Variable-Fixed Yield Swap
Last updated
Last updated
Variable-Fixed Yield Swap allows LPs to access (1) fixed rate yield until maturity and (2) variable but potentially higher yield compared to the yield source. A single Vault contract houses both liquidity flows.
The vault allows two ways of liquidity provision, denoting LP1 and LP2. LP1 provides liquidity to lock a fixed rate of yield until maturity. LP2 provides liquidity to get variable but likely higher rate than the source over time.
As one can imagine, LP2 can get higher rate (over time) because LP1 gets a lower (but fixed) rate than the source. The overflow yield of LP1 flows into LP2. Additionally, opening an LP1 position pays LP2 a position fee.
In an environment where the yield fluctuates over time, locking a specific yield upfront is desirable. The exact available rate to lock is determined by the market. More details in Yield Curve.
Equivalently, this enables a product to buy an asset with discount and get full access to the asset at maturity.
LP1 can exit any time before maturity, but can't get the full yield. The unmatured portion will be burned by the vault (equivalently, the actual unmatured yield will shared by all LP2s).
LP2 has variable but over time it's likely to have higher yield than the yield source. This is because both LP1 and LP2 are generating yield. And for the one pie of yield, LP1 is taking a smaller part (locking a lower yield than the instantaneous yield estimate). Besides, LP2 earns the position fee from LP1.
LP2 can exit any time and get the proportional yield and position fee. The proportion is this LP2's principal sum over time, divided by all LP2's principal sum over time.