Exponent yield assets have maturities, inherently impacting their price in a way that traditional AMMs are not designed to accommodate, as they typically don’t handle assets that expire or depreciate at maturity.

To enhance capital efficiency in trading Exponent yield markets and better manage impermanent loss, Exponent has developed a novel Time-Dynamic AMM specifically tailored for Solana assets with maturities. This AMM considers price ranges for maturing assets and dynamically concentrates the trading curve to optimize price execution.

The AMM also includes a Flash Swap mechanism, inspired by Pendle’s design, allowing liquidity providers to supply liquidity for Income Tokens (fixed yield) and Yield Tokens with a single asset price exposure. All trades occur within a single market, resulting in increased trading volume and higher swap fees for liquidity providers.

For capital efficiency and because Exponent’s AMM dynamically concentrates the liquidity as Income Tokens approach maturities, each AMM pool features Income Tokens paired with their underlying asset. With AMMs that use predefined formulas to allocate capital across a continuous spectrum of prices, pairing assets with others that are correlated by price is more efficient. When the paired assets’ prices are strongly correlated, the price curve can be tighter, significantly reducing price divergence and, consequently, impermanent loss.

For example, an Income Token based on ‘marginfi SOL’ would be paired with marginfi SOL (SOL lent on marginfi). This pairing is further justified by the fact that yield from lent SOL is paid in SOL, making the yield component for Exponent’s Income Token naturally expressed in SOL.

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Time-Dynamic Sensitivity

A unique aspect of Exponent’s AMM is its time sensitivity, which factors the time-dependencies of Exponent yield markets as they have maturities/expiries that could impact the capital value of liquidity providers’ funds as well as cause inefficient price impact for traders.

As Income Tokens and Yield Tokens near maturity, market volatility contracts. At maturity, a Yield Token has no remaining yield to distribute, making its price essentially zero, while an Income Token—representing a claim on the principal—also stabilizes at a fixed redemption value. The further from maturity, the greater the risk and volatility tied to these duration assets.

As such, the AMM gradually reduces trade sensitivity over time based on the maturity of the assets as well as yield accrued. Early in the maturity period, the curve is highly sensitive to trades since significant yield available. By maturity, however, trades have zero price impact since no further yield is distributed. By dynamically concentrating liquidity within a narrow range based on maturity, the AMM can capture higher trading volumes for liquidity providers and offer more optimal trade execution for traders.

In addition to time sensitivity, Exponent’s AMM also considers time decay — the progressive decrease in value of Yield Tokens as they approach maturity and eventually reach zero. As a result, the AMM has no active liquidity for Yield Tokens, while still allowing both variable and fixed yield traders to operate through a single liquidity pool. This is made possible by using a novel AMM mechanism called Flash Swap.

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Flash Swap

In an Exponent liquidity pool, Income Tokens are paired with the underlying asset (such as JitoSOL) deposited in the underlying protocol. This design allows swaps between Income Tokens and the underlying asset directly, not between Income Tokens and Yield Tokens.

Since Income Tokens and Yield Tokens are derived from the same product, their prices are inherently correlated. Exponent leverages this relationship by using a single liquidity pool to support trading for both Income Tokens and Yield Tokens belonging to the same market. This single-pool design not only enables liquidity providers to earn from both fixed and variable yield trading but also simplifies liquidity management.

Put simply, Income Tokens and Yield Tokens combined are worth 1 unit of the original principal deposit stripped through Exponent Yield Stripping. Therefore, when a user buys Income Tokens, it inversely affects the price of Yield Tokens, and vice versa. Exponent’s AMM uses this correlation to temporarily lend (flash lend) liquidity to the trader, making it more efficient for both liquidity providers, as they don’t need to deal with managing time decay for Yield Tokens, and for traders, who can tap into the liquidity of Income Tokens instead of having two separate pools.

When a trader buys or sells Yield Tokens, the AMM borrows against the liquidity in the pool for the trade, and this “flash loan” briefly impacts the liquidity pool and the price of the yield markets:

  • Buying Yield Tokens: When a user buys Yield Tokens, the AMM deposits the user’s funds into the underlying protocol to mint Yield Tokens. During this process, Income Tokens are also minted and immediately sold for the underlying asset in the pool, repaying the liquidity used. This transaction impacts the price of Income Tokens as a result of the Yield Tokens purchase.

  • Selling Yield Tokens: When a user sells Yield Tokens, the AMM borrows an equivalent amount of Income Tokens from the pool. It then combines the Yield Tokens with the borrowed Income Tokens to redeem the underlying from the protocol. Part of the redeemed underlying is sold back in the pool to repay the borrowed Income Tokens, affecting the price of Income Tokens as a result of the Yield Tokens sale.

In summary, although only Income Tokens and the underlying asset are held in the pool, this mechanism enables Exponent’s AMM to efficiently manage trades for both Income Tokens and Yield Tokens through a single liquidity pool, using flash swaps to provide instant liquidity for Yield Token trades.