āš”Sell future yield

You can use Delorean to sell future yield. Selling future yield locks your yield generating tokens into escrow, and redirects their yield to a liquidity pool. In exchange you get an upfront payment. The upfront payment includes a discount to compensate the liquidity pool.

As an example, suppose you have 100,000 GLP tokens, and they generate approximately 0.1 ETH per day. It would take 100 days to generate 10 ETH, as shown in the chart below.

Instead of waiting that long, you choose to sell the next 10 ETH of yield from those tokens using Delorean. The protocol computes your discount rate, and gives you 9.6 ETH today. The difference of 0.4 ETH is divided between the protocol and the liquidity providers.

Expected vs. actual yield rates

In the above example, we said your tokens generate 0.1 ETH per day. However, this is just an estimate based on historical data. The true yield rate will vary over time, perhaps slightly higher or slightly lower than the estimate.

When the true yield rate is higher than the estimate, the position will close sooner. Think of the future yield you sold as debt with compounding interest. By paying off the debt sooner, you owe less in compounding interest. Conversely, if the true yield rate is lower, then it takes longer to pay off the debt, and longer to unlock the tokens.

In either case, the APR is the same, as it is based on the immutable daily discount rate.

Computing the upfront payout

Delorean determines the upfront payout for your future yield based on two factors:

  1. The projected APY of the underlying tokens. This is the amount of yield that the protocol expects to be generated on a daily basis. The number is computed by a governance account that looks at historical yield rates, and uses that as input into an exponential decay function that gives the assumed APY of the underlying tokens. Note that Delorean focuses on real yield tokens, which all have variable yield rates. As a result, this projected APY will be an estimate, and the real APY will be different.

  2. The discount rate on future yield. Yield payments further into the future are worth less than yield payments today. Delorean applies a daily discount rate, which means that a yield payment with the same face value is worth less and less each additional day later it comes.

These two factors are used to compute the net present value of yield. Using the example from before, we have 100,000 GLP that generates a projected 0.1 ETH a day. Let's assume a daily discount rate of 0.5%. Here is how the Delorean protocol would appraise 5 days of yield from those tokens:

This gives a net present value of 0.49255 ETH. Note that the protocol doesn't directly pay ETH when you sell future yield. Instead, it mints NPV tokens. Those tokens can be exchanged for ETH in a liquidity pool.

What is the APR ?

The APR for borrowing against future yield is based on the discount rate of the market. The Delorean protocol applies a daily discount rate, and the APR of borrowing will be close to

APR=DailyĀ Discountā‹…365APR = Daily\space Discount \cdot 365

The true APR is slightly higher, because the discount rate compounds daily.

Note that while the APR is based on the immutable discount rate, the nominal cost of borrowing when you sell future yield varies. The longer it takes to repay the yield sold, the higher the nominal payment will be. As an example, suppose you sell 10 ETH of future yield at a 0.05% daily discount rate. If you repay it the next day, your nominal payment will be 10.0050025 ETH. If you repay it a full year later, with no payment in the intervening time, the nominal payment will be 12.0026893 ETH.

The rate of repayment depends on the yield rate of the locked token.

Risks of selling future yield

When you sell future yield on Delorean, your primary risk is related to the yield rate of the underlying token. Suppose you sell 1 ETH of yield on 100,000 GLP tokens, at a time when those tokens generate 25% APY in yield. You expect your tokens to generate that in under a month. However, if market conditions change, and the APY is cut in half, it will take over two months to close the position. In that time, you are unable to access your GLP tokens.

Early repayment

After selling future yield, you may wish to repay the amount owed early, to unlock your tokens. This is an option in Delorean, and any payments you make are treated as if they were yield generated by the underlying. It is as if the underlying tokens suddenly generated a large amount of yield.

The APR rate is the same, since the same discount rate is in effect, however the nominal amount will be lower than if you had waited for the tokens to generate that yield. The converse is true for the buyer side: the APY for buyers stays the same, but they receive a lower nominal value sooner.

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