Smart Collateral with Element's Principal Token
The integration adds another source of yield to Pods options legos
TL;DR
We are excited to announce our integration with Element Finance, making the most out of DeFi’s composability and unlocking another type of smart collateral in Pods protocol 🙌🏼
Users can now use the Principal Token (PT) from Element’s ePyvUSDC fixed yield product as collateral to write Put Options on Pods and benefit from:
- Buying USDC at a discount and still being able to collateralize at 1 USD value
- Receive premium from options sold
- Receive AMM fees and returns by providing liquidity to pools
PS: ePyvUSDC is called ePUSDC on Pods app
How does the integration work?
Element’s Principal Token (PT): what it is and how it works.
Element allows users to separate the base asset value (ETH, BTC, USDC, DAI) from the interest of yield generating positions into two distinct ERC20 tokens, that are the:
- Principal Token (PT)
- Yield Token (YT) that represents the interest generated on top of the PT from the yield generating strategies in other protocols, such as Yearn vaults
The principal tokens represent the full value of “on sale” versions of assets that can be bought (at a discount). When held throughout the pre-defined fixed term, the token holder can redeem the asset locked in at its total value, which is known since the beginning due to the fixed APY.
Let’s take the ePyvUSDC product at Element’s app to visualize how the PT works:
In this case, for every 1 ePyvUSDC bought, only 0.9948 USDC is spent while it is known that by December 17th, the unlocked value of the ePyvUSDC will be 1 USDC.
In other words, 1 USDC is bought at a discount while the PT represents the total value of 1 USDC that will be redeemed at the end of the term — this is where the smart collateral for put options comes in.
Using Element's Principal Token as Smart Collateral
Pricing put options at Pods protocol happens in USD terms. The strike asset must maintain its value the closest to 1 USD, which is why the protocol currently accepts stablecoins, such as USDC and DAI, as they have maintained the required pegged historically.
Considering that the principal token ePyvUSDC is guaranteed to have the value of 1 USDC by the end of December 17th, which matches the same expiry date of the expiry date of the ETH:ePyvUSDC put option, the options will be priced correctly while the smart collateral will not sit idle. This guarantees that the funds are earning element’s fixed rate through the eYyvUSDC tokens while the principal is earning fees through writing options and/or LPing in our AMM.
Users can now use the USDC bought at a discount through the ePyvUSDC to:
- Sell options and receive the premium upfront
- Provide liquidity to the pool and receive AMM fees and returns
Another unlocked possibility with this new type of smart collateral is the following, as mentioned by Element’s team:
How to get eP(USDC) on Element
- Get in Element's app and connect your wallet:
2. Click on the "Fixed Rates" tab and the USDC Principal Token market:
3. Make sure you select the "Term Period" is December 17, 2021:
4. Input the amount you want to spend:
5. Approve the transaction and click on Buy:
6. You can check your current position on the Portfolio tab, where it will show:
- Total balance of ePyvUSDC
- Current value of your position
And that's it! You're ready to use ePyvUSDC as collateral at Pods. Here are the blog posts to guide you in our app:
Next milestones for the integration: using Element's fixed-rate in the risk-free rate at Pods options pricing
Having options collateral earn a fixed yield is a quite fascinating application of DeFi. In TradFi, you wouldn’t be allowed to earn a yield on your collateral for your option because the broker would lend out your collateral and pocket the difference for himself.
The combination of fixed yield as a form of collateral from Element allows us to provide a cheaper option, which benefits:
- The option seller with the earning of fixed yield as the option moves to expiration
- The option buyer in the form of a higher discount rate inside the Black Scholes pricing formula outlined below:
In the Black Scholes equation for puts above, the presence of an earned yield in exp(-rt) helps reduce the price of an offered option. This is easily adjusted in the AMM upon the creation of an option series by matching the fixed yield from Element with the yield variable r.
This concept can apply to not just options collateral in the form of stablecoins, but also in the form of other crypto assets locked as collateral in the future!
About Pods
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
Join the Pods community
app | website | documentation | blog | twitter | youtube | telegram | discord
