APWine is a protocol for tokenizing yield and an AMM for trading tokenized yield. The concept and function of tokenizing yield enables speculating, hedging, borrowing, and leveraging assets with new (to defi) strategies. Tokenizing yield has motivated several teams in the DeFi space, including yours truly, to develop products that will serve these functions. This article will again explore the basics of APWine, how a user interacts with a future-yield market (AMM), and highlight a few basic yield strategies users can consider. Drinking wine is optional, though highly recommended, so relax with a glass of wine while you explore the future of future yield markets!
It All Starts with Interest Bearing Tokens
Yield-bearing tokens or “interest-bearing tokens” are tokens that automatically generate yield. Newly minted yield-bearing tokens have two properties baked into them. First, the ownership of the underlying assets. Second, the right to the accrued yield over time. APWine is able to split apart these two properties from interest-bearing tokens into two separate tokens: PT and FYT. Principal Token (PT), represents the ownership of the underlying asset. Future Yield Token (FYT), represents the rights to the future yield.
APWine AMM — Earn while you Trade
The purpose of the APWine AMM is to incentivize the pooling of yield-generating assets and to create a yield market for DeFi. In addition to speculators and arbitrageurs of yield, the APWine AMM will be very useful for “classic” yield farmers who are looking to safely generate a passive yield from two streams of revenue. Liquidity providers on the APWine AMM receive yield accrual generated from their initial collateralization and secondly, they will receive a portion of the fees generated by the AMM from their associated liquidity pool. There is also the ability to farm APW through liquidity provisioning by staking.
The LP experience on APWine is designed to be very simple and unrestrictive. LPs (liquidity providers) are able to join a pool at any time and leave at any time, regardless of the maturity (duration) set for the tokens they are collateralizing. Another key consideration for our design is to allow users the ability to deposit primitives such as Ethereum directly and/or yield-bearing tokens variants such as stETH without making extra stops on different dApps.
Generally, we expect hedgers will sell future yields when rates are high and borrowers will hedge borrowing rates when they are low. Traders will buy and sell future interest rates because they gain upside exposure without having to own the base asset. The ability to speculate on the yield of primitive assets such as wrapped Bitcoin and Ethereum without having to purchase them will be very useful to users as these assets continue to rise in price.
We take security very seriously and we are shipping a product that can safely scale from day one. As such we have worked with Peckshield and Quantstamp to complete two smart contracts audits on the protocol and two additional audits on the AMM. We will be conducting security bounties as well to help ensure long-term security.
Why Buy FYT Tokens?
If traders believe that yield rates will increase, traders will buy FYT tokens to gain exposure to the increasing yield rates. This can be understood as FYT arbitraging. For example, if the value of an FYT on the AMM is lower than the value of the underlying yield at the end of the period, then it’s worth buying said FYT and holding it until the end.
Why Sell FYT Tokens?
If traders believe yield rates will decrease, traders can sell their yield for upfront cash. To do so, users will deposit their IBT into APWine to mint PT and FYT tokens. They can then sell the FYT to hedge against a downturn and capture the present yield valuation. The term “yield swapping” will be popularized soon as a result!
Discounts and premiums on the buying and selling side will have to exist and tracking these fluctuations in the market will provide an analysis into the sentiment of the market overall. Interestingly, it is possible for APWine to become an “oracle”, or sorts, for yield after sufficient adoption and volume are bootstrapped.
Pro Tip: FYT have expiration dates. V1 will operate around 30-day maturities (durations). This window of opportunity is what speculators will take advantage of, seeking profit and arbitrage opportunities. Low hanging fruit opportunities to look out for can include purchasing an FYT that is nearing expiration which has a lower induced APY on the AMM compared to the “real” APY and claiming the difference.
People who sell yield for upfront money can use this money to again purchase interest-bearing tokens (by depositing their USDC, DAI, etc into Compound, AAVE, etc, for example) and sell the yield from those tokens for upfront money; over and over again. We have taken the liberty of designing vaults built on top of APWine which can auto-compound yield for users. This is something we have not yet seen on other platforms but we expect it to become a widely used feature. More details will follow after the V1 launch currently slated for the end of August.
What Makes APWine Unique?
A great (but outdated) high-level overview between APWine, Pendle, and Element Finance can be read on Coingecko here. After many months of development and with so much information gathered from our successful beta launch last February, we are ready to deliver what we humbly believe will be the best Tokenized Yield and Future Yield Market in DeFi. A couple of brief highlights are noted below.
- Liquidity providers will be able to deposit their liquidity and opt into automatic renewals. Rather than manually selling, rebuying, and re-staking, every period (30 days). This is something we haven’t seen on other platforms but is nonetheless greatly needed to enhance the user experience and ensure there is sufficient liquidity at all times, even during period switches. This feature will not be available from day 1 of V1 but it remains a top priority shortly thereafter.
- Users are able to delegate FYT’s and automatically compound expired FYTs in V1. These two features stand out as we have not seen them elsewhere. By delegating yield to an address, people can maintain their original deposit while essentially lending out their yield.
Closing Thoughts — Enjoying a Fine Wine Together
The common thread between all platforms and users interested in tokenizing yield is the battle against the volatility of yield. APWine empowers DeFi users to customize their existing exposure to variable yield by creating a liquid AMM where users can trade or sell their yield. Asset holders who choose to sell their rights to their yield in exchange for upfront money are able to use their gains as a safe form of leverage. On the buyer’s side, there is no concern about collateralization or liquidation because they do not need to purchase and stake the core underlying asset. It is worth noting that the APWine AMM will also cater to all assets and contracts with an expiration date. The V1 “Vintage” will feature a selection of popular interest-bearing tokens from a variety of platforms and overtime as the protocol matures, we will integrate all IBT’s on the market. Every trader has a unique risk tolerance, and in the crypto markets, where there isn’t a single dull moment, demand for a future-yield market that can be used to hedge risk will be there. Liquidity and volume on the APWine AMM will be driven by traders seeking profit opportunities through arbitrage and leverage in the yield markets. We hope to see you there taking part in the action soon!