What you need to know about Prism Protocol
Newly launched on Terra
This new project caught my eye due to its ability to split a yield generating asset into its most basic components: a Yield Token (YT) and a Principal Token (PT). And with an extremely cool name too: Refracting.
What is PRISM?
PRISM creates a new marketplace that enables users to trade these Principal and Yield tokens. Imagine you are able to split your equity shares into their capital gain and dividend components!
The principal token allows you to be exposed to the price action/capital gains of the token and the yield token allows you to be exposed to the staking rewards.
The Problem PRISM solves…
Currently, we gain leverage by pledging assets as collateral to borrow against their value (in Defi and in the real world).
For instance, Anchor protocol allows you to bond or pledge LUNA as collateral, and borrow UST with a LTV ratio of up to 80% (so if you pledge $100 of Luna, you bond it to Anchor and get a loan of UST of up to $80). However, as we all know, crypto is super volatile! During large market swings and bear markets, you run the risk of being completely liquidated.
So how do we gain leverage in a low-risk, liquidation-free way?
Enter PRISM.
1/ Liquidation Free Leverage: PRISM allows us to use the cash flow of our yield-generating assets to gain “liquidation-free”, lower-risk leverage. This is because the Yield Token will be a lot less volatile than the Principal Token (which captures price action).
2/ Ultimate Composability: WOW another cool phrase, which refers to the ability to seamlessly trade across platforms. This simply means that you can trade in and out of your yield and principal tokens on the open market, depending on whether you want more exposure to capital gains or yield.
3/ Capital Efficiency: By staking LUNA (lending your LUNA to Terra validators to verify transactions), we essentially have to make a choice between yield or liquidity. Staking LUNA will generate about a 8 to 10% yield, along with Terra project airdrops (free tokens from new projects launched on the Terra ecosystem). BUT the catch is, you have to wait 21 days to unstake it…. PRISM circumvents this, enabling you to enjoy the yield and free tokens while having your principal token accessible anytime by refraction.
More details can be found here on its litepaper.
How does it work?
Here we break down how refraction works using numerical examples:
Swap 1 LUNA for cLUNA on PRISM, which will refract into 1 pLUNA (principal token) and 1 yLUNA (yield token).
cLUNA = pLUNA + yLUNA
Since the LUNA price encompasses both its yield and capital gains — we can estimate what pLUNA and yLUNA will be. For example:
Assumptions
1/Current LUNA price = $50, and
2/Staking yield =10% (and assuming this remains at 10% in perpetuity)
3/ Risk-free rate = 20% (Anchor protocol)
We can estimate yLUNA using a simple discounted cash flow equation:
Annual Cash Flow = $50 x 10% = $5
yLUNA = Cash Flow/Risk-free rate = $5/20% = $25
pLUNA = cLUNA — yLUNA = $50 — $25 = $25
For now, PRISM v1.0 only uses LUNA as collateral, but over time the intention is to include other types of collateral such as SOL (Solana), ETH (Ethereum), DOT (Polkadot) etc.
My fellow Singaporean made this awesome video explaining the above and I would highly recommend everyone to watch this.
What can you do?
1Optimise your yield — especially in bear markets or if you intend to maximize your passive income.
Strategy 1: Swap your pLUNA for yLUNA.
If you are a risk-averse wuss like me, this is perhaps the way to go. So using the example above, 1 pLUNA = $25 and 1yLUNA = $25.
So you swap your 1 pLUNA to 1 yLUNA and now you have 2 yLUNAs, which means you have double the staking rewards as compared to holding LUNA. So you’d get a 20% fairly stable yield from this.
Strategy 2: Provide pLUNA liquidity.
You can also use your pLUNA and PRISM tokens to provide liquidity in the Automated Market Maker (AMM). Basically, you add liquidity to that trading pair on the PRISM market exchange and earn a portion of the fees generated each time users use the exchange. As a new protocol, you get incentives for doing this too!
2Maximise exposure to capital gains — especially in bull runs or if you’re a huge LUNAtic!
Strategy 1: Swap your yLUNA for pLUNA.
Using the same exmaple, we have determined that pLUNA = $25 and yLUNA = $25. So by swapping your yLUNA, you will now have 2 pLUNAs. And without the 21 day staking period!
Let’s say LUNA increases from $50 to $100– so a price increase of $50. This means pLUNA will also increase by $50 and now 1 pLUNA is worth $75. Since we swapped our yLUNA for pLUNA, our total position = 2 x $75 = $150
So instead of having 1 LUNA worth $100, we are able to lever up pLUNA and have a position worth $150.
Strategy 2: Deposit pLUNA as collateral and borrow UST on another protocol to buy LUNA, while staking your yLUNA.
This may run the risk of liquidation if you choose a high leverage ratio — so something conservative like 20 or 30% may be less risky.
So let’s say we take 30% leverage on our 1pLUNA at $25. So we borrow $7.50 and use it to buy $7.50 worth of LUNA (or 0.15 Luna). If LUNA increases by $50, pLUNA will be worth $75, and your additional LUNA will be worth $15.
Total position = pLUNA + LUNA + yLUNA = $75 + $15 + $25 = $115 (15% more then if you simply held LUNA)
Beyond these, I believe there are more complex strategies involving arbitrage between yLUNA, pLUNA, and LUNA itself, but I’ll save that for another mind-bending post once it is fully live :)
PRISM Token
You may want to hold some PRISM tokens for the following reasons:
1/ Governance: You can stake PRISM and get xPRISM (basically an IOU token from PRISM that guarantees that PRISM will pay you your initial amount of PRISM staked + rewards) to participate in the governance of the project. So this means voting on decisions such as on how the community treasury is being used, how to incentivize users, what assets can be refracted etc…
2/ Providing Liquidity: If you want to earn fees from providing liquidity, PRISM is the base asset in liquidity pairs.
3/ Rewards: If you stake PRISM, you will also receive fees from 1) protocol transaction costs 2) a % of the yield yLUNA holders get (from staking and rewards)
But I’ll be mindful of its vesting schedule — it has 40% (above the average of maybe 20 to 30%) of its tokens distributed to insiders which will vest from month 6 to 24…
Launch Timeline
PRISM has 4 phases to its launch and we are waiting for Phase 3 on the 11 Feb 2022 where the refracting begins!
Phase 3 will enable us to 1) stake yLUNA 2) provide liquidity 3) stake the PRISM token for governance and to earn protocol fees 4) PRISM swap to swap pLUNA to yLUNA etc.
Phase 4 is slated for 16 Feb 2022 and marks the complete launch, where we will be able to swap yLUNA (our yield) for PRISM tokens.
More information on the launch can be found here.
Key Takeaways and Thoughts
So that was a lot of information on a complex project… my 2 main takeaways are:
1/ Investment strategy
I believe that we can use PRISM to construct a hybird investment strategy of increased yield but yet maintaining some LUNA price exposure (without the 21 day waiting period to unstake LUNA) —
- Refract LUNA to get yLUNA and pLUNA
- Stake yLUNA to get the staking yield + airdrops
- Participate in the pLUNA/PRISM liquidity pool for fees/liquidity incentives + maintaining price exposure to LUNA and PRISM
The risk of the above strategy is impermanent loss — as you contribute liquidity in 2 assets (PRISM and pLUNA in this case), you stand to lose some gains as opposed to simply holding the 2 assets due to price changes between both. Binance Academy breaks it down pretty well here, and their ballpark estimate on losses is below. The more volatile the trade pairs are, you may be more exposed to impermanent loss.
2/ Limit Orders
Another feature of PRISM that I’m excited about is its ability to integrate with Anchor and place limit orders for LUNA using aUST.
When your UST stablecoins are deposited on Anchor, aUST is created as an IOU that Anchor will pay you interest. This is an interest-bearing token and PRISM has announced that it will accept this as collateral for LUNA limit orders. This means I wouldn’t have to withdraw my $$ from my Anchor account to use as collateral on PRISM to buy LUNA!
Ending Notes
The ability to split an asset into its yield and capital values is a gamechanger and I’ve never seen anything like that in traditional finance. The opportunities are endless and I can’t wait to play around with them… so I’ll update this space once PRISM is fully up and running.
Please note none of this is financial advice and I’m just talking to myself.
