🧊Liquid Yield Token (LYT)

Introduction to Liquid Yield Tokens.

Liquid Yield Tokens (LYT): Redefining On-Chain Yield Strategies

Stablecoins are hailed as the cornerstone of the crypto ecosystem, offering stability in a volatile market. However, in recent history they have evolved into complex on-chain hedge fund strategies, often carrying significant risk profiles. The legacy fundamental design of yield-bearing stablecoin has led to multiple de-peg events, exposing vulnerabilities that cannot be ignored.

The Problem: Stablecoins Aren’t Stable

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.

The Solution: Liquid Yield Tokens (LYT)

At Midas, we address these design shortcomings through a combination of technical and regulatory infrastructure. Liquid Yield Tokens (LYT) 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 Investment Universe: By removing the $1 liability constraint, the collateral can include assets beyond zero-duration collateral, unlocking better risk-adjusted returns. Competition in a narrow segment of the investable universe drives down returns. By expanding the asset pool, mispriced assets provide alpha opportunities for risk managers.

• Professional Risk Management: Dedicated risk managers dynamically allocate collateral to the best risk-reward strategies, adapting to changing market conditions and capturing alpha.

How Liquid Yield Tokens (LYT) Work

Liquid Yield Tokens (LYT) are issued through Midas’ open and composable infrastructure. This approach separates the roles of issuer and risk manager, allowing users to benefit from customised risk curation.

The collateral of each token is managed by dedicated risk managers who operate under specific mandates and reported transparently on-chain. The risk manager dynamically allocates collateral to the best opportunities, adapting to changing market conditions to capture alpha while managing risks.

Each Liquid Yield Tokens (LYT) is issued as a permissionless ERC-20 token, allowing composability with the broader DeFi ecosystem. Across all tokens, Midas has implemented shared liquidity for instant-redemptions. This novel approach allows for capital efficient redemption across all Liquid Yield Tokens (LYT), which unlocks DeFi use-cases.

Liquid Yield Tokens (LYT) unlock DeFi:

• Better risk-adjusted returns: by removing constraints to zero-duration and counterparty collateral, the yield profile benefit from better risk-adjusted returns and flexibility to adapt to changing market conditions

• Risk Mitigation: The floating reference value of LYT eliminates the structural vulnerabilities of fixed-liability stablecoins.

• Composability: Compatibility with DeFi protocols and Shared Liquidity across the infrastructure unlocks DeFi money market use-cases.

• Reward farming at scale: Users gain additional rewards from projects within the collateral and chains where the tokens are deployed, such as Plume, Etherlink, and TAC.

• Transparent Reporting: On-chain performance tracking ensures users have visibility into the collateral for each LYT.

Built for DeFi

Across all tokens, Midas has implemented shared liquidity pool for atomic redemptions. This novel approach allows for capital efficient redemption across all Liquid Yield Tokens (LYT), which unlocks DeFi use-cases that otherwise would require expensive subsidies to achieve liquidity pool in Dexes.