Perpetual Bonds

Basic concepts

Perpetual bonds allow users to trade the interest rate generated by LSD's (stETH, frxETH, etc). LSD holders who believe ETH yield will drop can sell the future yield to willing buyers.

Perpetual bonds are comprised of 2 tokens, a Deposit Token (dToken) and a Yield Token (yToken). When a user deposits 1 LSD, they are minted 1 dToken and 1 yToken. Similarly, to redeem 1 LSD, they need to burn 1 dToken and 1 yToken.

What are dTokens and yTokens?

When a user deposits a rebasing LSD (like stETH), it can be broken up into 2 parts: unstaked ETH (intrinsic value) and yield earned in perpetuity by the ETH (extrinsic value). Therefore the following holds: 1 dToken + 1 yToken = 1 LSD. The dToken represents 1 unstaked ETH. The yToken, represents all of the future ETH yield. In other words, 1 yToken will earn the ETH APR (paid in LSD) over a 1 year. If a user buys 1 yToken and stakes it for a year and the ETH yield stays at 5%, then the user will have earned 0.05 ETH in rewards after 1 year.

The user should hold on to their dTokens as it's the only way to redeem their original LSD (note: the user will only receive back the exact same number of LSD originally deposited).

The yToken can be added to a LP pool (to farm esBND) or staked (to earn ETH yield).

How to long the ETH yield?

A user would want to long the ETH yield if they believe future ETH yield will be higher than what it is right now. If ETH yields rise, the yToken should appreciate in value since it is expected to earn a higher APR.

Through an LP pool, a user can buy yTokens and stake them to earn the ETH yield (note: if the yToken is not staked, it will not earn yield).

To close the long, the user would sell their yToken at a higher price

How to short the ETH yield?

A user would want to short the ETH yield if they believe future ETH yield will be lower than what it is right now. If ETH yields drop, the yToken should depreciate in value since it is expected to earn a lower APR.

To short future ETH yield, a user needs to deposit LSD tokens to mint dTokens and yTokens. The user then sells the yTokens through an LP pool for another token. To close the short, the user would buy back their yToken (hoping at a lower price) and redeem their dTokens and yTokens for their original LSD token.