# What is the Sense Protocol?
Sense is decentralized permissionless infrastructure, where teams can build and develop new yield primitives for DeFi, such as fixed income tokens, yield tokens, and other custom re-divisions of existing tokens' exposures.
Stripping is the first application built atop Sense, where users can 1) access fixed rate versions of existing variable yield tokens or 2) make directional long/short bets on the future yields of existing yield-bearing assets.
# How does yield stripping work in Sense?
A yield stripping application permits a user to decompose a yield-bearing asset into its principal and yield components, and package them behind two fixed-term, maturing assets, a Principal Token (PT) and a Yield Token (YT).
With PTs and YTs, users can collect a fixed rate on an underlying token, or trade against future yields without the risk of liquidation.
# What are yield-bearing assets?
Yield-bearing assets are tokens that represent a share of a yield-generating activity, such as lending, staking, and protocol dividends. Each carries a unique, floating cash flow realized in real-time, commonly measured as an annual percentage yield (APY). Check out our blog post for more information!: https://medium.com/sensefinance/yield-in-the-defi-economy-3a83eb24ecba (opens new window)
# What are Principal Tokens (PTs)?
Principal Tokens (PTs) (opens new window) represent a claim to the principal amount of the yield-bearing asset. You can identify them easily, as they all use the use
sP prefix in their names. Before maturity, they trade at a market-driven discount to one of the Underlying (e.g. 0.90 sP-cDAI/DAI), and at maturity, Principal Tokens redeem 1-for-1 for 1 underlying (opens new window) worth of the target asset (opens new window) (e.g. 1 sp-cDAI/DAI).
Users purchase PTs to collect a fixed APY or to bet that implied APYs will fall before the maturity date.
# What are Yield Tokens (YTs)?
Yield Tokens (YTs) (opens new window) represent a claim to the future yield payments of the yield-bearing asset. You can identify them easily, as they all use the use
sY prefix in their names. Before maturity, they collect yield from a particular yield-bearing asset. After maturity, YTs becomes worthless, as they are no longer delivering yield to their holders.
Users purchase YTs to gain capital efficient exposure to future yield, and to bet it will be above the implied rate.
# Where do fixed rates come from in Sense?
Generally speaking yield bearing assets take in some principal amount and grow that amount by participating in yield-generating activities. Barring some kind of default or principal loss, the future value of yield-bearing asset in most cases is the starting principal amount of underlying + some amount of yield. Simply put, they make it possible to turn any amount of the underlying into some larger amount of that underlying in the future. This means that claims to future underlying are always worth less than underlying today as long as yields are positive -- holding one underlying today in a yield bearing asset becomes a claim to more than one underlying at some point in the future. Sense Principal Tokens make it possible to buy and sell claims to a fixed amount of future underlying that you can redeem 1:1 at a maturity date. The market will set a price, and that price ends up implying a rate: if I can buy a claim to 105 USDC a year from now for 100 USDC now I can lock in a 5% fixed rate.
# What is implied APY?
The implied APY is the APY implied by the market price of PTs & YTs. Implied rates are a function of:
- Expected Future Yield of the yield-bearing asset
- Expected Risk Premium from solvency risk in the yield-bearing asset and smart contract risk
There's a single implied APY per series per adapter, and it defines the fixed APY earned by Principal Token holders. The discount between PTs and underlying is the return a PT holder will get by buying now and holding to maturity: that return annualized is the fixed APY.
# How is the implied APY determined?
Yield discovery occurs in Sense Space pools and is free-market driven.
# Why are my positions "Deprecated" on the Sense Portal?
Sometimes you will see on the Sense Portal that a series is “Deprecated”. Deprecation is a different state from Maturity. If you see a deprecated series, it usually means the Sense core team has replaced a Sense-authored adapter on which the series is built, putting the old adapter into a “Deprecated” state, which prevents new issuance. More information can be found here (opens new window).
# Space Pool LPs
# How does Sense work?
Sense decomposes a yield-bearing asset (Target) into its principal and yield components and packages them behind two fixed term assets: a Principal Token (PT) and a Yield Token (YT). PTs redeem 1-for-1 for the underlying at maturity, whereas YTs collect yield from one underlying earning the variable rate from the yield-bearing asset until maturity. Users buy PTs to earn a fixed APY, and they buy YTs to long future yields. Learn more here (opens new window).
Sense Space is a custom fixed rate AMM, where PT & YT trading occurs.
# How do I provide Liquidity?
You can provide liquidity by going to the Sense Portal “Pool” tab, clicking “Manage” beside the pool you want and selecting “Add Liquidity” for a detailed guide, visit our tutorials (opens new window)
# Why did I get YTs when I added liquidity? Should I keep them?
Adding liquidity produces YTs as a part of the overall LP exposure. In an RLV (opens new window), these are held and managed within your LP share. In the older Sense pools, these show up on your Portfolio tab as separate assets from the LP share. We recommend keeping those YTs: they will accrue yield and hedge duration exposure from the Space Pool. Here’s an analysis on why it’s better to keep the YTs (opens new window). They also reduce slippage if you end up leaving the pool before maturity, as described here (opens new window).
# Is there a lockup?
You can exit the Space pool at any time. We recommend holding to maturity for the best risk adjusted return, as demonstrated by the table at the end of this analysis (opens new window). When exiting a non-RLV pool before maturity the LP always has the option of exiting the pool and receiving the component parts. The LP can then use their YTs to minimize their slippage if they want to convert their PTs into target through a process described here (opens new window). When exiting a RLV, an LP can directly exit into target by having the vault automatically re-combine PTs and YTs then sell any excess into the pool (as long as the slippage this would incur is less than the slippage cap allowed by the vault), or receive that excess balance as is. For a more technical understanding of the RLV exit functions, see the Rolling Liquidity Vault docs (opens new window).
# Do I lose my yield if I withdraw early?
No, you will get the entire value of your pool share regardless of when you exit into component parts. Even after combining PTs and YTs back into target, however, you may end up with some portion of your LP share’s value in YT or PT terms due to the changing balances in the pool. Selling these excess PTs or YTs back into the pool to return to target can incur some slippage. When exiting after maturity or during a cool-down period, the LP receives the entire value of their share in target (the provided yield-bearing asset) terms.
# Am I exposed to Impermanent Loss?
Unlike traditional AMMs where price action always leads to underperformance vs the provided assets (ex-fees), price action in the Space Pool (changing implied rates) can lead LPs to outperform or underperform the provided yield-bearing asset – even ignoring trading fees. Because of this “impermanent loss” isn’t really a meaningful concept, as it was invented to describe the phenomenon by which constant product AMMs underperform vs the provided assets (ex-fees) as long as there has been any change in price. For the Space Pool, in many price action scenarios, the pool actually outperforms the provided target asset even if you exclude trading fees. Read this (opens new window) for more detail.
# Will I outperform the underlying token I’m earning yield on (e.g. DAI)?
In almost any situation where (1) the yield on the provided yield bearing asset is not negative and (2) the pool is held until maturity, the pool will earn a positive yield vs underlying. There do actually exist cases in which the LP underperforms underlying at maturity, but these cases require specific market situations. As an example, if the implied rate and target rate both dropped to zero early in a pool's lifecycle, duration risk could create a bit of loss that the augmented exposure to the variable rate fails to make up by maturity. For more details on LP returns, go here (opens new window).
# Will I get a higher yield than the variable yielding token I am providing (e.g. wstETH)? How much higher?
An LP can overperform or underperform the provided variable yielding token. To get a sense of what drives this, in our first analysis of Space Pool returns (opens new window), the pool outperformed the provided yield bearing asset in most cases, with the exception being moderate rate rises at low volume. In those cases, the pool still provided an attractive return vs underlying. This analysis is a limited set of cases that does not describe the entire set of real-world variables (for example, it holds the variable return on the target asset constant and only moves the fixed rate market), and is just intended to illustrate some of the important dynamics.
# Where is the Space LP variable yield coming from?
A Liquidity Provider (LP) adds PTs and Target as liquidity in a Space pool. The variable yield is composed of the yield from PTs, the yield from the Target, yield earned by the YTs created by entering the pool, and the yield from trading fees. Over time, the pool can also develop some duration exposure. For a deeper understanding, read this (opens new window).
# What is backing my LPs?
Each LP share has a claim to its liquidity in the Space AMM. You can decompose your LP shares into PTs and Target at any time before maturity. RLV shares also include the YTs produced upon pool entry, which act as an effective hedge on duration risk and can be recombined with PTs to convert to Target at any time and converted into Target at a price of (1 PT + 1 YT) = 1 Underlying.
# What are the risks to LPs?
Because Sense only holds the Target, all of its users are exposed to the third-party conversion risk between Target and Underlying. E.g., although small, there is risk that Compound cDAI or Aave aDAI can’t be converted to DAI when a user wants to exit to underlying.
If LP shares are held until maturity, LPs are only exposed to Sense & Balancer V2 smart contract risk.
If liquidity is removed before maturity and converted into target terms, LPs are exposed to Sense & Balancer V2 smart contract risk and liquidity/price risk in Space pools (if they want to sell component parts into the pool to get target).
Note: One way to minimize liquidity/price risk in the older Space pools is to keep YTs while providing liquidity. Here’s how it’s done (opens new window).
The Sense Protocol has been audited by Spearbit and ABDK, among others. Nevertheless, we advise users to exercise caution and only risk funds they’re willing to lose. Learn more here (opens new window).
# Has Sense been audited?
Sense-v1 has undergone 3rd-party security audits by Pecksheild, ABDK, Kurt Barry, and Spearbit.
# Is the Sense Protocol or Sense Finance custodial?
No. Sense is entirely noncustodial. Users of the Sense Protocol are in full control of their private keys at all times.
# What are the risks?
As with any DeFi protocol, there is risk of losing funds as a user of Sense.
Smart contract risk is shared by all users (opens new window), Fuse Pool solvency risk affects only users of the Sense Fuse Pool, and market risk affects the following advanced users:
# Does Sense Finance have admin control over protocol?
The long-term goal of the Sense Protocol is to be community-owned and governed. However, out of caution, we’re taking a progressive decentralization (opens new window) approach, where we retain certain privileged permissions of Sense v1 to ensure the system scales safely as well as pause the system in case of an emergency (vulnerability, hack, etc). A detailed overview of the admin controls can be found here (TODO).
# Do you have a bug bounty?
For informatin on Sense security and bug bounties, go to our developer documentation (opens new window)
# Which chains are you launching on first?
We are live on Ethereum Mainnet, and have not decided what the next chain will be.
# Is there a public testnet?
# Does Sense have a token?
No, we do not have a token.
# Is there a Private/Public Sale?
No, we do not have a private/public sale.
# What is Sense Finance?
Sense Finance is an open source software development company, building products, tools, and infrastructure for the DeFi ecosystem.
Sense Finance is building the initial version of the Sense Protocol and therefore is the original Sense core team.
# How can I get involved?
At this time, the best way to get involved is to learn and educate. Engage in discord discussions, answer questions, and create content / memes!
If you’d like to join the Sense core team as a full-time contributor, check out https://jobs.lever.co/sensefinance (opens new window), or reach out to email@example.com.