Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi
We present the first formal treatment of \emph{yield tokenization}, a mechanism that decomposes yield-bearing assets into principal and yield components to facilitate risk transfer and price discovery in decentralized finance (DeFi). We propose a model that characterizes yield token dynamics using stochastic differential equations. We derive a no-arbitrage pricing framework for yield tokens, enabling their use in hedging future yield volatility and managing interest rate risk in decentralized l…
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