Yield trading is the practice of taking directional positions on the future yield of an asset. Instead of simply earning whatever rate a protocol pays, yield participants actively decide whether to lock in a fixed return or bet that rates will be higher than what the market expects. Exponent makes this possible through yield stripping - a mechanism that separates a yield asset into two tradable components for a defined maturity: Principal Token (PT) - represents the deposited principal, redeemable 1:1 at maturity. PT trades at a discount to its redemption value, and that discount is the fixed rate. Buying PT is the equivalent of swapping a variable rate for a fixed one. Yield Token (YT) - represents all the variable yield generated by the principal until maturity. Buying YT gives leveraged exposure to future yield at a fraction of the notional cost. 1 YT collects the yield earned by 1 unit of principal. This creates a two-sided market:
- Rate lockers buy PT when they believe current implied rates are attractive or expect yields to decline. Their return is fixed at entry and realized at maturity.
- Rate speculators buy YT when they believe realized yields will exceed what the market currently prices. Their return depends on whether the actual yield outperforms their cost basis.