GLUON

For every yield-bearing position, there is the underlying asset. In this example, we will use ATOM. Maturity in this context is defined as the length of time the underlying asset is staked. The Fixed Yield vault will allow users to deposit stATOM (Stride liquid staked ATOM) which will then be separated into its components. Since the underlying asset for stATOM is ATOM, it can be inferred that manipulating an stATOM position is the same as manipulating an ATOM position.

This means the maximum PT that can be minted is 1:1 with the underlying ( XX = 1 ). Please note in real world use XX value will fluctuate, and it may be impossible to mint the max value of XX.

In circumstances when YT has already accumulated some principal value, the protocol will mint PT less than 1:1 with its underlying component. ( XX < 1 )

First, let’s discuss Interest Rate Derivatives: a financial instrument with a value based on some underlying interest rate or interest bearing asset. These instruments can include futures, options, swaps, and more.

Swaps, or Interest Rate Swaps (abbreviated IRS) is a type of derivative where one stream of future interest payments is exchanged for another based on a specified principal amount.

Separately, a Tranche is a segment created from a pool of assets, with these segments being divided up based on risk, time to maturity, and other characteristics.

Therefore, a Fixed Yield Tranche is a type of Interest Rate Swap in which the interest generated from a specified principal amount is swapped for a guaranteed fixed yield. Users wishing to earn FY without exposure to variable yield can simply acquire FY directly (without first acquiring the underlying asset). Additionally, with Fixed Yield, there is zero default risk (no impermanent loss).
Fixed Yield = FY

Remember that with Yield Tokenization, a yield-bearing asset is split into its underlying components, PT & YT. As a staked position approaches Maturity, a YT continues to increase in value, with all yield earned also being redeemable at Maturity. Meanwhile, PT grows in value until it is equal 1:1 with the underlying asset (at Maturity).

FY represents this change in value for PT. Since PT and YT can be traded on the open secondary market, users can simply purchase PT without YT.

Buying PT directly (long PT) earns the user fixed yield if they hold the position until its Maturity date. Buying PT directly (pre-maturity) will always be cheaper than buying the underlying asset, and the realized discount becomes the fixed yield.

You can buy or sell Principal Token (PT) in the Gluon AMM. PT Price is determined by market demand and supply

Example: a user is buying PT for ATOM liquid staked in Stride (stATOM), also known as PT stATOM. Since PT stATOM does not include the yield component, PT stATOM will always be cheaper than 1 stATOM. This is true for all PT.

After buying 1 PT stATOM at a discounted price (0.9 stATOM), User can redeem 1 stATOM for his PT upon maturity. This is a fixed return (fixed yield) since the amount of stATOM redeemable at maturity is fixed.

Active Yield Trading can be enabled by taking advantage of the following trading types withing the IRS module:

Since the value of FY is determined directly based on the price difference between PT and the underlying asset, FY is a long PT position. When buying PT directly, the user will always be able to buy PT at a discount, since they will not be acquiring the PT component.

Buying and holding PT for Fixed Yield is more than just earning guaranteed yield. By removing YT from the equation, the user can remove their exposure to variable yield risk. A long PT position is a short YT position. Therefore, if the market expects yield to decrease, the price of PT increases.

Naturally, buying PT when it is cheaper will guarantee a higher FY. If FY is higher than their prediction for the future yield of the underlying asset, it is probably a good time to acquire PT.

Acquiring YT tokens gives the user the right to the yield of underlying asset until maturity. If the underlying asset generates more yield than the original purchase price of the YT token, the holder will have secured a profit on their position.

The user can sell their YT prior to maturity to secure their profit, which is known as Active Yield Trading.

YT price always grows from the yield on underlying asset.

A user can earn extra yield on top of their otherwise idle yield-bearing assets by providing liquidity with PT. No IL at Maturity date because PT in the pool can become 1:1 redeemable with the underlying asset.

Of course, APY is not guaranteed but capital is guaranteed when held to Maturity. Users can exit at any time without penalties. Since there is PT in the pool, this strategy can be seen as slightly bearish (remember long PT = short YT), therefore providing liquidity can provide some protection against falling yields in the underlying asset.

Additionally, since all three token types (underlying asset, PT tokens, and YT tokens) are traded within the same pool, Liquidity Providers can earn from swap fees for all 3 tokens.