The Yield Protocol: On-Chain Lending With Interest Rate Discovery

Apr 01, 2020 | Dan Robinson

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This paper presents a sketch of a new building block for decentralized finance: yTokens. yTokens are like zero-coupon bonds: on-chain obligations that settle on a specific future date based on the price of some target asset, and are secured by collateral in another asset. By buying or selling yTokens, users can synthetically lend or borrow the target asset for a fixed term. yTokens are fungible and trade at a floating price, which means their “interest rates” are determined by the market. The prices of yTokens of varying maturities can be used to infer interest rates, and even to construct a yield curve. Depending on the target asset, yTokens can settle through “cash-settlement” using an on-chain price oracle, through “physical settlement” in the target ERC20 token, or by synthetically issuing or borrowing the target ERC20 token on another platform.

Acknowledgments: This paper is heavily indebted to discussions with Hayden Adams, Arthur Breitman, Jill Carlson, Karl Floersch, Alex Herrmann, Ben Jones, Martin K¨oppelmann, Zubin Koticha, Aparna Krishnan, Hart Lambur, Teo Leibowitz, Robert Leshner, Lev Livnev, Allison Lu, Matt Luongo, James Prestwich, Cyrus Younessi, and Noah Zinsmeister. The authors are particularly grateful to Paradigm for supporting this research.

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