You can relate DeFi yield farming to agricultural farming. You plant seeds (your funds) and wait for a harvest (rewards and yield). What if you didn’t want to wait? What if you could sell your future harvest today to someone else in exchange for money upfront? That’s what yield derivatives protocols let you do in DeFi.

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Understanding Yield Derivatives

First, let’s define yield and derivatives and eventually build up to yield derivatives and how they work.

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What Is Yield

Yield is your reward for putting capital to work. When you stake tokens, provide liquidity, or deposit into lending protocols, you earn returns in the form of interest, fees, or staking rewards. That’s yield!

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What Is a Derivative

A derivative is a financial product whose value is derived from something else. In other words, it’s a contract that derives its value from an underlying asset, index, or rate. You’re not trading the thing itself. You’re trading a contract about the thing. Derivatives are handy for representing real-world assets like real estate, food items, etc. that cannot be physically represented on a blockchain. They allow you to speculate on price movements, hedge risks, and access markets that might otherwise be difficult to participate in directly.

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What Are Yield Derivatives?

Yield Derivatives are derivatives that are specifically based on the future of yield on an asset. Instead of holding your yield-bearing asset and waiting patiently, you break it apart:
  • One piece represents your principal (like your land or trees).
  • Another piece represents your future yield (like the fruits that’ll grow).
and you can trade those pieces separately. This means you can:
  • Keep the principal asset and sell off the future yield now.
  • Buy someone else’s yield if you think rewards will go up.
  • Build all sorts of creative strategies using these parts.
It’s all about speculation and flexibility so that you can maximize returns, hedge against risk, or secure predictable outcomes regardless of market conditions. In DeFi, the principal asset and yield asset are in the form of tokens:
  • PT (Principal Token) represents your original asset. It’s locked until a set maturity date. After that, you can redeem it fully.
  • YT (Yield Token) represents the rights to the future yield from that same asset. Whoever holds the YT gets the staking rewards until maturity.
You can trade these tokens on DEXs, pair them with liquidity pools to earn trading fees, and combine them with other DeFi apps and protocols.

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How Yield Derivative Protocols Work

Screenshot 2025-08-03 at 19.35.19.png Everything starts with the yield-bearing tokens, e.g, Sui or USDC, deposited into the yield derivative protocol like Nemo protocol. The platform splits the tokens into the PT and YT tokens:
  • Your asset is split into PT (Principal Token):
    • Represents your original staked token (e.g., 1 sSUI).
    • Redeemable 1:1 at maturity.
    • Trades at a discount since it omits yield.
  • And YT (Yield Token):
    • Represents all future yield + platform points.
    • Whoever holds YT collects rewards until the pool matures.
You’ve now tokenized yield into tradable pieces. Once PT + YT are minted, you have strategic options:
  • Sell YT (e.g. YT‑sSUI) for USDC. You get cash today, while still holding PT and underlying yield exposure.
  • If you anticipate yield (or farming points) rising, buying YT gives you leveraged upside.
Holding PT and YT tokens has the same effect as holding the same token. You can also add liquidity to PT/Asset pools (or PT + Asset) to earn fees and incentives. Each asset/token you tokenize has a fixed maturity. On maturity, the YT expires, and then PT holders can redeem their tokens for the full underlying asset (1:1). Any LP positions involving PT and the underlying token also convert to the underlying.