pTokens

pTokens or Principal Tokens represent the underlying principal portion of a yield-bearing asset. When a pToken reaches maturity, it can be redeemed for the equivalent value of the underlying asset, denominated in a cToken.

When a cToken is refracted into a yToken and a pToken, the pToken represents the underlying principal portion of the cToken.

Imagine an ETH LST called cETH is refracted into pETH and yETH with a maturity period of 1 month. After 1 month, 1 pETH can be redeemed for .95 cETH, which in this example is equivelant to 1 ETH. Keep in mind that cTokens represent LSTs which increase in price over time compared to their base assets. Therefore, in this example, you will recieve less cETH upon redemption, but it will be the equivelant of 1 ETH.

Fixed yield example

pTokens can be seen as fixed-yield assets because if you buy a pToken for less than its full value and hold it until maturity, you will receive the full value of the underlying asset. However, pTokens are also liquid assets and can be traded at any time before maturity.

For example, if 1 pETH is trading at a 20% discount compared to 1 ETH, you can purchase the pETH at that lower price. When the pETH reaches maturity, you can redeem it for the equivalent value of 1 ETH, paid out in cETH. If pETH was purchased at an 80% market value of ETH, you would effectively gain 25% by maturity. This means your pETH purchase would yield a 25% return by the maturity date.

Use cases

What are the use cases of pTokens?

• Buy tokens at a discount: because the market decides the price of pTokens, they generally trade at a discount compared to their unrefracted counterparts. This means you can buy pTokens at a lower price and redeem them for the full value of the underlying asset at their time of maturity.
• Trade: You can buy pETH when fixed yields are high and sell them when fixed yields move lower, profiting from the price difference.
• Arbitrage: You can merge pETH with the corresponding amount of yETH to redeem cETH, taking advantage of the price discrepancies between the tokens.
• Lock in fixed yields: You can hold pETH to earn fixed yields and redeem cETH at maturity, securing a guaranteed return.
• Liquid voting: You can use pETH to participate in voting on underlying ETH governance proposals, influencing the decisions of the network.
• Provide liquidity: You can provide liquidity to pETH pools to earn underlying ETH yields, swap fees, and liquidity rewards.