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In DeFi, yields can come in many forms: lending interest rates, trading fees, staking inflation, MEV rewards, arbitrage opportunities (e.g. funding rates), and even protocol incentives. In order to exchange DeFi yields, Exponent Yield Stripping separates the variable yield component from DeFi products, so that anyone can speculate on future yield on a fixed time horizon or sell it to get a fixed return on the position. It deposits user funds into an underlying protocol and leverages Exponent’s Solana Yields standard to support the position and differentiate between the accruing yield and the principal deposit. From this yield stripping mechanism, two assets are created and used for fixed and variable yield trading:
  • Income Tokens: These represent 1 unit of a principal asset deposited and locked into an underlying protocol for a set maturity. When Income tokens are minted, their exchange value for the principal asset is fixed. For instance, if 10 USDC deposited into Kamino are stripped into 10 Income Tokens and 10 yield tokens, the quantity Income Tokens own is worth 10 USDC. However, Income Tokens are only redeemable for the underlying after the market matures and don’t receive any accrued yield, which causes their price to trade below 10 USDC until maturity.
  • Yield Tokens: These represent shares of the yield produced by the principal asset in a DeFi product/position over time. The value of Yield Tokens matches the value of Income Tokens for the principal position. For example, if 25 Income Tokens are worth 25 SOL, then 25 yield tokens provide the yield produced by 25 SOL deposited into an underlying protocol.
Simply put, what Exponent Yield Stripping does is similar to bond stripping in traditional finance—where the principal and interest of bonds are separated—but for DeFi products. Income Tokens are in this sense similar to zero-coupon bonds, trading at a discount until maturity, while Yield Tokens are detached coupon payments that give exposure to the future interest payments.

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Vault Module

Yield stripping takes place when users’ deposits are placed into an Exponent vault’s escrow account for a specific market. Each yield market is initiated with a dedicated vault, set with its own parameters, which includes the maturity of the assets minted through this vault. This means every Income Token and Yield Tokens belonging to the same market originates from the same vault. An Exponent vault module manages the economics of Income Tokens and Yield Tokens. Its core functions include:
  1. Stripping: Converts DeFi positions/products into separate Income Tokens and Yield Tokens and holds the principal assets deposited in escrow.
  2. Yield Distribution: Enables holders of Yield Tokens to receive yield distribution from the underlying position/product, plus additional liquidity incentives, often referred to as emissions.
  3. Merging: Recombines Income Tokens and Yield Tokens into the original locked position. After maturity, only Income Tokens are needed to redeem for full value (1:1) the assets deposited in the underlying protocol.
The vault mints an equivalent amount of Income Tokens and Yield Tokens for the value of the tokenized position, denominated in the principal asset. For example, if 1 unit of deposit in a lending protocol is worth 1.2 USDC, then 1 position deposited in a yield stripping vault produces 1.2 Income Token and 1.2 Yield Tokens.
This Vault module essentially manages the lifecycle of these yield derivative assets issued by the protocol, from creation through yield accrual to eventual recombination. It provides the infrastructure for users to interact with and benefit from various types of DeFi markets.
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