Earn Fixed Yield

PT (Principal Token) represents the principal portion of the underlying asset. At maturity, PT can be converted 1:1 into ST and redeemed for the corresponding amount of the underlying assets.

In RateX, PT is synthesized by combining ST and YT positions. When held to maturity, users can receive a fixed yield on the underlying assets. Additionally, PT can be exited at any time by splitting the PT position into ST and YT, followed by unwinding the YT position through the RateX AMM.

Basics of PT

In simple terms, PT separates the yield portion from the underlying asset. Therefore, PT is priced at a discount compared to the underlying asset, or its standard version ST. Users can get more PT for the same amount of ST. Since PT can be converted 1:1 into ST upon maturity, holding PT locks in a fixed yield, which is determined by the price discount and the time to maturity (TTM).

For example, on June 28, 2024, Alice uses 100 SOL to buy 110 PT-mSOL-2506, maturing on June 28, 2025. After maturity, these PTs will convert to 110 SOL and can be redeemed for the equivalent value in mSOL. By purchasing PTs, Alice locks in a 10% APY for one year.

Mechanisms of Synthetic PT

From a more technical perspective, in RateX, PT is synthesized by combining ST and YT positions. Specifically:

1. Deposit underlying assets into RateX to receive $m$ ST through the minting system.

2. Borrow a pre-calculated $p$ amount of ST from the protocol.

3. Short sell $(m+p)*(1 - \text{fee}\%)$ YT in exchange of $p$ ST, where $fee\%$ is the corresponding PT management fee.

4. Repay the borrowed $p$ ST with the received $p$ ST from the sold YT.

5. Combine the $m+p$ ST and short selling $(m+p)*(1 - \text{fee}\%)$ YT positions to mint $m+p$ PT. The accrued yield of the $m+p$ ST will be distributed as follows:

   • $(100\%−fee\%)$ to the YT counterparty.

   • $fee\%$ to RateX.

6. At maturity, when the YT value goes to 0, your $m+p$ PT position will earn you $m+p$ ST in return for depositing $m$ ST equivalent of the underlying asset.

Please Note:

PT’s fixed yield is measured in ST tokens. For SOL-related yield-bearing assets, ST tokens grow in SOL based on the actual yield of the underlying asset. For stablecoin-related yield-bearing assets, ST tokens grow in the corresponding stablecoin, reflecting its actual yield.

JLP, as an LP token, is an exception. Fixed yield is measured in ST-JLP, which is distinct from both JLP and USD. ST-JLP rebases based on JLP’s actual yield. It strips out the yield component of JLP while retaining its impermanent loss component.

Risks of Trading PT:

1. Price (Yield) Risk: If you buy PT with the intention of withdrawing before maturity, you face the risk of price fluctuations. Since PT = ST - YT, if the price of YT rises above its level when you purchased PT, you may incur a loss on your principal when withdrawing. On the other hand, if YT’s implied yield drops below its level at the time of purchase, you might earn more than the fixed yield. Conversely, if YT’s implied yield increases, your realized return could fall below the fixed yield.

2. Liquidity Risk: Insufficient ST or YT liquidity in the AMM could make it difficult to fully buy or withdraw PT.

3. Underlying Asset Risk: If the underlying asset depegs or crashes, the value of your PT will likely decline as well. Additionally, a liquidity crunch caused by heavy withdrawals could make it impossible to fully withdraw your PT.