PRISM Protocol — ELI5 & The Best Yields On LUNA Staking
A step-by-step approach to breaking down PRISM Protocol — splitting of a yield-bearing digital asset into its core components, a yield token (YT) and a principal token (PT).
There have been many articles and threads on PRISM, yet a large majority of users are still not familiar with how to get involved. What is pLUNA, yLUNA and cLUNA? What is xPRISM and what does AMPS have to do with boosting yields?
For context, please watch their introductory explainer video.
This piece takes the reader through a step-by-step approach of what happens when LUNA enters PRISM — and aims to explain how and why LUNA holders may want to take advantage of PRISM Protocol to maximise yields on single-sided LUNA staking.
First, a recap on PRISM’s Architecture
Fig. 1 shows the flow of 100 units of LUNA within PRISM.
- Users deposit 100 LUNA in the PRISM “Refract” Vault and in return, get 100 cLUNA (21-day unstaking period to move back from cLUNA to LUNA, similar to transitioning from bLUNA to LUNA)
- Users may then choose to split the 100 cLUNA into equivalent amounts of pLUNA (100) and yLUNA (100)
- Both pLUNA and yLUNA are tradeable on PRISM’s inhouse DEX and have freely-determined values by the open market
- Since 1 pLUNA and 1 yLUNA is always required to mint 1 cLUNA the equation should always hold such that cLUNA = pLUNA + yLUNA (where it does not, there is an arbitrage opportunity)
What can Users do at each stage?
Fig. 2 shows what each user can do at each stage with their respective newly-minted asset after depositing LUNA into the PRISM “Refract” Vault.
- Users can pair the 100 cLUNA with an equivalent amount of PRISM to mint cLUNA-PRISM LP and supply to PRISM DEX as liquidity
- Alternatively, they can sell 50 cLUNA for an equivalent amount of PRISM — thereby not requiring additional capital
(Note that there is IL risk)
If they choose to split the 100 cLUNA, they get 100 pLUNA and 100 yLUNA; and can do separate actions with each of those tokens.
- Users may mint pLUNA-PRISM LP and provide it to the DEX (similar to cLUNA above) but downside IL risk seems to outweigh this strategy
Keep idle in wallet and wait for future features:
- Stake pLUNA in governance vault and exercise proxy LUNA voting rights
- Use pLUNA as collateral to borrow and lend on money markets (e.g. Edge, Mars, etc.)
- Buy NFTs with pLUNA on One Planet, Random Earth, Knowhere Art, etc.
- Stake yLUNA in staking vault for normal LUNA staking yield
- Staking yLUNA in PRISM Farm to earn PRISM tokens
- Mint yLUNA-PRISM LP and provide to PRISM DEX
Future features include:
- Use yLUNA as collateral to borrow and lend on money markets (e.g. Edge, Mars, etc.)
Understanding what happens on PRISM’s backend
When users commit LUNA to the PRISM “Refract” Vault, PRISM performs the relevant action for LUNA to begin generating yield — LUNA is delegated to a diverse set of validators which will start the process of receiving staking rewards and airdrops.
Fig. 3 shows that whenever users add LUNA into the vault, the protocol correspondingly delegates that to 1 of the 7 validators on the Active Set.
Below are examples of how the validator delegation logic works — the validator with the lowest amount of LUNA delegated to them at that point in time gets the next delegation.
In the future, validators will be required to pledge $xPRISM as collateral if they wish to be included in the Active Set that will get LUNA delegations. In a slashing event, the validator’s $xPRISM will be used as the first tranche to make whole any slashed amounts. This aligns incentives as validators risk their own capital in the form of $xPRISM to receive more delegations from increased assets refracting on PRISM.
Why $PRISM? Revenue & token value accrual
Main revenue source
The staking rewards and airdrops collected are distributed accordingly to users, depending on what they do with their refracted tokens.
Fig. 4 shows that users have the option to continue receiving the same yield they would have received from regular LUNA staking — by staking yLUNA in the normal staking contract. Users who choose not to stake yLUNA in the normal staking contract will not receive the respective staking rewards and airdrops; which will instead be collected by PRISM’s revenue “Collector”. (See Fig. 2 for reasons why users may choose not to stake)
For users that choose to stake yLUNA with PRISM, there is a 10% cut from the distributed yield, which goes to PRISM revenue “Collector”. Users may choose to do that because of the additional capital efficiency received from refracting their original LUNA.
See table below for illustration of outcomes.
All other revenue drivers
All fees collected by the PRISM revenue Collector is converted to PRISM tokens, then distributed into the xPRISM pool. These fees could come from different sources as shown in Fig. 5:
- 10% of the yield of yLUNA bonded in PRISM (mentioned above)
- 100% of the yield of unbonded assets, e.g., yLUNA or cLUNA tokens that are being used to provide liquidity (mentioned above)
- 0.1% of the value of all swaps generated on PRISM DEX
- 0.3% of the value of all limit orders successfully executed on PRISM
PRISM holders can stake their tokens to earn a share of protocol fees, thereby receiving xPRISM in return which has a 21-day unbonding period. xPRISM holders are also entitled to governance voting rights.
Getting the highest yield on LUNA with PRISM
Comparing available yields across native Terra dapps for strategies involving only LUNA price exposure:
Fig.6 and the table above shows that with PRISM’s Farm Event, LUNA holders are able to get yields as high as 40% on single-sided LUNA staking. With AMPS boosts (explained below), yields can range from 60–100%. All rewards are in PRISM tokens and will be vested after 30 days.
Using AMPS to get boosted yields
The 130m PRISM tokens (13% of total supply) set aside for emissions have been split into 2 pools — Base Pool (104m) and AMPS Boosted Pool (26m).
- Users can simply stake yLUNA in the PRISM Farm to earn emissions from the Base Pool
- Additionally, if they hold xPRISM, they may pledge it in the AMPS vault to farm AMPS
- There is no lock-up period for pledging xPRISM
- AMPS accrue over time and will reset if any or all xPRISM is withdrawn from the vault
- AMPS earned over time gives each user an increased share of emissions rewards from the Boosted Pool
The total amount of PRISM rewards collected from staking yLUNA is the sum of the base and boosted rewards:
Total Rewards = Base Rewards + Boosted Rewards
- Base Rewards (obtained from simply staking yLUNA)
- Boosted Rewards (obtained from pledging xPRISM to farm AMPS)\
You may use this calculator by @lejimmy to get an indication of your yLUNA Farm APR based on specific assumptions.
The bullish case for $PRISM & $xPRISM staking APR
Capture as much LUNA in PRISM Vault as possible.
As long as PRISM’s TVL grows, value will increasingly accrue back to PRISM holders in the form of buybacks, DEX swaps or limit orders — refer to Fig. 5.
Based on Smart Stake Analytics, LUNA has a circulating supply of 367m, of which 107m are liquid circulating — implying 260m staked. Of these, only 2.53m LUNA has been deposited in PRISM.
<1% of total staked LUNA is currently in PRISM — and we believe the yLUNA Farm Event should attract more users to enter PRISM and drive TVL:
- Bear case: Capture 2% of staked LUNA market share (5.2m LUNA in vault)
- Base case: Capture 5% of staked LUNA market share (13m LUNA in vault)
- Bull case: Capture 10% of staked LUNA market share (26m LUNA in vault)
To have a general idea of incremental revenue (and therefore APR from staking xPRISM) from this growth in TVL, we can look at a key metric:
How much yLUNA is expected to be staked as a % of total LUNA in PRISM vault?
Let’s look at current figures based on static key assumptions.
Out of the 2.53m LUNA in PRISM, 1.6m has been staked in PRISM’s normal yLUNA staking contract (63%) as at the time of writing. PRISM’s main revenue drivers are 10% of staked yLUNA yield and 100% of unstaked yLUNA yield.
Assuming constant staking yield of 9%, and constant LUNA price at $80, PRISM collects $7.8m in annualised revenue. Assuming PRISM price is constant at $0.50, and given there are no emissions until 30 days post Farm Launch, staking PRISM is expected to give 22.4% APR. (Note: Current UI may show different figures due to extrapolation of annualised rates)
However, we believe the true ratio of staked yLUNA as % of total LUNA in PRISM should stabilise at 80–90%. This is due to limited strategies for pLUNA, yLUNA and cLUNA in the earlier stages of the protocol, and so — the most beneficial strategy is to stake yLUNA in either the normal staking contract or PRISM Farm.
Below are 3 scenarios (Bear, Base and Bull) where TVL is forecasted to grow at different rates, and sensitivity analyses showing how APR may change based on (i) PRISM’s price and (ii) the amount of yLUNA staked as a % of total LUNA in vault.
TVL is assumed to increase from 2.5m LUNA to 5.2m LUNA (capturing at least 2% of staked LUNA market share). Most of that continues to remain staked, such that staked yLUNA represents 85% of total LUNA in the vault.
In this scenario, xPRISM APR only increases marginally to 25.1%; or 21.7% after accounting for an increase in circulating supply after 30 days of emissions.
However, the above are conservative assumptions as they assume a static LUNA price. The higher LUNA’s price goes, the more in absolute $ terms PRISM collects as revenue which results in more buybacks and distributions to xPRISM holders.
If LUNA’s price were to go back to its ATH of $100, and yLUNA staking ratio falls to 70% (due to more options and strategies instead of staking), xPRISM APR may increase to 49.5%.
TVL is assumed to increase from 2.5m LUNA to 13m LUNA (capturing at least 5% of staked LUNA market share). Most of that continues to remain staked, such that staked yLUNA represents 85% of total LUNA in the vault.
In this scenario, xPRISM APR increases significantly to 62.8%; or 54.3% after accounting for an increase in circulating supply after 30 days of emissions.
Similar to above, the above are conservative assumptions as they assume a static LUNA price.
If LUNA’s price were to go back to its ATH of $100, and yLUNA staking ratio falls to 70% (due to more options and strategies instead of staking), xPRISM APR may increase to 123.7%.
TVL is assumed to increase from 2.5m LUNA to 26m LUNA (capturing up to 10% of staked LUNA market share). Most of that continues to remain staked, such that staked yLUNA represents 85% of total LUNA in the vault.
In this scenario, xPRISM APR increases substantially to 125.7%; or 108.6% after accounting for an increase in circulating supply after 30 days of emissions.
Similar to above, the above are conservative assumptions as they assume a static LUNA price.
If LUNA’s price were to go back to its ATH of $100, and yLUNA staking ratio falls to 70% (due to more options and strategies instead of staking), xPRISM APR may increase to 247.4%.
Most protocols rely on native token emissions to bootstrap user adoption, grow TVL and keep community members vested.
PRISM Protocol takes a different approach by focusing on strong value accruals to its native token, while keeping emissions as low as possible.
By tokenising the yield component and principal component of any interest bearing asset, PRISM gives users enhanced capital efficiency and freedom to maneuver with two separate asset components. The protocol’s value proposition can be extended to autocompounding tokens, bAssets, LP tokens, etc.
There is an exciting roadmap for PRISM including — limit orders, LP incentives, other yield-bearing token refracting, pLUNA proxy governance and etc. We are beyond thrilled to be working so closely with the gigabrains on this project.
If you enjoy these kind of analyses and discussions, please feel free to follow me on Twitter at @cptn3m0x for more.
Disclosure: Hashed has established, maintained, and enforced strict internal policies and procedures designed to identify and effectively manage conflicts of interest related to its investment activities. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, references to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.