Crypto glossary
Yield tokenization (principal and yield tokens)
Yield tokenization splits a yield-bearing asset into a principal token and a yield token, letting users lock a fixed return or speculate on variable yield.
Protocols such as Pendle take a yield-bearing asset, for example staked ETH or a yield-bearing stablecoin, and split it until a set maturity date into two parts. The principal token (PT) can be redeemed for the underlying asset at maturity and trades at a discount beforehand, so buying it locks in a fixed rate. The yield token (YT) receives all the yield and any points or rewards the asset earns until maturity, then expires worthless.
This turns floating DeFi yields into a market. Conservative users and treasuries buy PTs for predictable returns, while speculators buy YTs to bet that yields or airdrop points will be higher than the market expects. PTs are also widely used as collateral in lending markets and looping strategies.
Pricing depends on implied yield, which can swing quickly, and YTs lose value as maturity approaches. Selling before maturity depends on pool liquidity. Users also inherit every risk of the underlying asset: if it depegs or its protocol fails, both tokens fall.
Example
A user buys a principal token of a staked ETH asset maturing in six months at 0.975 ETH; at maturity it redeems for 1 ETH worth of the underlying, a fixed return of about 5% annualised.