# 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?
Because yield bearing assets will always be worth the principal amount of underlying + some amount of yield in the future, 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.
# How is the implied APY determined?
Yield discovery occurs in Sense Space pools and is free-market driven.
# Is Sense protocol like an IRS protocol?
Sense protocol is the foundation for various fixed income (and other) applications, with yield stripping just being one example. The PTs and YTs from a yield stripping application are similar to an IRS, but with a couple important differences:
- The entire fixed rate leg is paid up front, covering the entire tenor (less capital efficient, but better UX, no liquidations, etc)
- Sense uses physical settlement instead of cash settlement (i.e. there's no derivative value being created)
# 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).
# 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 costodial?
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?
It hasn't been announced yet, but we're working to launch a bug bounty program with Immunefi (opens new window) shortly after mainnet launch.
# Which chains are you launching on first?
# When is mainnet launch?
Sense is launching this week.
# 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 firstname.lastname@example.org.