokens generated when using CT to mint PT and YT
  • CT=PT + YT

In Prism Protocol, they have an interesting name for those who provide the splitting of underlying assets: guarantee providers, their task is to convert CT into PT and YT after receiving it in the Prism vault.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Because it is based on the Terra ecology, the team will first use LUNA as the underlying asset in PRISM v1.0, and split it into cost gold tokens-pLUNA and revenue tokens-yLUNA. LUNA holders can choose 3 months, 6 months, 9 months or perpetual future earnings period (not yet launched). In the near future, PRISM will further expand its collateral varieties, which will include mainstream PoS assets and native assets of the Terra ecosystem.

According to the team’s route plan, PRISM will eventually be able to split all profitable digital assets, such as PoS assets, profit farms, LP tokens, DeFi governance tokens, and NFTs. In addition, it plans to cover profitable traditional financial assets such as real estate. , Commodities, precious metals or other investment asset classes, such as stocks, bonds, investment funds and derivatives. In addition, the PRISM team claims that it will also work to provide “leverage” services for pTokens and yTokens-that is, lending and shorting are possible. If this function can be achieved, the yield derivatives market will truly “live”. After all, few DeFi players can reject the temptation of leverage.

From the above introduction, we can see that the team’s development direction is clear and ambitious, and with Terra official support, the resources and influence will naturally not be low. The author suggests that you can focus on the next development trend of the project and lay ambush the next “Terra” dark horse.


Tempus Finance is an agreement that focuses on splitting the principal and income tokens for wrapped tokens. Their AMM is a custom AMM built based on Balancer v2. Its principal token is called Principals, and its income token is called Yields. The combination of the two and the corresponding underlying asset certificate is called Yield Bearing Token. So far, Tempus has realized the separation of principal and interest for Lido, Compound and Aave.

There are 4 types of fees for the Tempus protocol:

  • Storage fee
  • Early redemption fee
  • Redemption fee
  • Additional income fee after maturity

The first three fees (deposit, early redemption, redemption) can be changed and set to 0 by default. Currently, the Tempus Agreement does not charge users any of these three fees, but this may change in the future.

Time Pool

Currently supports storage of two types of assets:

  • Yield Bearing Token: Yield Bearing Token
  • Underlying assets: Backing Token

If you store revenue-bearing tokens such as cDAI and stETH, Tempus will split them into Tempus Yields and Tempus Principals; if you store underlying assets such as DAI and ETH, Tempus will convert them into revenue Carry the tokens and then split them.

A probe into development prospects

Build energy for everything: the founder

If the revenue tokenization project is to liberate the liquidity of LP tokens, this purpose sounds rather awkward: LP tokens only need to be pledged on the original agreement. If the funds are used for other purposes, unstake + remove LP can withdraw the flow at any time There is no need to mint OT and YT tokens in these revenue tokenization projects to release liquidity (and there are many operating steps, and the handling fee on Ethereum will be high). At present, because all these revenue tokenization projects are in the early stage of the project, they can only use the most conventional high APR OT and YT liquidity pools to attract early users to pledge their LP tokens in the agreement-after all, Before you bother to figure out the complicated gameplay of these projects, high yields are the ultimate attraction that will not deceive people.

And these users who provide liquidity in the agreement because of the high rate of return I call them “early founders”: they don’t need to understand the value of the agreement, they only need to use their “money power” to help the project develop further. And in view of the recent NFT frenzy bubble wave in Ethereum, the gas fee on the chain has soared, and the “founders” who pledged LP tokens in the agreement will not withdraw at will: because the steps from withdrawing liquidity to returning the principal are true There are many. If you only rely on mining in a short period of time, the gas fee may eat up all the profits.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Gas fee when the Ethereum network has not reached the congestion peak (early September 2021)

Necessity of protocol native token

Although liquidity is the “source of life” of a project, the liquidity of native tokens in this kind of revenue tokenization project will not have much impact on the project itself, or it is not a decisive factor: Pendle is launching its own (Pe,P) The currency price doubles directly after the native token liquidity pool; and Element does not have its own protocol token at all, and TVL is still the first among all revenue tokenization projects. Because the development of this type of project is currently closely dependent on the original head agreement corresponding to the LP token, they only provide derivative services on the basis of it.

Therefore, we will also find that even if there is no proper native token liquidity, the product market fits well. Projects with sufficiently high product quality can also succeed; and projects that taste like wax and are meaningless, even if they have strong token liquidity, they will inevitably fail. It’s not just revenue tokenization projects. If all DeFi project parties decide to issue their own native tokens, they should strive to maximize the role of native tokens to incentivize their products’ core behaviors, instead of being “fettered” by native tokens.

Value mining: more scenarios to play

Project team’s help: Take Element’s Treasury Management as an example

Forerunner Element recently released one of their new products: Treasury Management. This product is used to help other protocols manage their own DAO Treasury. Generally speaking, the Treasury of a project is an important “backup force” that will play many functions in the development of the project: such as compensating contributors to the agreement, paying operating expenses, maintaining the normal development of the agreement in turbulent market conditions, and so on.

And Element smells the huge potential in this: because for most protocols and DAO Treasury, asset management with DeFi is still not its strong point, but this is a huge growth opportunity. So Element is working hard to develop this emerging use case to help other protocols to simplify financial management.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Link to Element’s Treasury Asset Management Strategy Table

Element’s approach also shows the magical charm of income tokenization to most users who are still confused: they can allow fixed funds (or part of them) to obtain fixed interest rate income, and at the same time keep them at any time when they need this part of the funds. Ability to withdraw.

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

The infinite charm of revenue tokenization: mining the next dark horse of derivatives in the DeFi world

Examples of DeFi protocols that have cooperated with Element: OPOLIS and ChainSafe Systems

Traditional big money

For ordinary investors, the “wealth effect” brought about by fixed interest rates and income tokenization is not obvious, especially at the moment when the expansion plan of Ethereum has not been fully resolved and popularized, and the increasingly high fee costs are also Ordinary investors with small funds will retreat. However, the existence of income tokenization agreement and fixed income agreement is crucial to the development and growth of the DeFi ecosystem, because this will be the only way for traditional large funds to enter DeFi.

The capital management of large funds usually chooses a more conservative and stable capital management plan, because many responsibilities related to this capital and for the purpose of budget allocation require a certain degree of predictability calculation. Therefore, traditional large funds tend to focus on fixed interest rates rather than variable interest rates as their solutions. Therefore, with the entry of traditional capital, the structured, reliable and predictable capital growth plan provided by revenue tokenization projects will be highlighted in the turbulent DeFi market while maintaining capital efficiency. If other revenue tokenization projects also want to attract large funds to settle in, they can also directly copy Element’s work: adopt a passive long-term strategy to minimize interest rate risk and gradually expand its capital scale.

Even though many investors currently have relatively high risk appetites and are accustomed to the ups and downs of DeFi, they are more inclined to choose floating rate agreements. However, when the infrastructure of this subdivision track is sufficiently complete, coupled with the maturity of the Ethereum network Layer 2 solution, traditional large funds will inevitably choose this sufficiently safe and stable channel to enter DeFi. Even if small-capital investors cannot profit from direct token investment, they can also benefit from rich ecological gameplay; and the entry of large funds means that the volume of the DeFi market will also increase significantly, and they are in DeFi. Every player in the game can also enjoy the rewards of market expansion.

Derivatives based on yield

The idea of ​​the PRISM team is the same as the author: YT tokens can become more interesting and exciting. The author believes that there can be two different types of product designs, namely “yield perpetual contract” and “yield leveraged token”. The author has always believed in the phrase “a good trader, trade everything”, everything can be traded based on unknown predictions for a certain period of time in the future. This is also the greatest charm of finance. When the trading volume is large enough, the trading results of the future rate of return can reflect the market’s general view of the future rate of return to a certain extent, and the transaction of the future rate of return provides users with another place to hedge risks and increase leverage. .

Yield Perpetual Contract

As PRISM said, this can be done easily by opening a YT token trading market with no expiry date. The only problem that needs to be solved is the acquisition of the price index of the rate of return perpetual contract. Because we know that the absence of a delivery date for a perpetual contract means that the price of a perpetual contract does not have a mandatory constraint, and it needs to rely on external data to maintain its contract price within a correct range of price fluctuations.

Referring to the design of some exchanges for Bitcoin perpetual contracts, this matter can become very simple:

  1. When the yield contract price is greater than and significantly deviates from the spot price, the longs need to pay the shorts.
  2. When the yield contract price is less than and significantly deviates from the spot price, the short side needs to pay the long side.
  3. The greater the deviation, the higher the payment rate.

This only requires the project party to set a fixed time point in a period of time to detect and adjust the price. With this mechanism, the perpetual contract price can be anchored to the spot price, and to the greatest possible limit the malicious manipulation of the contract price. The real-time and accurate control of the current target rate of return value is a link that requires the project party to focus on the design.

Yield leveraged tokens

Leveraged tokens are ERC20 tokens with leverage function. Users do not need to pay any margin when trading leveraged tokens. They can achieve the purpose of trading leverage by simply buying and selling coins. Buying and selling YT tokens is itself a bullish/ bearish process of future returns. However, if more and more users believe that they have sufficient sensitivity to the market and prefer higher risks, the “5× ”, “10×” and other leveraged tokens are also reasonable things.

At present, the above two products are my personal thoughts. If interested friends are willing to discuss the design with me or have other more interesting ways to play, please send an email to my mailbox and look forward to your whimsical ideas!


DeFi never lacks opportunities. You may never know where the next wave will be, but at least you have to stay in the sea.


Posted by:CoinYuppie,Reprinted with attribution to:
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