What does the newly launched Prism Protocol by Terraform Labs aim to do?

Written by: A Poplar Tree, Chain News

Terra ecosystem has experienced leapfrog development in the past few months, with its TVL surpassing $7.6 billion as of August 29, significantly exceeding Solana ($3 billion) and Polygon ($4.7 billion). Among them, Anchor Protocol, with a locked amount of $2.9 billion, has played a "critical minority" role—thanks to Anchor, Terra investors can collateralize their illiquid crypto assets to gain liquidity support.

However, the stablecoin design of Terra's dual-token arbitrage and the typical over-collateralization requirements still cannot avoid the severe large-scale liquidation events that are prone to occur during drastic fluctuations in the crypto market. During the previous "5.19" crash, UST once experienced a price "de-pegging" situation due to spiral liquidations.

As another flagship product launched by Terraform Labs, Prism Protocol aims to solve this problem—allowing users to sell the corresponding future yields of their held assets within a selectable time frame, thereby obtaining liquidity through borrowing against those future yields without facing any principal liquidation risk.

What is Prism?

Essentially, Prism introduces a new asset class in DeFi, enabling users to manage risks associated with price volatility and yield instability in a simple and capital-efficient manner.

Specifically, Prism allows investors to split yield-bearing assets into two fundamental components: Yield Tokens (YT) and Principal Tokens (PT), and further create new markets to trade these Yield Tokens (YT) and Principal Tokens (PT), thus providing users with new and diversified yield possibilities:

• Tokenizing the future yields of assets to achieve borrowing without liquidation risk or daily financing costs;
• Converting variable rate yields into fixed rate yields;
• Gaining leveraged risk exposure to asset prices or yields;
• Managing risk exposure by converting future yields into Terra ecosystem stablecoins;
• Receiving all staking rewards, including airdrops, while being able to trade these assets immediately or deploy them to other DeFi protocols;
• Gaining or trading risk exposure to other yield-bearing assets through the Prism market;
• All airdrops can be accessed within Prism without needing to access any other protocols;

In short, Prism enables users to trade the yield portion and the principal asset portion of assets on the open market by introducing composability, allowing for the design of personalized financial product combinations.

PRISM Product Design

The product design of Prism is specifically divided into:

System Components

• CT: Collateral tokens generated when yield-bearing assets are submitted to the Prism vault;
• PT: Principal tokens generated when CT is minted into PT and YT;
• YT: Yield tokens generated when CT is minted into PT and YT;
• CT = PT + YT;
• Liquidity pools. Ensuring market depth and liquidity for various assets.

Ecosystem Participants

1. Collateral Providers: Providers of "collateral tokens," responsible for converting CT into PT and YT upon receiving it in the Prism vault;
2. Risk Buyers: Purchasing PT and YT through automated market makers;
3. PRISM Stakers: Earning rewards and participating in protocol governance by staking PRISM;
4. Liquidity Providers (LP): Providing token pairs as trading reward pools;

Rights of PT and YT Holders

1. Obtaining YT through Prism and earning stable staking rewards on the underlying assets, including airdrops;
2. Obtaining PT through Prism and exercising governance rights over the underlying assets, with Prism allowing voting on governance proposals in the future;
3. Providing liquidity to automated market makers (AMM) and earning liquidity incentives and AMM fees;
4. Trading YT or PT on AMM, selling YT for a fixed amount (yield rate for the guarantee period), or selling PT while maintaining yield exposure;
5. Upon the expiration of the yield term, burning an equivalent amount of PT and YT to obtain CT;
6. Combining PT and YT in equal amounts, burning them at any time to exchange for CT;
7. Holders of CT can mint a new PT and YT or use it to redeem collateral assets (after completing the staking unlock, e.g., Luna requires 21 days), or quickly exchange it for collateral assets through AMM pools;

PRISM v1.0

Prism v1.0 plans to initially use LUNA as collateral, splitting LUNA tokens into Principal Tokens (pLUNA) and Yield Tokens (yLUNA).

For example, LUNA holders can choose future yield terms of 1 month, 3 months, 6 months, 9 months, 12 months, or perpetual, and submit them to a smart contract to create corresponding PT and YT that match the term, thus further generating a trading market with depth and liquidity.

The yLUNA token grants holders the right to permanently receive LUNA staking rewards and project airdrop rewards, allowing for storage, liquidity provision, trading, burning, and redemption.

The pLUNA token can serve as a liquidity provider for AMM liquidity pools like pLUNA-PRISM, allowing holders to earn liquidity incentives and AMM fee income.

If a user decides to sell yLUNA and buy more pLUNA after some time, they can unlock yLUNA from the Prism contract (selling directly in the AMM trading pool avoids the unlock period) and choose to sell, using the trading proceeds to purchase additional pLUNA, thus achieving leveraged trading of LUNA without liquidation risk.

Token Model

The total supply of PRISM tokens is 1 billion, of which:

• 30% will be used for community and liquidity incentives;
• 15% will be used for airdrops;
• 20% will be used for ecosystem development funds;
• 35% will be used for distribution plans for project teams, investors, project advisors, and IDOs;

PRISM holders can stake PRISM tokens to obtain xPRISM with a 21-day unlock period, and the key attributes of xPRISM include:

• Governance Token: xPRISM holders will oversee various important matters of the protocol, including liquidity incentive distribution, how to use community funds, deciding on new asset listings and terms, etc.;
• Fee Income: xPRISM holders can receive protocol fee income, including staking rewards and airdrop income, which will be exchanged for PRISM on AMM and added to the xPRISM staking pool;

The roadmap for Prism v2.0 also plans to use a method similar to the veCRV voting lock mechanism, where PRISM can choose a voting lock period of as little as 1 week and up to 4 years to increase the voting weight and yield potential for holders.

Development Roadmap

After PRISM v1.0, PRISM plans to further provide investment options for different future yield rates with LUNA maturing in 3 months, 6 months, 9 months, and 12 months.

At the same time, PRISM will rapidly expand the protocol's asset scale by introducing new collateral, which is expected to include:

• PoS assets, including ETH, SOL, ATOM, and DOT;
• Native assets of the Terra ecosystem, such as aUST, mAssets, ANC, MIR, MINE, etc.;
• A range of upcoming new protocol assets, including protocol assets from money market protocols, DEXs, and bridging USDT, USDC, and DAI to Terra;

Subsequently, PRISM will also focus on providing leveraged options for pTokens and yTokens, enabling borrowing and shorting, which will help facilitate value trading that is relatively market-neutral between assets and yields, and allow for hedging future digital asset income and expenditures using currency forwards.

Ultimately, PRISM aims to enable the splitting of all yield-bearing digital assets, such as PoS assets, yield farms, LP tokens, money markets, DeFi governance tokens, and NFTs, and also plans to cover yield-bearing traditional financial assets, such as real estate, commodities, precious metals, artworks, or other investment asset classes like stocks, bonds, investment funds, and derivatives.