Element Finance

Element Finance is a protocol that enables users to seek high fixed yield income in the DeFi market.

How does Element work

Element Finance enables deposits for users who want to take a variable interest position on a specific asset. The current underlying variable interest strategies are integrated from Yearn strategies. When the user makes a deposit, they may choose from a variety of different lockup terms for their assets. After a user chooses a Term Period, a Principal Token and a Yield Token are minted by the protocol and issued to the user which is redeemable at the chosen Term Period.

How is Element useful

• Many types of users can benefit from using Element Finance. The users who are highly speculative on Variable Yield, the risk-averse users who want a stable form of Fixed Rates, and the Traders who capitalize on the trading markets of these token splits.
• The highly sophisticated users who want to efficiently allocate their capital towards variable interest can choose to deposit their assets into Element and sell their Principal Tokens to repurpose their capital and increase their exposure to variable interest. This process is called Yield Token Compounding.
• The risk-averse users can choose to buy discounted assets that are being sold by the speculative users to earn a guaranteed fixed rate yield as the assets reach maturity. Additionally, the risk-averse users can choose to stake their assets into the AMM to earn trading fees.
• The traders can fill market gaps and inefficiencies by arbitraging the discounted rates as well as the variable rates in the market. Additionally, the traders can arbitrage yields across multiple protocols to keep prices aligned and make a profit.

Creating a Fixed-Rate Market

• The two token split enables a wider degree of capital efficiency due to the secondary market available to trade these different components.
• If a user opts to exit out of their base deposit position and maintain exposure to the variable interest earned by that base deposit, they may choose to sell their Principal Tokens in the AMM.
• However, because the principal tokens are not redeemable until the term period is over, the principal tokens will naturally trade a discount relative to the underlying asset. The discounted rate, when purchased, determines a fixed rate of return as the principal token eventually converges to a 1:1 value to the underlying asset.
• The Fixed Rate is earned from the purchasing of discounted assets and having the certainty of knowing what the value of the asset will arrive at.

Variable Interest Flexibility

• With the Yield Tokens being fungible, users have the ability to take higher exposure to variable interest. A yield token for a 10% APY on 1 ETH will pay out 0.1 ETH annually. A user can opt to increase exposure to a large sum of yield tokens before maturity and earn the remaining variable interest accrued during that term period.
• By performing this action, the user facilitates exit liquidity for a seller to recognize their gains in the form of current accumulated yield.
• A user who wants to utilize the entire value of their capital towards variable interest, can do so and gain a very high return if the average APY of the vault utilized stays consistent.

Sources:

• https://www.element.fi/
• https://docs.element.fi/
• https://defillama.com/protocol/element-finance