The Problem with DeFi Yields
As avid DeFi users, we know that yield matters. Yield is the life force of DeFI: it's distributed by protocols to their active participants as compensation for providing fundamental services to the network. For example, AMMs (like Saber and Raydium) reward liquidity providers with trading fees. Credit marketplaces (like Solend) reward lenders with interest. Tokenized proof-of-stake protocols (like Marinade and Lido) reward stakers with inflation
DeFi yield is channeled through particular yield-bearing tokens, usually called “LP tokens”. For all their worth, these yield-bearing tokens embed two unfavourable properties:
- Interest rate volatility: yield rates are variable and volatile
- Capital inefficiency: yield-generating deposits are locked until redeemed, so they can't be employed productively elsewhere
It is important to note that these drawbacks are not an accident. They originate from mechanisms that allow DeFi protocols to remain competitive and solvent, by responding to changes in market forces through the adjustment of interest rates. However, they also adversely affect a large swathe of users who are susceptible to uncertainty, risk and volatility.
Our Solution: the Superposition Protocol
We have built Superposition to turbocharge the potential of yield-bearing assets by mitigating these two fundamental drawbacks. Superposition is a decentralized fixed income protocol which allows users to tokenize, trade and monetize their future yield. It works by taking a yield-bearing asset, like a Saber LP or Raydium LP, and splitting it into two sets of separate tradable tokens:
- Principal Tokens
- Yield Tokens
At maturity, Principal Tokens can be redeemed 1-for-1 for the value of the yield-bearing asset at the moment of minting, whereas Yield Tokens can be redeemed for the yield generated since then.
By allowing investors to tokenize and monetize principal and yield separately, Superposition unlocks an entirely novel section of DeFi design space.
🤑 Getting future yield, today
As anyone who has provided liquidity in DeFi knows, APYs can change dramatically over time, often with little warning. Solana users can now rely on Superposition to transform their unrealized yield into yield tokens, which can be sold on the market to lock-in current APY for upfront cash
💰 More bang for your (crypto) buck
Principal tokens can be thought of as the crypto-equivalent of TradFi’s zero-coupon bonds. They are discounted versions of an underlying LP token (e.g. a Raydium or Saber LP) that can be bought at a discount, due to time-value of money, and then redeemed for full value at maturity
⚙️ Gearing up with risk-free leverage
Yield tokens allow traders to gain exposure to an asset’s yield streams without owning the underlying asset itself. Instead than leveraging, speculators can compound Yield Token exposure to multiply returns without borrowing any assets (which means there is no liquidation risk)
💸 Unlocking a new source of yield
Existing holders of LP tokens can access a new source of yield by routing their activities through Superposition. After minting the relevant Principal and Yield Tokens, these can be deposited into the Superposition AMM to provide liquidity and earn additional APY
Superposition's addressable market is vast. In traditional financial markets, interest rate products represent c. 80% of the outstanding notional value of OTC derivatives, i.e. c. $467 trillion dollars. Fixed rate products (like the ones enabled by Superposition), represent c. $140 trillion dollars.
Our thesis is that there is a substantial chance that most financial activity in the world will run on Solana in a decade or so. As DeFI and TradFi converge, we expect fixed-rate DeFi lending markets to eventually become just as large as variable-rate lending markets. We believe that decentralized fixed income protocol infrastructure will drive the next order-of-magnitude increase in DeFi TVL and Superposition is our contribution towards achieving this milestone.
The team behind Superposition has deep technical and financial experience, gained from working at companies like Google, Morgan Stanley and VC-backed Unicorns. Some of us have designed and developed technology products used by millions of users, others have advised on cross-border financial transactions worth billions of dollars.
At the core, however, we are a group of friends who shares the conviction that crypto offers us a once-in-a-lifetime opportunity to build a more open, fair and equitable financial system.