Yield Stripping & Swap

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Yield stripping is Exponent’s core issuance mechanism. It strips an onchain yield asset into its principal and variable yield components for a defined maturity, creating two independently tradable instruments. This is analogous to how US Treasury STRIPS separate a bond into its principal repayment and individual coupon payments.

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How Stripping Works

When a yield asset is listing as an Exponent market:

1. An initial asset is locked in an Exponent’s yield stripping vault for the market’s maturity period
2. The protocol mints 1 PT (Principal Token) — a claim on the deposited principal, redeemable 1:1 at maturity
3. The protocol mints 1 YT (Yield Token) — a claim on all variable yield generated by that principal until maturity

The fundamental accounting identity always holds:

1 Underlying = 1 PT + 1 YT

For every unit of underlying asset stripped, the depositor receives exactly 1 PT and 1 YT. This identity enables the reverse operation (merging) and keeps pricing across instruments consistent.

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Stripping Example

A user deposits 100 JitoSOL into the JitoSOL-31JUL25 market: The depositor can then sell one component and retain the other, sell both to different participants, or provide both as liquidity.

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Merging

Merging is the inverse of stripping. A holder with equal amounts of PT and YT from the same market can combine them to recover the underlying asset at any time before maturity, with no cost beyond transaction fees. This arbitrage mechanism keeps PT + YT prices aligned with the underlying asset’s value:

• If PT + YT trades below the underlying, arbitrageurs merge for a profit
• If PT + YT trades above the underlying, arbitrageurs strip for a profit

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Interest Rate Swap

In practice, most participants interact with yield stripping indirectly through Exponent’s trading interfaces rather than manually stripping and merging. Underlying → PT (floating to fixed) The participant gives up variable yield and receives a fixed return embedded in the PT discount. This is the onchain equivalent of a pay-floating, receive-fixed interest rate swap. Underlying → YT (acquiring yield exposure) The participant pays a premium to receive leveraged exposure to future variable yield. This is the onchain equivalent of acquiring a yield forward. These swaps execute on Exponent’s Rate CLMM and Rate Order Book, where liquidity providers facilitate rate trading.

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Implied Rate

Every Exponent market has an Implied Rate — the market-driven pricing of expected future yield until maturity. It is determined by supply and demand for PT and YT. The Implied Rate is a forward rate. It represents the market’s consensus expectation and is not the same as the underlying protocol’s current APY. Because PT + YT = Underlying, trading one side always affects the other inversely.

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Flash Swaps

Exponent’s trading infrastructure is primarily built around PT and the underlying yield asset, while YT is created through Exponent Core’s stripping mechanism via ‘Flash Swaps’. Rather than fragmenting liquidity for Exponent’s interest rate instruments across separate venues or forcing users through multiple manual steps, Exponent can atomically strip or merge within the same transaction to complete the desired trade. In practice, flash swaps make YT trading feel like a normal swap flow, while the protocol handles the yield-stripping logic under the hood.

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How Flash Swaps Work

Because the core accounting identity always holds: 1 Underlying = 1 PT + 1 YT Exponent can use temporary access to one side of the market to complete a trade and settle the full position by the end of the transaction. This enables flows such as:

• Buying YT by sourcing the required PT and underlying liquidity, then atomically stripping to deliver YT to the user
• Selling YT by combining YT with PT through an atomic merge path, then routing the resulting underlying or PT into available liquidity
• Routing YT trades through PT-based liquidity on the Rate CLMM or available liquidity on the Rate Order Book

The user sees a direct YT trade, while the protocol handles the strip or merge logic internally.

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Why Flash Swaps Matter

Flash swaps are important for three reasons:

• Better liquidity efficiency — YT trading can use the same underlying market structure rather than depending on isolated YT-only liquidity
• Cleaner user experience — users do not need to manually strip before buying or selling YT
• Consistent pricing — YT pricing remains tied to PT and the underlying through the same core accounting identity

This is especially important for the Rate CLMM, where liquidity is structured around PT and the underlying yield asset rather than around PT and YT directly. It is also relevant for Rate Order Book routing, where YT exposure can be traded through the same core yield market structure. Flash swaps are therefore a core primitive between yield stripping as the issuance layer and YT trading as part of the exchange layer.

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Post-Maturity Behavior

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Yield Routing and Emissions

For yield sources that distribute rewards beyond the base yield (e.g. protocol points, airdrops, emission tokens), Exponent routes all such rewards to YT holders.

• PT holders receive none of these additional incentives — they have been priced into the PT discount by the market as part of the fixed rate
• YT holders receive the full variable yield including all rewards
• The value of these rewards is reflected in YT pricing through the Implied Rate, priced by the market

This routing is handled automatically by the protocol. YT holders can claim accrued yield at any time.