Chapter 2 - Yield Tokenization Basics
Last updated
Last updated
Course level: #beginner
Yield tokenization means splitting a yield-bearing asset into its two components: the principal and the yield components.
A yield-bearing asset is an asset that generates yield over time (e.g. stETH, Uniswap LP Token, sDAI, etc). To better illustrate this, we can look at the example of a real estate property. A real estate property is a yield-bearing asset, where it generates rental yield to the owner of the property.
Now imagine a real estate property that’s been split into 2 components:
The rights to the ownership of the property. You can think of this as the Principal.
The rights to the rental income of the property, which can grant its owner the right collect all the rental income (AKA yield) generated by the property for a certain length of time. You can think of this as the Yield.
At any point in time, you can combine both to get the whole property:
When you tokenize the yield, you can sell or trade the Yield portion even before maturity. This creates new ways to manage and even speculate on yield.
Let’s say the maturity date is in 1 year:
You can buy the Rights to Ownership at a lower price than an actual property. After 1 year, the rights entitle you to redeem the property. The guaranteed value appreciation from the discounted value of paper ownership → owning the property at its full value constitutes the fixed yield/income.
You can also buy only the yield portion (the Rights to Rental Payments) to receive rent for 1 year. Assuming this costs $5000, you’ll profit when you collect more than $5000 within the year or suffer a loss when it yields less. Buying this lets you speculate on the property “yield”. Think the rental price is going up soon and you want some exposure? Buy the “yield” instead of paying the whole property price.
DeFi pools gives you a yield-bearing position in return for staking or depositing tokens.
In Pendle, the yield-bearing position can be split into two components:
YT (Yield Token) -> representing the yield-receivables of the position
PT (Principal Token) -> representing the principal amount
When yield is tokenized, there is a maturity associated with the tokenization, demonstrated below.
The $ value sum of PT and YT should equate to its underlying as they’re individual parts of a whole. You can redeem the underlying by depositing equal amount of PTs and YTs. On maturity, PT can be redeemed for its underlying without its YT counterpart (This is because matured YT have 0 value as they no longer generate yield).
Here are the definitions of PT and YT:
1 YT gives you the right to receive the yield of 1 unit of the accounting asset (e.g. 1 ETH, 1 DAI, 1 USDe, etc) until maturity, claimable in real-time.
1 PT gives you the right to redeem 1 unit of the accounting asset (e.g. 1 ETH, 1 DAI, 1 USDe, etc) upon maturity.
Using an example of sUSDe from Ethena, the naming convention for PT and YT is:
1 YT-sUSDe (USDe)
1 PT-sUSDe (USDe)
With that example, the definition of PT and YT is:
1 YT-sUSDe (USDe) -> Receive the yield of 1 USDe worth of sUSDe
1 PT-sUSDe (USDe) -> Will be redeemable for 1 USDe worth of sUSDe
1 YT-HLP (USDC) -> Receive the yield of 1 USDC worth of HLP
1 PT-HLP (USDC) -> Will be redeemable for 1 USDC worth of HLP
PT and YT can be minted from the underlying asset.
PT and YT can be redeemed back into its underlying asset
YT holders can claim any accrued yield in real-time.
PT holders can redeem underlying asset 1:1 without YT.
You can buy and sell PT and YT on the open market using Pendle AMM. As such, PT and YT will always have a market price. We will talk more about trading PT and YT in the next chapters.
PT Price + YT Price = Accounting Asset Price
Since 1 unit of underlying asset mints 1 PT + 1 YT and 1 PT + 1 YT redeems for 1 unit of the accounting asset, there is an obvious relationship between their prices:
The Pendle AMM ensures that this relationship holds true at all times.
A zero-coupon bond is a type of bond that does not pay any interest to the bondholder during the life of the bond. Instead, the bond is sold at a deep discount to its face value, and the bondholder receives the full face value when the bond matures. The difference between the purchase price and the face value is the investor’s return or profit. For example, if you buy a zero-coupon bond for $800 that has a face value of $1,000 and matures in 3 years, you will receive $1,000 at maturity and earn a profit of $200 for the 3 years of investment.
A detached coupon is a part of a coupon bond that has been separated from the bond and can be traded or sold separately. A coupon bond is a type of bond that pays regular interest payments to the bondholder until the bond matures. The interest payments are called coupons, and they are usually attached to the bond certificate. A detached coupon is a coupon that has been cut off from the certificate and can be redeemed for cash by anyone who holds it. For example, if you have a coupon bond that pays $50 every year for 3 years and you detach the coupons, you can sell it to someone else to wishes to claim that $150 over the 3 years. A person who buys the detached coupon below $150 makes a profit over the 3 years.
In TradFi, what Pendle does is similar to bond stripping. The principal and interest of bonds are separated, so PTs are equivalent to , while YTs are the detached .
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