Onchain Atlas

Yield Tokenization

Splitting a yield-bearing asset into two separate tradeable tokens — one that represents the underlying principal, and one that represents just the future yield — so each can be bought and sold independently.

Also called: yield stripping · principal/yield splitting · PT/YT tokens

What it is

A yield-bearing asset, like a staked token or an interest-earning deposit, bundles two things together: the principal (the underlying value) and the yield it generates over time. Yield tokenization splits these into two separate tokens — a principal token (PT), redeemable for the underlying asset at maturity, and a yield token (YT), which entitles the holder to all the yield generated between now and maturity. Each can then be traded, priced, and hedged on its own.

How it works

  1. A depositor locks a yield-bearing asset (e.g., a liquid-staking token or a lending-market deposit token) into a tokenization contract for a fixed maturity date.
  2. The contract mints two tokens in return: a principal token (PT) and a yield token (YT), both tied to that same underlying position and maturity.
  3. The PT trades at a discount to the underlying asset before maturity, since it doesn't earn yield itself but is redeemable 1:1 for the underlying at maturity — buying PT is effectively buying a fixed-rate, zero-coupon exposure.
  4. The YT captures all yield the underlying asset accrues between now and maturity, streamed or claimable by whoever holds it, making it a leveraged bet on the asset's variable yield rate.
  5. Both PT and YT typically trade on a dedicated AMM designed for this kind of time-decaying, maturity-bound asset pair, letting the market price in an implied fixed rate.
  6. At maturity, PT holders redeem 1:1 for the underlying asset, and YT tokens expire worthless (having already paid out all yield along the way) since there's no more future yield left to claim.
  7. This lets a user pick a side: sell YT and hold PT to lock in a fixed rate today, or buy YT to speculate on yield going up, all without touching the underlying protocol's variable-rate mechanism directly.

Why designers use it

  • Turns a variable, unpredictable yield stream into a market with a visible, tradeable implied fixed rate — something DeFi otherwise lacks compared to traditional fixed-income markets.
  • Lets risk-averse users lock in a known return (via PT) while risk-seeking users get leveraged exposure to yield fluctuations (via YT), matching different risk appetites from the same underlying pool.
  • Enables yield speculation and hedging without needing to borrow or short the underlying asset directly.
  • Creates capital-efficient markets around yield itself as an asset class, useful for treasuries wanting predictable income.

Failure modes

  • YT pricing is highly sensitive to yield-rate assumptions; if actual yield collapses (e.g., a staking reward cut or lending rate drop) after users bought YT expecting high yield, YT value can go to near zero quickly.
  • The underlying yield source itself can fail (protocol hack, depeg, slashing) — tokenization doesn't remove the underlying asset's own risk, it just repackages the yield component of it.
  • Maturity mismatches and illiquid PT/YT markets can make it hard to exit a position before maturity without significant slippage, especially for less popular underlying assets.
  • If the AMM pricing PT/YT misprices the implied rate relative to real yield, arbitrageurs can extract value from less sophisticated LPs or traders in that market.
  • Complexity: many users misunderstand that PT trades at a discount for a reason (time value of foregone yield) and either overpay for PT expecting yield too, or underestimate YT's decay to zero at maturity.

What to check before using it

  • Confirm what happens to PT/YT holders if the underlying protocol's yield source is paused, slashed, or exploited before maturity.
  • Check the liquidity depth of the PT/YT AMM at the maturities you care about — thin markets near maturity can make exit expensive.
  • Verify the yield being tokenized is well-defined and measurable (e.g., not subject to sudden governance-controlled reward changes) since YT pricing depends entirely on yield expectations.
  • Understand the redemption mechanics at maturity: is settlement automatic, does it require a claim transaction, and what's the gas/complexity cost for smaller holders?
  • Model worst-case YT value if yield drops to zero, and worst-case PT discount if the market prices in default or depeg risk on the underlying.

Experiments that used it · 2

Shown oldest first, so you can watch the design evolve.

APWine
One of the first protocols to split yield-bearing tokens into principal and tradable future-yield tokens, letting farmers sell unrealized yield in advance — it pioneered the mechanism Pendle later dominated, and survived by rebranding into Spectra.
2021 partial success
Pendle Boros
Pendle's funding-rate derivatives venue that tokenizes perpetual-futures funding into tradable Yield Units (YU), letting traders go long/short or hedge funding-rate exposure on margin.
2025 too early to judge