The Yield-Optimized Layer 1 Blockchain
Prism is the first layer-1 blockchain dedicated to the harvesting, trading and utilisation of yield. It will be the cross-chain hub where users convene to swap cash flows of major Proof-of-Stake (PoS) and DeFi assets, empowering them to manage risks associated with unstable prices and volatile yields. Core features built in at the chain level will allow the stripping of yield and spawn an ecosystem of innovative dAPPS utilising cash flows generated by yield-bearing PoS and DeFi assets. Prism is built using the Cosmos SDK and Tendermint consensus.
Prism V2 will operate as a hub and spoke model with Prism Hub controlling “Outposts” on any chain containing assets users would like to refract. Prism works by taking a liquid staking derivative (CT) of yield-bearing assets (YBAs) such as Eth, Atom, Dot, Matic, Osmo or Luna and splitting them into two fixed term assets; a Principal Token (PT) and a Yield Token (YT). The YT allows the user to earn all the yield harvested from the CT during the fixed term and the PT allows the user to redeem the CT at the expiry of the fixed term.
The free market will determine the price of YTs and PTs on Prism’s new capital efficient AMM. By separating a token from its future yield users neither have to lock away their assets for long periods to earn staking rewards, nor risk liquidation whilst paying volatile interest rates to raise capital against their assets.
Whilst DeFi markets for fixed income and interest rate derivatives are of negligible size, TradFi fixed income markets stand at $130 trillion, with interest rate derivatives at $500 trillion. It is our firm belief that the market structure of DeFi will evolve to resemble the composition of TradFi, and Prism will aim to provide the key primitives for this evolution.
Prism The Layer 1
Layer 1s are traditionally unspecialised and general purpose but the Cosmos SDK allows Layer 1s to easily add bespoke functionality at the blockchain level. Prism aims to provide unique functionality where yield harvesting is embedded at core level and a smart contract layer on top allows an ecosystem of innovative, DeFi, GameFi and NFT apps to be built, harnessing the power of future cash flows and fixed yields.
The original vision for Prism enabled refracting of all assets that were on Terra but as development progressed the limitations of this approach became apparent. External dependencies meant Prism, and its community, could not be masters of their own destiny. The crash in May, whilst painful, was the catalyst needed to design a radically improved vision. It was clear that to reach its full potential Prism needed to implement logic at the blockchain level and no longer be constrained to the limitations of smart contracts and building on a third-party blockchain.
The Cosmos SDK facilitates building a highly customizable and interoperable layer 1 blockchain.
- Modules — Each Cosmos chain is a purpose-built blockchain. Cosmos SDK modules define the unique properties of each chain. Modules define most of the logic of Cosmos SDK applications. Prism has created many such bespoke modules including “Refract”, “Swap”, “Exchange Rate” & “Proxy Governance”.
- IBC — The Inter-Blockchain Communication Protocol (IBC) allows independent blockchains to directly communicate and trade assets. Prism will utilise this to enable many CTs from the interchain to be refracted and PTs and YTs to be sent throughout the interchain.
- ICA — Interchain Accounts (ICA) allow an account on one blockchain to execute activities on another blockchain, enabling greater possibilities across Cosmos through more effective cross-chain communication. Prism will utilise ICAs to allow users to swap, refract and claim yield from other Cosmos Zones. This enables a full interchain experience where users on Cosmos Zones such as Osmosis or Terra can make use of Prism’s functionality without leaving their native chain.
- ICQ — Interchain Queries (ICQ) allow one blockchain to query data from another. They’re a key addition to DeFi applications, allowing them to query required data accurately without needing consensus. ICQ will power Prism to offer true interchain governance and allow Prism Hub to check balances and states of users and contracts on other chains.
Using these tools allows us to build a blockchain that is truly unique and tailored for its specific purpose.
Prism v1 quickly found product market fit hitting ~$800m TVL, ~$70m in liquidity on its native AMM, stable real yield of ~25%, annualised protocol revenues of $15mm and ~$3Bn annualized trade volume within 3 months of launch. Prism v2 is a complete upgrade and a side by side comparison of what was possible in Prism v1 in comparison to v2 highlights the dramatic increase in functionality.
The Need for Fixed Yield & Composability
The current structure of many PoS and Defi assets require that users must lock away their assets in order to participate in governance and earn variable staking yield.
2022 has shown how important it is to have instant liquidity. Below is a comparison showing the tools Prism empowers users with compared to traditional staking or normal liquid staking derivatives (LSDs).
The illustration below shows the interaction between Prism Hub and its Outposts.
- Prism Hub — user on Prism Hub can mint or redeem collateral tokens (CTs) without leaving Prism Hub and only signing transactions with their Prism Hub wallet.
- Prism Outpost — users on an Outpost can interact with Prism Hub functionalities without leaving their preferred blockchain or requiring a new wallet. For example a user on Terra or Osmosis could: (1) mint a CT -> (2) refract it into PT & YT -> (3) sell the YT on Prism AMM using a cross-chain swap -> (4) use the PT to proxy vote and amplify their governance powers.
The PRISM AMM
Traditional automated market makers (AMMs) suffer from many issues that expose liquidity providers to impermanent loss, low swap fees and poor capital efficiency. Meanwhile traders suffer from low liquidity and high slippage. Unsustainable liquidity incentives are often used to mitigate these issues but that is only a short term solution and exposes the AMM to forks and vampire attacks.
The Prism v2 AMM is the next evolution in liquidity and will use a balancer inspired multi-asset pool to pair CTs with PTs. As both PTs and CTs are auto-compounding this allows users to earn staking yields on all assets in the liquidity pool whilst offering minimised risk of impermanent loss as CTs and PTs are highly correlated because PTs can be redeemed for CTs at maturity.
Trading of YTs will be done using a combination of flash loans, the “refract” function and the CT <> PTs liquidity pool. This will allow liquidity providers to benefit from boosted swap revenues without any risk of liquidation.
Below is a comparison of the new Prism v2 AMM compared to AMM’s based on Uniswap v2.
We will be publishing a research paper on the Prism v2 AMM in due course.
Value Capture
In Prism v1 the real staking yield was consistently over 25% and protocol revenue was annualising ~$15m per year after only 3 months. Prism v2 will have significantly improved revenue capture and the native token holders can choose how that revenue is spent including: distributed to stakers, buyback & burn, buyback & distribute or transfer to community pool.
Unlike general purpose blockchains that only make revenue from network transaction fees, Prism will have multiple sources of revenue including:
- Network transaction fees
- Fees from Prism’s native AMM
- Percentage of yASSET yield
- Protocol transaction fees
- MEV capture
The Prism Vision
Prism aims to be the layer-1:
- Where retail and intuitional users comes to trade or hedge their yield for all major PoS and DeFi assets
- Where a thriving ecosystem of dApps harness the power of future yield.
- Where TradFi style instruments are created on top of Prism’s fixed and variable yield primitives; options, tranches, caps and collars, swaps and more…
- Where users come to participate in leveraged governance of each of the underlying refracted assets.
- Where DeFi protocols and PoS chains permissionlessly refract their tokens to unlock new utility
We hope you’ve enjoyed the introduction to Prism v2. This is the first of a multi-part series as we progress towards the launch of the blockchain. If you would like to participate in Prism v2 we have already announced the first of our airdrop campaigns here. More campaigns will follow shortly.
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Disclaimer
This paper is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This paper reflects current opinions of the authors and is not made on behalf of any entities associated with them, or their affiliates and does not necessarily reflect the opinions of entities associated with them, their affiliates or individuals associated with them. The opinions reflected herein are subject to change without being updated.
