How to Tokenize your Yield
Yield tokenization gives users more control over the yield they earn through yield farming platforms such as Aave or Curve Finance. It provides flexibility so that you can speculate on earned yield, hedge against declining APY rates, or get your yield in advance.
At the emergence of yield farming, users had to wait weeks, sometimes months, for a good moment to harvest their accrued yields. Yield tokenization enables farmers to get their yield upfront without having to monitor accrued yield and wait for optimal timing.
Sounds useful, right? Read on to learn how yield tokenization works and how to leverage this tool for both DeFi & real-life needs.
How Does Yield Tokenization Work?
The process of yield tokenization unlocks a couple creative new tools called Principal Tokens & Future-Yield Tokens. These tools make use of interest-bearing tokens like $aUSDC, which you earn by depositing USDC into Aave.
When you deposit USDC into Aave to earn yield, you receive LP tokens (also known as interest-bearing tokens) as a receipt of your deposit. These $aUSDC tokens entitle you to withdraw your USDC (principal) plus any yield that accrues from your deposited USDC.
Yield tokenization protocols work by first splitting interest-bearing tokens into two different types: Principal Tokens & Future-Yield Tokens. A Principal Token (PT) represents your locked position (in this example, aUSDC) on a given platform (Aave). Importantly, the PTs earned by using the yield tokenization protocol is not restricted for use in any specific time period, no matter when the deposit was made.
The Future Yield Token (FYT) represents a right to claim the underlying yield of assets deposited on a given platform. In contrast to PTs, they are uniquely associated with a specific period that reflects the terms of your deposit, such as a month or a financial quarter.
By splitting the interest-bearing token into two separate token-types, tokenization protocols unlock new opportunities that give users more flexibility to re-invest yield earned on deposits.
Ways to Leverage Yield Tokenization
Yield tokenization protocols allow you to earn a fixed rather than variable yield on your underlying assets, such as $USDC. If you think the market may be volatile and you want to reduce risk or plan for a certain amount of income, you can buy & use PTs at a fixed rate. The PTs will then be unlockable at the end of the period you select for the fixed rate.
PTs & FYTs are new DeFi tools that also represent new markets for speculators. Both types of these tokens can be traded on specific types of AMMs. If a user expects USDC yield rates to go up, they might want to bet on that rise by buying FYT tokens and selling them later for a profit.
If you’re a little short on money, you can sell FYTs on the market for assets like stablecoins. From there, you can spend it on groceries or buy more $ETH.
Options for Tokenizing Yield
One example of a long-standing yield tokenization protocol is APWine, which was co-founded in August 2020 by Gaspard Peduzzi. APWine offers simple fixed yield options and allows more advanced users to issue Principal & Future Yield in a few clicks.
At the time this article was written, the platform offered 21 assets of yield-generating platforms such as Aave, Lido or Yearn across Ethereum Mainnet and Polygon.
Other popular Yield Tokenization protocols include Pendle Finance and Element Finance.