Exponent is building Solana’s first DeFi fixed yield market. It was born out of the founders’ realization that there was no way for Solana users to access predictable yields. You could say crypto’s appeal has been in the volatile stuff— the speculative, sexy bets. But, the success of USDC and other stablecoins shows that as users bring more of their financial life on-chain and manage sophisticated portfolios, they need the full run of assets at their disposal, including stable yield options. Exponent brings this to Solana, with a protocol that lets users strip yield and underlying principal from yield-bearing assets, and then manage the positions separately. Thanks to the product’s neat design, Exponent opens up Solana’s DeFi space for institutional-level risk management, while also catering to the degens focused on airdrop farming.
Yield stripping as an industry
Yield stripping’s already earned its strips in TradFi (yes, pun intended). It’s when the principal and interest components of a bond are separated and sold as individual securities, as is common in the creation of zero-coupon bonds, where the bond is sold at a discount to its face value, and no periodic interest payments are made.
The total value of US Treasury STRIPS (stripped bonds) outstanding has spiked from over $200 billion in 2020 to over $500 billion today. That’s just one segment of the yield stripping market — zoomed out to global scale and across the duration curve, the market is huge.
Yield stripping in DeFi
Yield stripping isn’t new to DeFi, either. Protocols like Spectra, Sense (deprecated), and Swivel (deprecated) brought the concept to Ethereum, but it really took off with Pendle, which lets users easily split assets into Principal Tokens (PT) and Yield Tokens (YT), and speculate on, trade, and leverage yields. DeFi yield stripping has become a key financial primitive as it unlocks several new use cases — fixed rate lending, interest-rate swapping, and leverage airdrop farming — in a blockchain-native, composable way.
Stepping back on the mechanics, users lock yield-bearing assets (stETH, AMM LP positions, lending deposits, etc) into the yield-stripping protocol and receiving 2 assets back — the YT is the representation of the claim on the future yield and the PT represents the principal, redeemable 1:1 at maturity. Then the tokens can be separately traded. Thanks to well-designed AMM pools, users can access strong secondary market liquidity.
PT behaves as a zero-coupon bond, which allows buyers to effectively fix their yield in a pre-dominantly variable rate industry. YT, on the other hand, is a time-decaying asset and its value trends toward zero at maturity. The price of YT is based on the expected yield over the time to maturity and buyers speculate whether the yield in reality is going to be higher or lower than the market-implied yield. Similarly, sellers fix their return at the moment of YT sale.
Pendle has been one of the most successful protocols of 2024, amassing over $6.7 billion in TVL at its peak (around 8.5% of the total Ethereum TVL), up 28x since January 1, 2024. It benefitted from three key tailwinds:
- Market sentiment has been improving since late 2023, which drove up lending rates that Pendle allows to fix.
- Institutional adoption continues to increase, and portfolio managers’ ability and desire to manage interest rate risk on-chain has driven Pendle’s adoption.
- Pendle capitalized on the points airdrop farming meta, allowing users to leverage-farm points by buying YT tokens, which received the points.
Pendle proved product-market-fit, and we believe the tailwinds for yield stripping protocols in crypto are currently stronger than ever.
Yield Stripping on Solana
Enter Exponent! Exponent has built a yield stripping protocol to bring interest rate management on Solana. The dapp will provide both the stripping component, as well as an AMM-style DEX to trade PT and YT-tokens, which are tricky to trade in traditional exchanges. As Solana continues to experience rapid growth, surpassing Ethereum on key metrics such as DEX volumes, NFT sales, daily active users, and recently passing $7.5bn in TVL, it will need to step up its institutional DeFi game to keep pace. Yield stripping protocols are a critical tool for sophisticated portfolio management.
Exponent is launching with integrations to Kamino and MarginFi, the two largest Solana money market players, where users can tap into the simplest strategy of yield stripping and fix up yield on their variable rate credit. Fortunately for Exponent, there are plenty of Solana-based products that could benefit from yield stripping, such as Sanctum’s LSTs, Drift’s insurance program, Jupiter/Flash/Adrena’s perp-LP tokens.
We are particularly excited about Exponent’s focus on UI, as the team understands the need for a simple, slick, web2-like product that Solana’s leading dapps are known for. Its founding team, Thomas L., Thomas R., and Valentin, are Solana community OGs, with close ties to the mothership and previous experience at top projects Squads (also a RockawayX portfolio company), Kamino (also! and Solana’s largest money market protocol) and Raydium (Solana’s largest DEX). They know the space deeply and understand its users well.
Backing Exponent was one of our easiest decisions. Solana is our home-turf, so we look to support teams that push its boundaries, and introduce or improve infrastructure that accelerates its growth. That we will be active Exponent protocol users and have witnessed firsthand the founders’ work ethic and devotion to the space made this one a no-brainer.
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Check out Exponent’s website to stay ahead (NB: you’re not behind *yet… public launch is now) and follow them @ExponentFinance so you don’t miss anything!
