Farm

Farm enables anyone to maximize exposure to variable yields from Exponent markets.

Users can swap their productive assets for Yield Tokens (YTs) if they believe the current underlying APY is undervalued. You want to generate more from the APY and points earned by YT than the cost of acquiring it.

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What are Yield Tokens

A yield token (e.g. YT-JitoSOL-31JUL25) represents the variable yield component of a yield market, earning all the yield and points generated by the principal component (e.g. PT-JitoSOL-31JUL25) until maturity.

To sell off the variable yield stripped from the principal tokens backing Income Tokens, the accruing yield is tokenized until maturity, where 1 YT represents 1 share of the yield per unit of principal. The Implied APY reflects the market’s pricing of the remaining future yield that will be earned by the principal amount (e.g. PT-JitoSOL-31JUL25).

Implied APY = Expected Yield Return

Ultimately, yield tokens (YTs) capture all the underlying yield accruing, including airdrops from converted points. If you believe that the current variable APY is undervalued and likely to realize a higher return at maturity, you can profit and earn more yield than your initial investment.

Yield trading is a concept new to Solana. When used effectively, it can be a profitable activity for maximizing returns from DeFi yields.

Yields are an inherent part of DeFi — any DeFi product carries risks that users take on when deploying their capital. In exchange, they receive a return for risking their capital (e.g. when lending capital or providing liquidity).

Until Exponent, Solana DeFi participants had no way to manage those yields and their exposure. Yield trading offers them the ability to:

• Hedge (e.g. longing a lending rate to hedge a borrow rate);

• Long (to receive more yield);

• Short (to still generate returns during yield downturns).

When longing yield on Exponent, users need to account for the maturity date. Over time, as there becomes less future yield to earn, the price of the Yield Tokens gradually decreases.

Similar to options, Exponent’s Yield Tokens have a predefined expiry and represent the average future yield of a DeFi product up to a specific horizon. At expiry, there is no more future yield left for the Yield Token to collect, and their market value becomes effectively zero.

As such, users risk losing part of their investment (similar to an option’s premium) if the expected realized APY does not materialize, but stand to gain significantly if the underlying APY distributed exceeds what was the market expectations (= Implied APY) at the time of purchase.

Underlying APY

Every yield market has an underlying APY — this is the actual yield earned by the Yield Tokens’ yield exposure, distributed to holders. It directly affects the market, as traders receive yield from it, influencing buying and selling pressure and impacting the implied yield.

1 YT always equals 1 principal’s yield (e.g. 1 YT-kySOL = 1 SOL earning kySOL APY).

Implied APY

Exponent has no control on the APY of a DeFi product; users trade an “implied” APY, which represents the market view of the future realized underlying APY at maturity. It is driven by market forces and generally will not match the actual APY earned by the assets deposited in the underlying protocol.

Implied APYs on Exponent are a function of:

• Expected future average APY at maturity of the underlying position,

• Expected risk premium from solvency risk in the underlying position and smart contract risk.

It is common to see the Implied APY lower than the underlying yield, as fixed yield (Income Token) traders take minimal capital risk and are thus comfortable paying a premium to secure a fixed APY. This dynamic can create deep discounts on variable yields and enables sophisticated users to buy those variable APYs with a reasonable risk/reward, either to arbitrage those rates or incorporate them into strategies with a buffer against risks.

However, in some instances, the Implied APY may exceed the underlying APY, indicating that users are willing to buy Yield Tokens at a premium to their current yield value. This can occur if there is an expectation of unpredictable future yield additions (e.g. airdrops) or if buyers believe the underlying APY is temporarily unnecessary low (e.g due to market’s fear) and expect it to average higher by maturity.

Being Short Implied APYs

Given the correlated nature of Exponent yield markets (with fixed and variable market prices trading inversely), users can also purchase fixed yields through Income Tokens to effectively “short” implied yields if they anticipate a decline in those yields.

With that in mind, Income Tokens can also serve as protection for participants with deployed capital who may not be in a position to exit their yield positions at the moment.

Exponent offers amplified exposure to variable yields through “Yield Tokens,” representing the future variable yield sold from Income Tokens. These assets are created through a yield stripping mechanism.

Exponent splits the variable yield component of a DeFi position into two assets with maturities: the variable yield and the position without any yield.

What users buy on the Farm page are shares representing the yield only of a position, where 1 Yield Token = 1 token earning yield in the position. Yield Tokens (YTs) are automatically staked when a position is opened in order to receive yield distributions.

Trading is powered by Exponent’s Time-Dynamic AMM. Yield Tokens are tradable for the underlying asset they are derived from. For example, the Yield Tokens for marginfi SOL are paired with SOL. The Yield Tokens for Kamino USDC are paired with USDC.

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Trading Yield Tokens with Flash Swaps

Because Exponent’s yield markets have maturities and the Yield Token price tends toward zero over time, the AMM has no active liquidity for Yield Tokens. Instead, it uses a mint/burn function to provide just-exactly the amount required for a trade. This is done through flash swap, a mechanism inspired by Pendle. During a trade, the protocol either:

• (during a buy) receives the underlying asset (e.g. USDC) from the buyer and borrows the remaining amount of underlying needed to mint Yield Tokens for the buyer. Since YTs and Income Tokens are always minted together, the Income Tokens “residue” is sold back to the pool for the underlying to repay the original borrow, pushing down the price of Income Tokens and affecting the implied APY.

• (during a sell) borrows an equivalent amount of Income Tokens from the pool. The YTs sold by the user and the borrowed Income Tokens are combined to redeem the underlying asset from which they were minted, which is then sent to the seller. A portion of the underlying asset is sold back to the pool (in the form of Liquid Yield Tokens) to repay the borrowed Income Tokens, ensuring the pool price remains balanced.

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Price Correlation

This flash swap mechanism is made possible because of the relation between Exponent yield assets. When minted, their combined value always equals the principal asset. 1 Yield Token (YT) gives exposure to the yield of 1 principal asset, while 1 Income Token gives exposure to 1 principal asset minus its remaining yield.

Exponent’s Yield Tokens and Income Tokens are derived from the same DeFi product and are minted together. This means that when one rises in price, the other naturally decreases. Buying Yield Tokens lowers the price of Income Tokens (as Income Tokens are minted and sold for this operation), while selling Yield Tokens raises the price of Income Tokens (as Income Tokens are borrowed and repurchased).

For more details on the mechanisms behind Exponent’s AMM and Flash Swap, please refer to the Protocol Mechanisms section.