Liquid Staking Bonds
Last updated
Last updated
Liquid Staking Bonds (LSBs) are a novel DeFi primitive we designed that separates staking capital into principal and yield tokens. LSBs break down validtor stake into gramnular components, unlocking an entirely new design space for liquid staking.
When a user stakes via Pye, their assets are deposited into a LST (eg. Jito) or a PoS validator (eg. Kiln) and locked up for a pre-determined period of time.
Upon deposit, the Pye Core contracts issue the following tokens:
Principal SOL (PSOL): Redeemable for the locked principal at maturity. Receives no yield.
Yield SOL (YSOL): Redeemable for the yield generated by the principal token.
1 YSOL is equal to the yield generated by 1 PSOL until maturity. Both principal and yield tokens are SPL tokens, designed to be composable across AMMs and lending protocols.
Example
Imagine Alice owns 100 SOL and the SOL staking APY is 10%. SOL is at all time high and she wants to take advantage of the favorable market conditions to sell all her yield up front.
Alice deposits 100 SOL into Pye. She chooses Galaxy Digital as her node operator and selects a 12 month lockup (Sep 2024 - Sep 2025) The system mints her the following tokens:
100 PSOL-SEP24-SEP25
100 YSOL-SEP24-SEP25
Strategies
At this point in time Alice can sell her 100 YT at Pye’s Yield Marketplace and get all of her yield upfront today at market rate.
We’re also exploring a new mechanism that would make PSOL tokens of any kind composable across DeFi, using a "metavault pattern" - this would allow users to:
Use PSOLs as collateral to get a loan and trade
Use PSOLs to participate in re-staking protocols like Jito
Use PSOLs to earn VRT points on Jito and other shared SVMs using shared security
The same strategy can be applied to LSTs, where instead of the assets being locked with the validator generating the yield the LST is locked in a smart contract vault. Since these assets are themselves yield generating the same logic will apply, and both PSOL and YSOL tokens will be minted as representations of the LSTs.
Single-strip bonds issue two assets, the principal component and the yield component. Both assets are locked up for the same duration and are minted in equal amounts. For example, a 100 SOL deposit locked up from January 2025 till March 2025, would issue the following tokens:
100 PSOL-DEC25-MAR25
100 YSOL-DEC25-MAR25
Each YSOL is redeemable for the yield produced by 1 PSOL during the lockup period (1 year). In short, as long as yield can be accrued between 2 unix timestamps, it could be tranched into a single strip (from start date to maturity date).
End-of-Term Payout: Where yield is claimable only at the end of the lockup.
Yield can be broken down into 3 separate streams:
Block Rewards: Also referred to as priority fees, are incentives paid out to validator transactoin inclusion in a block. High block rewards, simialrly to MEV, are a function of high ecvonomic activity on-chain.
Since yield strips from a strip bond are traded separately, they can respond more flexibly to changes in interest rates across different maturities than a zero-coupon bond with a single YTM. For instance, if the yield curve is steeply upward sloping, long-dated strips may trade at higher yields compared to the YTM on a shorter-dated zero-coupon bond.
The opposite is also possible if on Solana, the yield in Sep 2025 is 76% and the yield is expected to fall down to 6.75% by Dec 2025, then the yield strip for SEP-2025 will trade closer to 3% while the longer dated strip trade closer to 2.75%.
Historically, when the yield component is sold separate from the principal component it leads to behavior where the principal component becomes sensitive to interest rate changes; if rates rise, the price of the principal components falls more than bonds with more coupons given the longer duration.
Unlike single-strip bonds, multi-strip bonds issue 1+N1+N1+N1+N assets, the principal component and the NNNN number of yield strips (coupons). In the case of a monthly-strip bond, a 1 year lockup issues one token related to the principal:
100 PSOL-DEC25-DEC26
And twelve tokens related to the yield component:
100 YSOL-DEC25
100 YSOL-JAN26
100 YSOL-FEB26
100 YSOL-MAR26
100 YSOL-APR26
100 YSOL-MAY26
100 YSOL-JUN26
100 YSOL-JUL26
100 YSOL-AUG26
100 YSOL-SEP26
100 YSOL-OCT26
100 YSOL-NOV26
Each YT (eg. 100 YT-MAY26) is redeemable for the yield produced by 1 PSOL from the start of that month till the end of the month (May 1st → May 31st). The yield for a given YT becomes available immediately after maturity is reach on May 31st, for that specific strip.
Inflation: Originating from the issuance of SOL at Solana's protocol layer, dictated by an .
MEV: Bids originating from traders submitting transaction bundles, paid out to validators and stakers .
