Principal Token and Yield Token

Splitting Yield Bearing Tokens into PT and YT

Principal Token

Principal Token (PT) represents the principal portion of an underlying yield-bearing asset. Upon maturity, PT can be redeemed at 1:1 for the underlying asset (e.g. 1 PT-aDAI is redeemed for 1 DAI worth of aDAI).

1 PT-aDAI is redeemed for 1 DAI worth of aDAI

Since the collective value of its yield component has been separated, PT can be acquired at a discount compared to the underlying asset. Assuming no swaps, the value of PT will approach and ultimately match the value of underlying asset on maturity when redemption is enabled.

The known final value of PT (relative to the underlying asset) is what establishes its Fixed Yield APY.

For example: 1 PT-aDAI will be redeemable for 1 DAI (denominated in aDAI).

Additionally, PT is also a core component of all the Napier AMM pools. You can learn more about the Napier AMM here.

Yield Token

Yield Token (YT) represents the yield component of an underlying yield-bearing asset. By holding YT, users are entitled to receive the yield of the underlying asset, the rate of which is represented as "Underlying APY" in the Napier app. For example, holding 10000 YT-aDAI lets you receive all of the yield from 10000 DAI deposited in Aave.

Buying YT allows users to "long" the yield of an asset and profit when the yield received is higher than the cost paid to buy YT.