Pryzm explained with $1

Example Using One Dollar in a Bank Account

Imagine you put 1 dollar in a savings account that is currently paying 10% annual interest. The interest rate is variable, and the bank can change it at any point.

To earn this interest rate, you have to do a fixed-term deposit, meaning you need to give the bank a notice period of at least 21 days to withdraw any money from your savings account.

The bank pays out the interest into your current account. If you want to earn 10% interest on the income you receive, you need to manually move it from your current account into your fixed-term deposit account.

Defining Different Types of Tokens

Liquid Staked Dollar: This is a receipt token for the original money you put into the account plus any accrued interest. All the accrued interest is collected from the current account and put into the fixed-term account automatically. You can freely trade this liquid token, transfer it, or use it as collateral elsewhere. At any time, you can choose to redeem this liquid staked dollar for its full value in the underlying asset, which is your original deposit into the fixed-term account plus accrued interest.

Principal and Yield Tokens: You can deposit a dollar into Pryzm and receive 1 yield token (YT) and 1 principal token (PT) with a defined maturity.

• Yield Token (YT): This gives you the right to all the future yield that accrues from the point you deposit until maturity.
• Principal Token (PT): This gives you the right to redeem 1 dollar’s worth of value at maturity.

Before maturity, 1 YT + 1 PT can be used to redeem 1 dollar’s worth of value. This means you can always mint and redeem 1 YT + 1 PT = 1 dollar.

Example Using the Above Numbers

I deposit 1 dollar into Pryzm and select to receive a yield token and principal token with a maturity in one year.

If the bank account continues to pay 10% yield over the next year, the yield token would pay out 10 cents, and the principal token would be redeemable for 1 dollar’s worth of value at the end of the year. This means you would have 1 dollar’s worth of value from the PT plus 10 cents from the YT, which is equivalent to the total value you would have in the bank account.

Market Pricing of YT and PT

The market will decide the fair price of what it thinks a YT and PT are worth. If the market expects a YT to pay out 10 cents in yield, then it might be happy to pay 9 cents now for a YT to receive an expected 10 cents. This would be a yield of (10-9)/9 = 11.1%. If the yield token is priced at 9 cents, then the principal token must be priced at 91 cents (100-9).

If the market expects that yields may decrease, then the yield token will be worth less, pushing up the price of the principal token. Conversely, if the market thinks yields might increase, then the yield token will be worth more, which decreases the price of the principal token.

Why a Principal Token is Like a Zero-Coupon Bond

A principal token is similar to a zero-coupon bond because:

• No Regular Interest Payments: You don’t get interest payments over time. Instead, you buy it for less than its full value.
• Full Value at Maturity: You get the full value when it matures (reaches its end date).

In traditional finance, a zero-coupon bond is a bond that doesn’t pay periodic interest. Instead, it’s sold at a discount and redeemed for its full face value at maturity.

What Drives the Price?

1. Interest Rates: When interest rates go up, the price of the token usually goes down, and vice versa.
2. Time to Maturity: The closer it gets to the maturity date, the closer its price gets to its full value.
3. Market Expectations: If people think the value of the underlying asset will go up or down, it affects the token’s price.
4. Supply and Demand: If more people want to buy the token, its price goes up. If more people want to sell, its price goes down.

Simple Analogy

Think of it like buying a gift card for $90 that you can use to buy $100 worth of stuff in a year. The value of that gift card can change based on:

• How much people think $100 will be worth in the future.
• How close it is to the time you can use it.
• How many people want to buy or sell the gift card.

Below is a table showing the yield percentage of the Yield Token (YT) and Principal Token (PT) at different prices in 2% increments from 98 to 80, assuming the underlying yield is 10%.