The Scrypto challenges are back! This time, you’re invited to delve deep into the world of yield derivatives. Get ready to test your skills and build the next Pendle-like dApp in the Radix Network. Prizes include 15k USD in XRD, exclusive NFTs, and a fast-track to a Booster Grant!
The concept of yield derivatives is critical to the DeFi ecosystems but has not yet gained widespread adoption despite being an innovative concept that offers significant potential benefits. It’s time to show the true potential of DeFi on Radix!
Find everything you need to enter the challenge below. The challenge starts now and the submission deadline is May 3rd. Good luck!
What are Yield Derivatives?
Yield derivatives or interest rate derivatives are financial instruments that derive their value from the yield of the underlying asset. There are different classes of yield derivatives in TradFi, but we’ve begun to see some of their implementation in DeFi, such as interest rate swaps with protocols such as IPOR or yield stripping protocols like Pendle. Yield stripping protocols have gained more steam in DeFi given the popularity of yield-bearing assets such as Liquid Staking Units (LSU) and Liquidity Provider (LP) tokens.
These yield-bearing assets are tokenized to strip the yield from the principal, splitting the yield-bearing asset into two parts: Principal Token (PT) and Yield Token (YT), essentially creating two derivatives of the underlying asset. With these two derivatives existing, the underlying asset is subject to a maturity date before being redeemed. The PT portion gives you the right to the principal of the token, while the YT gives you the right to the future yield of the token.
With these two separate derivative tokens, a trader can speculate on either portion of the underlying asset as parts rather than as a whole. For example, once you have YT and PT, you may speculate on the YT portion (yield of the underlying asset) while keeping your PT (principal of the underlying asset). The flexibility and optionality offer great benefits to the trader.
Here's how it generally works and some benefits associated with it:
- Derivatives of Yield: In traditional finance, yields or returns on assets are typically received periodically, such as dividends from stocks or interest from bonds. Yield derivatives convert these future expected yields into a token, often referred to as yield token (YT), which is separated by the underlying asset, often called principal token (PT). The YT token represents the right to claim the future yields generated by the underlying asset.
- Liquidity and Flexibility: By tokenizing yields, investors gain liquidity and flexibility. Instead of waiting for the maturity of an investment or periodic payouts, investors can trade these yield tokens instantly on decentralized exchanges (DEXs) or use them as collateral in various DeFi protocols. This liquidity allows investors to manage their portfolios more dynamically.
- Access to DeFi Ecosystem: Yield derivatives facilitate integration with various DeFi protocols and applications. For instance, investors can use yield-bearing tokens as collateral to borrow other assets, provide liquidity in decentralized exchanges, or participate in yield-farming strategies to earn additional returns.
- Fractional Ownership and Accessibility: Yield derivatives enable fractional ownership of future income streams. This means that investors can purchase smaller portions of the yield-bearing tokens, allowing for broader accessibility to income-generating assets.
- Risk Management: Yield derivatives can also assist in risk management strategies. By separating the underlying asset from its future yields, investors can hedge against specific risks associated with the asset while still maintaining exposure to its income streams. Additionally, diversification of yield-bearing tokens across multiple assets can further mitigate risk.
Overall, yield derivatives introduce new opportunities for investors to efficiently access and manage income-generating assets within the decentralized finance ecosystem. It enhances liquidity, flexibility, and accessibility while also offering potential benefits in risk management.
→ Learn more about yield derivatives principles
Yield Derivatives on Radix
Building a yield derivatives protocol on Radix offers several benefits:
- Enhanced Security: With Scrypto's asset-oriented nature, digital assets behave in a predictable and intuitive manner, reducing the likelihood of coding errors that could lead to security vulnerabilities. This increased security is crucial when dealing with yield-bearing tokens, as any vulnerabilities could result in significant financial losses.
- Improved Developer Efficiency: Developers don’t need to manually program the logic for how tokens behave, as this functionality is built into the language itself. This streamlines the development process and reduces the risk of errors, enabling developers to focus more on building the core product and innovative features.
- Native liquid staking: By harnessing the inherent capability of liquid staking units (LSUs) issued by Radix Network validators to individual stakers, developers can explore innovative approaches to yield derivatives.
- Native pools: By utilizing the native pool components within the Radix Network, developers can ensure that users are equipped with clear information about their pool units, including their current value and redeemability, thus fostering trust and encouraging participation in liquidity provision.
In summary, Radix's tech stack is uniquely aligned with the characteristics of this specific niche in DeFi, making it an ideal environment for developing applications like a yield derivatives protocol.
The Scrypto challenge
The Scrypto challenge involves building a yield derivative platform using the Radix Tech Stack.
- Understand the concept of yield derivatives
- Build a Scrypto package for a yield derivatives platform
- Integrate the Scrypto package with a front-end interface and the Radix DApp Toolkit
What you could build
Yield derivatives offer a rich field for innovation in DeFi, and you can combine financial ingenuity with Radix technology. We encourage you to blend imagination with practicality. Here is a guide to spur your creativity:
Project Inspiration
Yield Stripping
Imagine a platform where users can tokenize a staking pool’s future yield with your own features. Dive into separating a financial instrument’s yield component from its principal. This creates two distinct assets (YT and PT). This mechanism allows users to manage immediate liquidity needs while retaining exposure to future earnings.
Interest Rate Swaps
Develop a scrypto-based dApp, focusing on accurate and decentralized interest rate information, to facilitate more efficient and transparent rate swaps. Explore the development of platforms enabling users to swap their expected yields based on different interest rates. This concept is essential for managing interest rate exposure and can provide stability in volatile yield environments.
Yield Swapping Platform
You could build a Swapping Platform specifically designed for trading yield derivatives, where users can trade the yields they expect from different DeFi products. This can include both fixed and variable yields, offering users a way to diversify and hedge their yield exposure.
Yield Derivative Examples
Pendle Finance
Directly uses yield derivatives by allowing users to tokenize future yield. This is done by separating the future yield component from the underlying asset. Users can sell or trade these yield tokens, which represent the right to future streams independently of the underlying asset. This innovation effectively creates a new market for yield, where risks and returns associated with future yields can be separately managed.
Learn more about Pendle Finance here.
Notional Finance
Notional Finance’s approach, particularly with fixed-rate lending and leveraged vaults, offers a nuanced view of yield management in Defi. Their products create opportunities for users to engage with yield in more controlled and predictable ways, resembling aspects of yield derivatives by locking in returns and managing risks.
- Fixed Rate Lending: Users can lock in a fixed interest rate on their crypto until maturity for a nominal upfront fee, receiving more fCash (tokens similar to zero-coupon bonds) than the lent amount. The extra fCash represents the fixed amount of interest earned over time. Yield is generated by liquidity providers who borrow at fixed rates and let at variable rates, balancing risk and ensuring a fixed return for lenders.
- Leveraged Vaults: Allow users to maximize returns using leverage, by borrowing multiple times their capital for deposit into high-yield DeFi strategies. Yield source is primarily from specific DeFi yield strategies executed by the vaults. These can be Notional-specific strategies or strategies involving external protocols.
Learn more about Notional Finance here.
Tranche Finance
Tranche Finance is integrated with other DeFi protocols, providing two types of tranches (fixed and variable) for each listed asset. When a user deposits an asset into Tranche, it automatically begins generating yield though the relevant DeFi protocol. In return, the user receives a Tranche Token (either A for fixed or B for variable rates) plus any yield generated.
Additionally, users have the option to earn yield by depositing into either the fixed-rate Tranche A or the variable-rate Tranche B. The variable returns are influenced by the underlying protocol and other Tranche deposits.
Learn more about Tranche Finance here
IPOR
IPOR, standing for Inter-Protocol Offered Rate, plays a crucial role in the evolution of yield derivatives in DeFi. It provides a reliable reference rate, essential for pricing and valuing interest rate derivatives much like what a yield curve does in TradFi. This innovation paves the way for more advanced financial instruments in DeFi, enabling market participants to either hedge or speculate on interest rate fluctuations. By using decentralized liquidity pools as counterparties in these derivatives, IPOR simplifies market processes and supports the development of a yield curve in DeFi, crucial for the valuation of yield derivatives. The presence of IPOR in the market could transform how yield risks are managed and offer new investment opportunities in the DeFi space.
Learn more about IPOR here.
Gearbox Protocol
Gearbox offers a platform for leveraged liquid staking. Users can enhance their staking yields by borrowing assets, which increases their staking power and generates additional returns in the form of stETH. The platform also features lending pools where users lend assets and earn returns without facing impermanent loss. These returns are a combination of interest from borrowers and potential additional token rewards. Gearbox’s approach enables users to maximize their yield strategies in DeFi, leveraging assets to enhance returns while managing risks associated with market fluctuations.
Learn more about Gearbox here.
Implementation Example
To assist with the challenge, we’ve provided an example Scrypto package which has a basic implementation of a “yield tokenizer” and Pendle Finance’s V2 AMM. The example is optional and if used, can be reworked or expanded to fit your needs. It is only meant to provide a reference of how it could look like in Scrypto and may assist you in understanding how a yield derivative protocol works.
→ View the example Scrypto package
Evaluation Criteria
- Quality and asset-orientedness of the code: did the participant show a good understanding of the asset-oriented programming paradigm?
- Breadth of functionality: the more we could do with the submitted package, the more points the participant gets.
- Creativity of the concept: was the idea creative and original?
- Quality of the documentation and comments in the code: did the participant provide documentation to make it easier to understand the code?
- Usage of the frontend javascript SDK and the transaction manifest: did the participant show a good understanding of the frontend SDK and the transaction manifest?
Prizes: $15K in XRD to win!
Challenges have proven to be an effective way to build your skills and show them off to the Radix community. Every participant submitting a valid project will receive an exclusive NFT to forever show their commitment and achievements in the Radix Ecosystem!
The top 3 winners will share a $15K prize pool:
- 1st: 8,000 USD in XRD
- 2nd: 4,500 USD in XRD
- 3rd: 2,500 USD in XRD
All winners will also receive a Scrypto OG NFT and will be given the opportunity to interview with the Dev Ecosystem team to get a Radix Booster Grant to launch their project on Radix.
Judges
This challenge is a great opportunity to get your work reviewed by some of the senior members of the RDX Works team. The jury gathers a diverse panel with expertise in a wide range of domains from protocol architecture, to product, front-end and more.
- Matthew Hine, CPO
- Joshua Primero, Head Protocol Architect
- Alex Stelea, dApp Engineering Lead
- Jake Mai, Developer Success Engineer
- Maëlle Baud, Head of Developer Ecosystem
How to participate
1. Register for the challenge
The challenge starts now (March 26th, 2024)
→ Sign up today to register for the challenge
You will get access to the challenge’s Discord channel where you can get assistance or have questions have the challenge.
You can participate alone or as a team. This is a great opportunity to work with other frontend/backend developers who want to start building on web3. Feel free to join the Discord channel and find team members, our team will assist you with all questions you may have!
2. Submit your project
The deadline to submit your project is Friday May 3rd, 15h UTC
Once you have completed your project:
- You must make a Pull Request to the official repository on Github.
- You must fill the Submission form
Submission guide
- Your submission must be a Scrypto package.
- Yield Derivative implementation: The Scrypto package will have blueprints which implement a way to create yield derivatives and trade them.
- Frontend integration: Integrate the Radix dApp Toolkit to your frontend.
- Testing (Optional): It is recommended to use Scrypto testing or Testrunner in your project.
- Readme (Optional): It is recommended to create a Readme that explains your submission.