Liquid Yield Token
Composable Tokenised Yield
Last updated
Composable Tokenised Yield
Last updated
Stablecoins have become a foundational building block of digital finance. Yet many modern implementations - particularly those offering embedded yield - introduce structural risks by implicitly combining token liabilities with market strategies. These hybrid models often blur the line between utility tokens and regulated investment products.
The current design of yield-bearing stablecoins ties their value to a fixed $1 peg, while users can ‘stake’ their stablecoin to earn yield from the collateral (for example a cash & carry trade or other fixed income assets). This structure has emerged because issuing a “stable” coin avoids classification as a security or a collective investment scheme, which would require regulatory approval. By framing these products as “quasi stablecoins”, issuers navigate regulatory loopholes – however this comes at the cost of introducing systemic risks:
De-Peg Events: If the portfolio underperforms, a run-on-the-bank scenario salvages residual value for all token holders, destabilizing the ecosystem.
Misaligned Incentives: Issuers compete for higher yields, pushing portfolios further up the risk curve to attract Total Value Locked (TVL), increasing systemic risk.
Regulatory Grey Areas: Wrapping hedge fund strategies into “quasi-stablecoins” skirts securities regulations but introduces regulatory risks. Investors don’t have a legally defined claim on the underlying collateral.
On the flip side, yield-seeking investors don’t get what they want. By setting a $1 liability, the investable universe is restricted to zero-duration collateral – In practise, this is an unrealistic constraint as several de-pegs and collapses have shown. The weakest link of the collateral pool, breaks the entire stablecoin chain and leading to a de-peg.
At Midas, we address these design shortcomings through a combination of technical and regulatory infrastructure. Liquid Yield Tokens represent a new class of on-chain assets:
Floating Reference Value: Unlike traditional stablecoins, LYT’s value is not pegged to $1. Instead, it fluctuates based on the performance of the underlying, eliminating the risk of de-pegging. Midas’s approved prospectus allows it to issue regulatory compliant stablecoin yield strategies without a “quasi-stablecoin” wrapper.
Expanded Collateral Design: With no fixed redemption price, issuers can select a broader range of reference assets - potentially including longer-duration or structured exposures. This enables flexibility in how the issuer structures the collateral and sets the reference value.
Liquid Yield Tokens (LYTs) are issued by Midas through permissionless ERC-20 infrastructure, enabling interoperability with the broader DeFi ecosystem. Each LYT reflects predefined functional parameters relevant to its role within the protocol.
To enhance usability across DeFi applications, Midas has implemented shared liquidity architecture. This allows for flexible redemptions across LYT tokens, supporting composability and reducing fragmentation in DeFi use cases.
