yTokens

yTokens represent the yield portion of a yield-bearing asset. In the case of LSTs, the yield is derived from staking rewards.

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

If you own a yToken, you have the right to collect all the earnings (yield) from the underlying token until the yToken's maturity date. After the maturity date, the yToken becomes worthless because all the earnings have been paid out. Essentially, when you buy a yToken, you're buying the current value of its future earnings. Once it reaches maturity, you can't collect any more earnings, so its value drops to zero.

As yToken yield increases, its value decreases. At maturity, all the yield has been paid, and the token value is 0.

Variable yield

yTokens have variable yield, as staking rewards can vary depending on external factors. Unlike pTokens, the anticipated yield for yTokens can fluctuate over their maturity periods.

For example, suppose you purchase 1 yETH, which represents the yield portion only of 1 cETH (an ETH LST). If the estimated yield for staking ETH is 20% APY, and the maturity of yETH is 1 year, over the year you may expect to claim 0.2 ETH given the current APY. However, if ETH staking yields a higher APY in the future, you will be able to profit more from the higher rates. Likewise, if ETH staking yield decreases during yETH’s maturity period, you may be earning less than the anticipated yield.

Shorts and longs

Because of their potential variation in yield, the open market price of yTokens is based on their anticipated yield and their time to maturity.

If a yToken holder expects the future earnings (yield) to be less than what the current price of the yToken suggests, they can sell the token. This is similar to betting against the yield, like "shorting" it.

If a yToken holder expects the future earnings (yield) to be higher than what the current price of the yToken suggests, they keep the token. This is like betting in favor of the yield, similar to being "long" on it.

Use cases

What are the use cases for yTokens?

• Trade: speculate on changes in yield or the market pricing of yield.
• Arbitrage: merge yETH with a corresponding amount of pETH to receive cETH and profit off of price differences.
• Earn variable yields: Hold yETH to earn ETH yield at a fraction of the cost of ETH.