Participating in a DeFi protocol by staking tokens allows you to earn yield, essentially creating yield bearing position.
Yield trading platforms like Pendle, Napier, Timeless or Spectra introduce a novel concept where this earnings-generating position is divided into two distinct elements: YT, which embodies the future income from the token, and PT, which represents the principal staked amount.
Tokenizing the yield introduces a set timeframe or maturity date for the investment. Each yield bearing position is backed by an asset, serving as the benchmark to assess the position's value and its APY.
Regarding the practical uses of Principal Tokens (PT) and Yield Tokens (YT): prior to the investment reaching maturity, combining one PT with one YT allows for the retrieval of one unit of the base asset, or YT holders may continuously claim any accumulated earnings. Once the maturity date passes, PT owners can exchange their PT for the base asset at a one-to-one ratio, independent of YT.
At any point, PT and YT can be traded through the platform’s AMM, which ensures both types of tokens maintain a market value. The sum of the market values of PT and YT equals the price of the underlying asset.
Let’s dive into this new market and analyze the differences between some leading projects.
Pendle
Although APWine v1 initially led the way in the yield trading market, it was Pendle that truly achieved product-market fit and escape velocity. What element of their strategy helped them catch lightning in a bottle ?
Firstly, kudos to the Pendle team, who have been relentlessly dedicated, especially their business development team that successfully aligned Pendle with every emerging trend.
The strategy exploded with the restaking hype, as they were able to capitalize on the "points" narrative. Point farming, essentially a novel approach to liquidity mining with a definitive maturity date (the date of the airdrop), made yield trading an optimal method for maximizing value extraction from these points.
That is where Pendle played it so well, by integrating all the important LRT campaigns such as ether.fi, Renzo, Kelp and later on, the Ethena campaign. Thanks to Pendle the best yield traders managed to create strategies earning up to 3 digits APR on ETH derivatives and stablecoins. All these opportunities allowed Pendle’s TVL to grow up to $4.7B and become the top 7 protocol by TVL across DeFi.
Spectra (APWine)
Just as Uniswap emerged as a key player surpassing Bancor, Spectra (APWine v2) has the ambition to compete with Pendle in the yield trading arena. Despite not being the first to enter the market, its permissionless nature positions could help them to become the main contender force in this space. What could they do to emerge in front of the giant that has become Pendle?
Spectra revolutionizes the field with permissionless creation of pools for a vast array of ERC-4626 interest-bearing tokens, enabling anyone to launch an iBT pool and enhance earnings through protocol fees and incentives. Unlike Pendle, which is restricted to its own DEX and requires governance intervention to add assets, Spectra offers flexibility, allowing swaps via Uniswap, Curve, and more without such constraints.
Its permissionless nature ensures full interoperability and composability, making it adaptable across numerous DeFi platforms and empowering users to innovate and build upon its framework.
Transitioning to a model akin to Solidly, Spectra’s new tokenomics promise enticing bribes. Token holders can vote on vaults to allocate $APW emissions, rewarding LPs and receiving bribes, 70% of deposit fees for the chosen vault, and a portion of emissions, further cementing its potential dominance in the yield trading sphere. This is an important point because It has been one of the weaknesses of Pendle, considering the bribe volume on Penpie and Equilibria.
Napier
Our third contender of the market, Napier, the latest off spring of the Curve ecosystem family, launching today. What sets him apart from the two others?
Napier employs a pool architecture that optimizes for both capital efficiency and risk isolation. By assigning each yield-bearing token its unique trading market, paired exclusively with the bridge assets of the Napier 3Pool, this methodology guarantees a singular market for each yield-bearing token. This design choice effectively avoids the pitfalls of fragmented liquidity, thereby enhancing the protocol's overall efficiency. This stands in marked contrast to Pendle’s methods of yield trading, which typically generate a new market for every additional pairing, complicating liquidity and trading efficiency.
Napier AMM introduces a nested AMM structure designed to enhance yield trading, incorporating Principal Tokens (PT), Yield Tokens (YT), and their underlying assets through a base pool, as well as facilitating trade between the LP token of this base pool and the underlying assets via a time-dependent metapool. This structure, inspired by Curve Finance's metapool concept, allows for seamless trading among different asset types. The base pool, Napier's simplest pool form, securely holds all deposited assets, functioning as a foundational element for more complex trading activities.
The innovative time-dependent metapool adds a temporal dimension to trading on Curve Finance, enabling trades across various fixed-term tokens within the platform. Future plans involve combining blue-chip base pool LP tokens with higher-risk PTs to form new base pools, effectively isolating risks. Considering the amount of TVL and the support of other ecosystem projects, we expect Napier to at least find a vibrant market due to its specific positioning.
Conclusion
The exploration of yield trading and tokenization within DeFi reveals an evolving landscape marked by innovative platforms like Pendle, Spectra, and Napier, each introducing unique mechanisms to optimize earnings and efficiency for their users.
Looking ahead, the anticipated launch of the $EIGEN token is on the horizon, marking a pivotal moment that is expected to conclude the current LRT campaigns. This raises an important question: how will these platforms adapt and innovate to maintain and develop their TVL market share?
Tip for the PT/YT magicians: You can deposit PoL on any of these platforms, and deposit the YT as incentives on Quest, they become as valuable as people vote for them. Welcome to the magical world of yield trading.