Terra Autumn Series Ep.

7: Introducing Ultimate
Composability, Refracting Digital Assets with
PRISM
Podcast · DEC 14TH, 2021

Jose Maria Macedo

DeFi L1 / L2 Podcast

Disclosures: This podcast is strictly informational and educational and is not

investment advice or a solicitation to buy or sell any tokens or securities or to
make any financial decisions. Do not trade or invest in any project, tokens, or
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Delphi’s transparency page can be viewed here.
Head of Delphi Labs Jose Maria Macedo sits down with Hyperion, General
Manager of PRISM, a protocol that “refracts” digital assets into yield and principal
components, enabling the next level of DeFi composability. The two discuss the
potential of interest rate derivatives in crypto, projections for principal and yield
tokens, the composability of these refracted assets, and much more!

Social links:

Hyperion’s Twitter
PRISM Twitter
PRISM Telegram
PRISM Discord

Resources:

Delphi Podcast Summaries

PRISM Website
PRISM Litepaper

More

Watch Our Video Interviews

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Show Notes:

(00:00:00) – Introduction.

(00:01:27) – Hyperion’s background.

(00:05:42) – Deciding to build in crypto.

(00:07:27) – Interest rate derivatives in TradFi.

(00:11:09) – Using interest rate derivatives as a hedge.

(00:14:40) – The size of the interest rate derivatives market.

(00:16:50) – The founding basis of PRISM.

(00:20:49) – Yield curves in crypto.

(00:22:06) – The user journey on PRISM.

(00:23:45) – Price expectations for pLuna and yLuna.

(00:29:37) – Long/short strategies for pLuna and yLuna.

(00:32:10) – Perpetuals for pLuna.

(00:34:35) – Fixed maturity on the tokens.

(00:37:15) – The relationship between p tokens and y tokens.

(00:38:57) – Tokens beyond pLuna and yLuna.

(00:42:08) – The possibilities for aUST?

(00:44:48) – Additional functionalities on PRISM.

(00:48:01) – The $PRISM token.

(00:53:11) – Composability use-cases for PRISM.

(00:55:24) – Why interest rate derivatives have not gained traction in crypto.

(00:59:41) – The core interest rates in crypto.

(01:03:52) – Closing thoughts.

Delphi Podcast hosted by Jose, with Hyperion on Prism

00:57 • Jose
Hi everyone. Today, I’m thrilled to be hosting the GM at Prism. has a long career
in TradFi where he spent time doing fixed income at JP Morgan and other
American investment banks. He is now helping contribute to Prism, a Terra-
based protocol which enables users to split their digital assets into yield and
principal components thereby expanding the surface area for composability and
allowing for a range of interesting use cases which we’ll explore in this podcast. ,
thanks very much for joining me.

01:24 • Hyperion
Thanks very much for having me. I appreciate it.

01:26 • Jose
First of all, could you start by giving us a quick description of your background
and how you got into crypto?

01:33 • Hyperion
Of course. I spent all of my career in finance and mostly in fixed income. I initially
came at crypto through a “macroeconomic, fixed supply of Bitcoin” narrative.
Having invested in stocks and bonds, it became clear to me that what was
driving value in these growth stocks wasn’t only future earnings potential but also
devaluation of fiat currency, which is, for most people, the denominator that
everyone uses to measure their returns or their wealth. After spending a lot more
time on that and getting fascinated with DeFi in the middle of last year it…it blew
my mind – some of the things you’re able to do like borrow and lend and that’s all
governed by smart contracts. In many cases with these protocols, 100% of the
revenue generated is being paid out as a profit on a block-by-block basis.

02:28 • Hyperion
That was a real light bulb moment for me. Having invested in stocks where you
have to wait for the management board to approve a quarterly dividend to
shareholders, which can only be a tiny fraction of the revenue earned, DeFi was
this big light bulb moment. These were real protocols with real cash flows that
could actually be analyzed and valued. That brought me on to crypto. I came
across Terra and LUNA towards the end of last year. It resonated a lot with me
because, regardless of many of the problems with fiat currency that a lot of
people in crypto understand, we still all have real world expenses in fiat. We still
are all potentially looking at buying houses or cars and using fiat to denominate
our wealth and to denominate our crypto returns. So, people need a way to hold
fiat in a self-custodied and censorship way.

03:27 • Hyperion
That’s a big reason why I gravitated towards Terra. I’ve seen the financial markets
impact of capital controls in Greece where people weren’t allowed to remove
their own money from the bank. The value of that currency was getting
destroyed. I was on the trading floors when that was happening. It was crazy and
really sad to see. This is absolutely a risk people are taking when they buy
centralized stable coins such as Tether, Circle, or DAI, which are all basically just
an IOU on some amount of dollars held in their bank account. I think that’s why I
gravitate towards Terra. It was clear to me in the financial markets that describing
a stablecoin as one-to-one backed… if you’re taking a physical dollar off of
someone and then issuing them a stablecoin dollar in return, and then using that
physical dollar they gave you to buy extremely risky commercial paper…

04:16 • Hyperion
I’ve seen and traded firsthand when commercial paper that’s meant to represent
a dollar is priced very below a dollar. So, Terra for me solved a lot of these
problems on self-custody and censorship. That’s why I gravitated towards Terra
and the fiat stablecoins that Terra produced. Obviously, with a fixed income
background, Anchor Protocol was amazing for me to see. Suddenly, you have
self-custodied and theoretically censorship-resistant stablecoins that were able
to pay you a 20% yield. After the mass liquidations in May last year, it became
clear to me that most people were doing borrowing backed against the value of
their assets rather than actually…One of the amazing characteristics of DeFi is
this yield you can get, and people weren’t really securitizing or trading the yield.

05:07 • Hyperion
They were only taking loan-to-value risk. It got me thinking about how I could
isolate out yields (which is something that happens a lot in TradFi with coupon
stripping) and started thinking about all the different implications that this could
have. That took me to putting pen to paper and sending Do Kwon the outline of
an idea. I was lucky enough that he was interested and agreed to help me build
it. That’s a bit of a round trip of how I got to where I am now basically. So, we’ve
been building Prism ever since.

05:41 • Jose
That’s awesome. When you were looking at crypto, were you looking at it with the
intent of, “Maybe I want to build something,” or when you started looking at DeFi,
were you interested straightaway in building something, and then you came
across Terra and it clicked? How did you decide to build something?

06:01 • Hyperion
It’s one of these things where, if you’re working in really large organizations and
you’re investing in stuff where 100% of revenue isn’t going through immediately
through to profit and shareholders, and you start seeing what’s happening in
DeFi, it’s just that moment where you’re think, “TradFi is a declining industry. DeFi
is something that is truly exciting and innovative.” It was amazing just to
understand it. I’m sitting there as a TradFi guy thinking to myself, “What value can
I add? I’m not a developer. I’m not a smart contract guy. What am I going to be
able to do here?” So, you doubt your own abilities initially. I didn’t specifically
have the intentions of doing something, then I realized that it was something that
I really wanted to focus all my time on in one capacity or another.

06:55 • Hyperion
I wasn’t expecting much back from Do when I sent him the idea. Once that all
starts, and you start the process, you realize that there is a huge need for people
from loads of different backgrounds to come into DeFi because, as everything
moves on-chain, expertise from all over is going to be relevant. It’s not just about
whether you have smart contracts or experience or not. It was a happy accident
to build something, but I knew before that I wanted to be involved in DeFi 100%
because it’s so exciting.

07:25 • Jose
That’s really cool. Before we get into Prism, I think it’d be cool to explore the idea
of interest rate derivatives in traditional markets. You mentioned Prism is splitting
a token into its principal component and into its yield component, which we can
get into that more in detail later. I’d be interested to understand what are interest-
rate derivatives, and how do they work? How do they work in traditional
markets? How did you use them? Just to give some background for the
listeners…

07:52 • Hyperion
One of the fundamental things that I don’t think people realize is that everyone’s
exposed to interest rates ,whether you know it or not, one way or another you are
exposed to interest rates. I think the simplest thing is that most people know that
a dollar now is worth more than a dollar that they would receive in a year. A dollar
in a year is worth more than a dollar that they’re being told that they’re going to
receive in ten years time. The main reason for this is interest rates. In very
simplistic terms, if I have a dollar now I can invest it in a bank account and it’s
going to be worth more than $1 in a year or $1 in 10 years. That’s the basis of
interest rates and how they work. Then, everyone who is ever expecting to pay or
receive any future amount is exposed to interest rate risk, whether this is your
salary your pension, mortgage payments, credit card debt, car loans, etc.
08:49 • Hyperion
The same thing goes for any companies that have future income or expenses
that are also exposed to interest rate risk. It touches everyone in one way or
another. An interest rate derivative is a financial instrument where the value is
linked to movements in those underlying interest rates. These can include lots of
different things like futures options or swaps. Interest rate derivatives are often
used as hedges by institutional investors in order to swap from fixed rates to
variable rates, or vice versa, that can be used by banks and companies or they
can be used by individuals to protect themselves against market interest rates.
That’s a bit of a background on how the derivatives markets work. Previously,
these kinds of things were only available to institutional investors with ISDA. ISDA
is a contract that allows you to trade derivatives with mostly investment banks or
with other sophisticated counterparties. Your average retail investor person is
excluded from this market and is unable to trade these derivatives and would
have to go to a bank if they wanted to do that for them.

10:02 • Hyperion
In terms of how they’re used, they’re most often used to hedge against interest
rate risk or to speculate on the direction of future interest rate moves. So, if the
Fed is making a big policy decision about what they’re going to do with
underlying interest rates, or if the Bundesbank is doing something similar in
Europe, huge volumes of interest rate derivatives will trade as people try to
speculate or protect themselves against what the potential outcome of these rate
decisions is going to be. It is an enormous market. Interest rates kind of exist as
these interest-bearing assets such as loans or bonds, and due to the possibility of
the change in the assets value resulting from these interest rates, (which is what
we discussed before where a dollar in the future is worth less than a dollar now)
interest rate risk management has become a crazy important part of TradFi and
that’s why these instruments that we discussed have been developed, to help
people allow that.

11:05 • Jose
Could you walk through one example of someone using this to hedge? Is it like, “I
have a loan, and maybe the loan is variable interest rate, and I have a razor-thin
margin business.” I know you said they’re used by banks, or maybe you can use
an example more in that context, but I have a razor-thin margin business. I can’t
afford for the cost of interest rates to go up. So, I swap the variable rate for a fixed
rate. I then pay a slightly higher fixed rate to compensate for the extra risk that
someone’s taking. Someone else takes the extra on top. Is it something like that?

11:39 • Hyperion
Exactly. One thing that hopefully lots of people can relate to whether they’ve had
a mortgage themselves or whether their parents and family have had a mortgage
is, when you sit there and you get your mortgage you’re on a 75% or 60% loan-to-
value mortgage (and I hope mortgages work like this globally…in case I didn’t
mention earlier – my dodgy accent is from the UK, so maybe this might be a bit of
a UK centric example)…If I am taking out a mortgage, the bank might say to me,
“The variable interest rate at the moment is 1% and you can take that out for your
five-year mortgage, or, we can offer you a fixed rate at 2%.” You as an individual
have to make a decision there about whether you’re going to fix your rate and
guarantee the rate that you’re going to pay or whether you’re going to take this
variable rate.

12:35 • Hyperion
If the Bank of England or the Fed or whoever increased rates then you could end
up paying a higher rate of interest. As an individual person, that’s how you can
take exposure to interest rate risk or to hedge your interest rate risk. Behind the
scenes, the bank who gives you the mortgage will be trading these interest rate
derivatives for all their millions of clients to hedge out this risk. Hopefully that’s an
example that most people will feel familiar with, where they’ve had to make a
decision about whether they want to fix or float their rates basically.

13:08 • Jose
That makes sense. In the crypto case, which we’ll get into, it’s becoming a
derivative that’s tokenized. In TradFi, is it a synthetic instrument? Does it have a
price? Kind of a weird question, but I’m quite interested in understanding how it
works.
13:30 • Hyperion
I’d classify it as either fully-funded or margin. Fully-funded are these initial
examples that we’re creating with Prism where you’re tokenizing it and all of the
yield is represented in one token. In TradFi, you can have exactly the same thing.
You can coupon strip something and all of the present value of the yield is held
within one contract. But also, then you have this element where these can be
traded on huge margin, e.g. huge derivative instruments where you can put down
one to two basis points to five basis points and be trading billions and billions a
side of exposure on this by only putting down a very small amount of margin. To
my view on it, I do think that over time, DeFi will have… we’re starting off with
these fully funded instruments that we’re creating… but over time, allowing margin
speculation on interest rates is going to be huge in DeFi as it is in TradFi

14:36 • Jose
We’ll definitely get into that later and how that would work. Could you give
people an idea of how big this market is? I don’t think people realize just how big
the interest-rate derivatives market is in TradFi.

14:50 • Hyperion
Because we’re discussing that everyone’s exposed to it, whether you’re an
individual or whether you’re a company, a sovereign wealth fund, a government,
pension fund, hedge fund, asset managers,… all those kinds of people are all
exposed to interest rates, so it’s probably the biggest market in the world.
Currently, it’s around $600 trillion worth of notional exposure out there in interest
rates swaps. I think they trade around 7 trillion a day. It dwarfs stocks, bonds, and
everything else.

15:25 • Jose
That’s crazy. Out of curiosity, I understand the hedging use case – who are the
main counterparties for whom it makes sense to go super long interest rates?
Who are the degens 2000x longing?

15:38 • Hyperion
The biggest degens are hedge funds, if we’re just being honest. The alternative
asset management industry has a huge risk propensity. When you have pension
funds that want to be ultra-safe or people that want to banks they want to be
ultra-safe on the mortgages that they’re doing, and they’re happy to pay quite a
big premium to fix their rates, hedge funds are really happy to take the other side
of that a lot of the time (and speculate on interest rates and take exposure to
yields). They’re the equivalent of DeFi degens in TradFi now.

16:15 • Jose
Everyone’s kind of long rates anyway, right? If you’re investing in equities or
crypto or whatever… It’s an interesting one that people are taking even more
exposure to that. Is there anything else you want to cover on the traditional
interest rate swap market that you think people should know that would help
them understand Prism? Or should we move on to Prism?

16:36 • Hyperion
I think that’s good. Once people can conceptually understand how interest rates
touch their life, then hopefully it becomes a lot more relevant what we’re trying to
do with Prism and DeFi.

16:49 • Jose
Turning to Prism, could you walk us through the idea behind it and how it works?

16:55 • Hyperion
Building on what we discussed around interest rate risk, DeFi users have the
same issue. They’re exposed to volatile yields and volatile prices just like users in
traditional finance. In most instances, it’s a lot more volatile and a lot bigger
fluctuations that they’re getting at the moment. Currently, there isn’t really a way
to manage these risks at all or to speculate on them. That’s what we’re trying to
build with Prism. At the moment, for the most part, DeFi is a spot asset.You don’t
really get fixed maturities. You get perpetuals but they’re non-maturing. As DeFi
matures, the same way that you have bond curves for the United States treasury,
like the two year, five year, ten year…
17:45 • Jose
Can you explain a bond curve for listeners that don’t know how that works?

17:49 • Hyperion
A bond curve, in really simple terms as it works for government, is that
governments need to fund their ongoing expenses. They have a couple of ways
of doing that. One is through taking tax receipts off of people. Another way of
doing that is by borrowing. A government, in order to raise funds, will say to
people, “If you give us X billion dollars, we will pay you this interest rate and we’ll
pay you back your X billion dollars in a year.” So, bond curves are formed when a
government will say, “We want to borrow money for two years. We also want to
borrow money for five years and we also want to borrow money for ten years.” If
you’re lending to the government for 10 years, you’re going to want a higher
interest rate to compensate you for the fact that you’re tying up your capital for
10 years. You’ll take a slightly lower interest rate for five years and you might take
a lower interest rate than that for two years.

18:43 • Hyperion
This is how bond curves are formed. The bond curve tells you what rate you’re
accepting for two years, five years, and ten years, in very simplistic terms. I think
we’re going to start seeing that in DeFi, where, in the future, people will want to
know, “What’s my yield if I lock up Ethereum for five years or lock up DOT for 10
years?” or whatever it ends up being. These bond curves are some of the most
liquid instruments in the world. Basically, every single country has a bond curve
that issues that debt. The same thing happens not only at a country level but at a
company level. We might look at Nike or Apple or Amazon. All of these issuers
have a bond curve and they’ve borrowed money for maybe two years, five years,
ten years.

19:38 • Hyperion
For every single company, you can see what the interest rate is that the market is
demanding to lend to them for ten years or five years. As the quality of the
company and the probability that you’re going to get paid your debt back in ten
years time is better, e.g. for really high quality companies like Apple or Amazon,
people aren’t going to demand much interest rate, but for very speculative
companies, people are going to require to be paid a lot more interest rate to
effectively lend to those companies for ten years. I think that’s one of the things
that really happens in DeFi at the moment, is that you see these huge yields, and
these huge yields are there because the underlying assets are lower quality than
the high quality assets which are Solana, ETH, DOT, LUNA. That’s why you see
lower yields on these assets than you see on the latest BSC farm that’s paying
you 8,000,000%.

20:33 • Hyperion
People are going to demand a higher yield on a BSC farm because the risk is
significantly higher than. That’s the whole founding basis of what we’re working
with on Prism.

20:49 • Jose
Crypto protocols aren’t going to be borrowing for two years, five years, ten years…
they’re going to be paying maybe a staking yield or there might be a yield on
money markets for lending on them…so what’s the equivalent in crypto? Is the
yield curve just generated by how much people are willing to sell their future
yield for on Prism or how does that come about?

21:14 • Hyperion
The original side of this is going to be the supply side. As a holder of a LUNA
token, for example, I have a choice of whether I want to borrow against that asset
to raise money and have liquidation risk or whether I’m thinking, “Why don’t I sell
you a year’s worth of my LUNA yield?” And, you’re going to make a price to me at
which you’d be happy buying a year’s worth of LUNA yield. Eventually, the market
will make a price. That’s how the yield curve will come about, because you’re
going to make me a different price for a year, for six months, for two years, etc.
That’s how a trading curve will start generating in these assets.

22:04 • Jose
Before we go more into that, could you walk through, with LUNA as an example,
the user journey of someone on Prism, to help people understand the step-by-
step?

22:16 • Hyperion
If you are to participate in Prism, you’ll take your LUNA token and you will put it
into Prism and Prism will automatically stake the LUNA token from its vault where
it’ll start earning airdrops and staking rewards. What you’ll be issued with a
cLUNA token (which is a collateral token which represents your ownership of the
underlying LUNA in the vault) – you can then refrack that LUNA token into a
principal token and a yield token, and you’ll receive both tokens. What your yield
token does is it gives you the right to all the cash flow generated by the
corresponding amount of LUNA that you just put into the Prism vault. What your
principal’s token does is represents the underlying ownership of that underlying
asset in the vault. You’ll then have these two tokens, your P token and your Y
token, and you’re free to use them as you want. You can be a liquidity provider or
you can lend them out in money market protocols or you can trade them.

23:28 • Hyperion
The user journey should actually feel very familiar to people from what they’re
doing in Anchor. It’s just one extra step of splitting your bLUNA token into a
yLUNA and pLUNA.

23:41 • Jose
Makes sense. To reason about that, how do you expect pLUNA and yLUNA to be
priced and what do the relative prices tell us? The two have to add up to the
price of LUNA, right? Otherwise there’s an arbitrage opportunity that opens
up…but I’m curious, could you walk us through an example of how you think
they’ll be priced and what the prices actually mean.

24:05 • Hyperion
(All the usual caveats that this is not financial advice, do your own research, all
that stuff. These are just my thoughts so if I’m wrong don’t hold me to that) The
first question is what are the fundamental drivers of LUNA as a whole’s price?
And, that is the burning expectations of LUNA. So, in that situation pLUNA would
be the disproportionate beneficiary of that because that doesn’t affect the yield
as much. So, yield expectations: if people think there’s going to be huge yield
generating events for yLUNA then that’s going to disproportionately benefit
yLUNA. Obviously, on any of these assets there’s speculation and market beta
which pLUNA would be a bigger beneficiary of. Then, we touched on it earlier, but
the discount rate and risk-free rate that people use to discount their future cash
flows…

25:00 • Hyperion
So, if I’m receiving my yLUNA yield in a year’s time or two year’s time, if discount
rates change or the underlying interest rates change, then the value of that future
cash flow (i.e. that future dollar that I’m going to receive) changes a lot. Obviously,
that is going to impact yLUNA more than it’ll impact pLUNA. I think talking about
that – it’s going to be really interesting. A lot of the pricing on it – what I would
actually caveat – is a lot of the pricing of this is going to depend on what interest
rate people use to discount future cash flows. So, if I’m going to receive my LUNA
yield over the next year, (if I’m using the yield on U.S. government bonds then I’m
discounting things a very small percentage) but if I’m a DeFi user then I’m
probably discounting things at the yield on Anchor, which is 20%

25:49 • Hyperion
That really changes the picture of what the actual price of the yLUNA and pLUNA
token should be. With all that having been said, in very simplistic terms – the
pricing of the yield instrument is the yield divided by the discount rate. If people
are going to use the Anchor discount rate (i.e. 20% yield on your dollars at the
moment) and use that as the effective risk-free rate in DeFi, then at current yields
that probably puts the price of a yield token and a principal token both at 50%.
You might see a yield token trade at half the price of a LUNA token because yield
token plus principal token must roughly equals the price of LUNA, otherwise
there’s this arbitrage that you mentioned. That means that the principal token
must also be at 50%.
26:44 • Jose
How come? Because the yield on LUNA is 10% right now, right? How do you
work out the 50%?

26:50 • Hyperion
Say the Anchor rate is 20% at the moment. The yield on LUNA, for argument’s
sake, let’s just say it’s 10% for round numbers. So 10% divided by 20%. 10%
divided by 0.2 gives you 50%. Effectively, because it’s 20%, you times the yield
by five and that gives you what the value of that perpetual cash flow or yield
should be worth.

27:24 • Jose
Okay. Makes sense. The price movements as you mentioned reflect people’s
expectations about future yields. So, if they think there’s a huge burn coming or
for some reason the UST is going to grow a lot and that’s not priced, then the
yield token would trade higher. By association, the principal token would trade
lower.

27:47 • Hyperion
What’s been happening in LUNA recently is a great example. There’s this big
partnership with $Spell. If people were able to anticipate that they might think,
“There’s going to be a huge burning event. A result of a lot of that burning is that
LUNA yield isn’t going to change significantly, but LUNA price will.” They might
have decided they wanted to own more P-token. Recently, with LUNA, there was
an event where the community pool was burned which was 80 odd million LUNA.
As a result of that, a huge amount of fees were generated for LUNA stakers which
was a huge event for LUNA yield, and LUNA yield has nearly 3X’d as a result of
that. If you’d held the yield token, and the market hadn’t been expecting that
event to happen, your yield token would have massively benefited compared to
your principal token.

28:45 • Hyperion
It allows you to speculate on things like that. For example, not to get too specific
on LUNA, but LUNA rewards that have accrued are paid out over two years at the
moment. That recently changed from three years to two years. If there was an
event where there was a proposal to move the LUNA yield rewards from two
years to one year, effectively doubling LUNA yield, then again that’s the kind of
huge event that people might speculate on that would really benefit the yield
token rather than the principal token. There’s lots of different dynamics at play
with each of these tokens that they’re going to make them really interesting for
people to trade.

29:26 • Jose
It also gives you a lot more information, right? It makes the market more efficient.
It allows you to figure out what the market’s expecting actually in terms of yield
growth, right? Going into some potential use cases, one of the things that you
mentioned in our first talk which was really interesting is the idea of leverage and
the principal token representing cheaper leverage than just holding LUNA. But
there’s other use cases too. Maybe we can walk through for both the principle
token and the yield token, what it means to be long and short it, so people can
reason about the different exposures.

30:04 • Hyperion
If you have a hundred dollars, you have a choice of buying one LUNA or you have
a choice of buying a hundred dollars worth of yield token or a hundred dollars
worth of principal token. If you’re expecting LUNA’s price to go up significantly,…
then if we use the examples before where we expect the LUNA principal token to
trade at half the price of the LUNA token and as a result of the LUNA yield token
is also trading at half the price because two halves make a hole… If you’re
expecting LUNA price to go significantly higher than the LUNA token valued at
$100, the LUNA principal is valued at $50 and LUNA price goes 10X, LUNA’s yield
doesn’t change.

30:58 • Hyperion
The LUNA yield token is still valued at $50. If you just own LUNA, you would have
made 10X. You would have gone from $100 to $1000. Whereas, if you owned the
LUNA principal token, you would have a $1000 minus the $50 value of the yield
token. You would have gotten from $50 to $950 and made a much higher return.
And, it’s a similar thing with LUNA yield. If you expected LUNA yield to increase
significantly, you might want to buy the LUNA yield token. If LUNA yield doubles,
for example, then you’re going to get a much bigger outsized return on your
LUNA yield token. The yield token valuations is a bit more complex on LUNA
because you have all these different components of LUNA which have LUNA
yield which are staking rewards in multiple different stablecoins and also LUNA
itself.

31:53 • Hyperion
That gives you an example of how you can take this leverage to LUNA’s price or
leverage to LUNA’s yield without taking any liquidation risks. You can isolate
exactly which opportunities or risks that you want to take. It gives you a lot more
freedom and flexibility.

32:10 • Jose
Won’t that always be a cheaper way to get leverage to LUNA then a perp, for
instance? If you had a perp for pLUNA, wouldn’t that always be a cheaper way?
Because with a perp you’re not getting the yield anyway, but you’re paying full
price. Or, am I thinking about that incorrectly?

32:31 • Hyperion
I agree with you and I think there’s going to be something I think there’s going to
be some really interesting integrations when some protocols start using pLUNA
as the underlying token rather than LUNA because baked into LUNA’s price is
going to be the yield that you’d get if you staked LUNA. This is going to allow
people to take a much more isolated risk in a much more capital efficient way.
Obviously, in our example where pLUNA is trading at 50% of LUNA price, you’re
getting just under two times leverage, but, obviously, then if there’s a perpetual
platform that’s offering you 20 times leverage on top of that, then you then it’s
going to be a really interesting way for people to isolate exactly the price
exposure or exactly the yield exposure that they want to take. I think it will be
really interesting.

33:21 • Jose
It feels like it would almost make more sense as a trader to trade the perpetual
for pLUNA, right? Because you’re not getting the yield anyway…

33:30 • Hyperion
Say, for example, we do a one year token, and say the one year LUNA yield
token, just for argument’s sake, is trading at 10% of LUNA price. That means the
principal token must be trading at 90% of LUNA’s price. A really popular trade in
DeFi at the moment is the cash and carry trade where you will buy spot LUNA,
for example. If there’s been huge demand for the perpetuals then there’s a really
big high funding rate. So you’ll buy LUNA, then sell the perpetual. When the
funding rate comes down you’re going to end up locking in that profit of the
funding rate you’ve taken in over that time. It’s going to be much more capital
efficient to buy a LUNA principal token at 90 and then sell the perpetual. You’re
then also looking at that extra 10% over a year because, at the end of the year,
you’re going to be able to reclaim your original LUNA back. It’s more capital
efficient and you’re going to get a much high yield or IRR as a result of that.

34:34 • Jose
In the lite paper you also mentioned the expiries – how does that work, and is
that going to be live from the beginning? For instance, if you had a one-year yield
token then you’d have to have a one-year C Token as well right? At that point,
would it have to be redeemed? Or, what if it was being used in a perp platform?

35:03 • Hyperion
For V1, we just want to launch with perpetuals. Conceptually for people, that’s
going to be a great introductory instrument to Prism. The aim is definitely to start
spinning up these maturities. Your collateral token will always be a collateral
token and it won’t actually ever have an expiry. You can then choose whether to
split that collateral token into a three-month YT or PT or a six-month YT or PT.
Basically, then people are going to be able to choose which term they want to do.
At the end of that term, once your three months or six months is up, your yield
token will no longer have the right to any yield, and you can swap your principal
token back for a collateral token. You can either redeem your original collateral
or you can mint a PT or a YT for a new term if you want to.

36:05 • Jose
Why do you think it makes sense to do that at the Prism level versus having, for
example, a fixed-income protocol on top where you can take your perpetual P-
token and your perpetual Y-token and put some term on it to lend it to people?
Would you not be able to recreate the same exposure with that?

36:26 • Hyperion
I think stuff getting re-hypothecated and having cash settlement of derivatives – I
definitely think DeFi will go that way, probably using oracle prices of these yield
tokens that we create. In the first instance, I think you have to create the products
that allow people to give the true value that people are prepared to pay to
actually physically receive LUNA yield or DOT yield or SOL yield. In the future, I
see it going in a direction where perpetual derivative protocols use oracle
reporting of LUNA yield token prices to allow people to speculate in big size on
those.

37:14 • Jose
To finish up the previous thread: if someone is long the principal token, they’re
also necessarily short the yield token, right? So if yields go up, the price of their
principal token can go down, right?

37:28 • Hyperion
The way I would probably describe it best is: people are familiar with CDP
collateralized debt positions that you have on MakerDAO, for example, or on
Mirror Protocol on Terra. What really happens is, in really simple terms, if you
want it to be a user and you just wanted to have 100% exposure to LUNA’s yield,
you would spend all of your dollars on yLUNA. Or, if you want it to have 100%
exposure to all of LUNA’s price, you would spend your hundred dollars on
pLUNA. Or, if you wanted to have two staking derivatives where you can earn
LUNA’s yield but also earn additional yield on top of that but still have your full,
consolidated exposure to LUNA, then you’d just keep your principal token and
yield token and use them as you wanted.

38:12 • Hyperion
Where it gets really interesting is when you start talking about shorting. If I held
LUNA but I thought LUNA’s price was going to go down, I could use my LUNA to
mint pLUNA and yLUNA and then just sell my pLUNA in the open market with the
expectation of buying it back. In order to close out my collateral, my CDP
position effectively in this example, I would have to buy my pLUNA back at a
lower price. The same thing can happen with yields. In a way, it allows people to
go leveraged long or leveraged short the exposure of the underlying asset if that’s
what they want to do.

38:54 • Jose
It makes a lot of sense. Switching gears a bit, I know your initial product is pLUNA
and yLUNA, and we’ve spent a lot of time on that – are there other tokens that
you’re also excited for Prism to integrate that you think makes sense?

39:07 • Hyperion
The feedback we’ve been getting, and something we think as well, is that getting
Layer1 assets reflected into perpetual yield and perpetual principle instruments
is going to be pretty exciting. So, ETH, SOL, DOT, ATOM are really high on the to-
do list. With Wormhole and IBC this is going to be a much easier task to do. I
think building out the yield curve on those, e.g. thee three-months, six-months,
nine-months, twelve-months, etc. is going to be really interesting.

39:39 • Jose
How are you doing that? Are you using existing stake derivatives like the LDO
ones? Are you building it so that you’re staking it yourselves?

39:50 • Hyperion
The initial iterations will probably be using LDO derivatives like staked SOL,
staked ETH, staked DOT I know is in the making at the moment. The plan is to use
staking derivatives to start off with. SOL’s coming to Terra pretty soon via BSOL
for Anchor. Staked SOL is coming as well over Wormhole. They’re going to be in
the ecosystem anyway, so I think it makes sense for us to use them in a first
instance. Maybe later on we can look at whether we want to natively stake on
each blockchain to create it from there. Using the LDO assets or other staking
derivatives to start off with is going to give us a faster route to market for people
that want to speculate or manage risks on these.

40:43 • Hyperion
The other really interesting potential use cases are things like LP tokens which
we’re really excited to refract because, at the moment, if you’re a liquidity
provider and you stake your LP tokens, you’re exposed to the price of the
underlying instruments.You’re also exposed to impermanent loss. You’re
exposed to the AMM fees generated by the trading volumes and the liquidity
incentives provided for staking your LP tokens. Refracting LP tokens is going to
allow users to choose which risks they want to be exposed to. It could be
extremely useful for protocols. We believe it can help solve some of the
mercenary capital farming issues and means that liquidity incentives can actually
end up in the hands of people that want to be exposed to their token. It’s also
going to allow people to take leveraged exposure to the intrinsic price of the
underlying assets in the liquidity pool and the associated AMM fees or to take
leveraged exposure to the yield that’s being offered for staking your LP token.
That’s what I’m super excited about.

41:51 • Jose
Some of the 40 chats* that’ll be happening with people buying the yield token
and then using their VX Astro to vote issuance to their pool and pumping their
yield token is going to be pretty maddening to see. It’s cool that this exists. What
about Anchor? Anchor right now is a fixed deal but the idea from the beginning
was to move to a yield that’s not very volatile but it does move quarter to quarter
based on some indicators, right? Would there be a possibility for a kind of aUST
to also be split into its yield component and its principal components somehow?
42:31 • Hyperion
aUST is something that’s a really high priority for us because I think it’s such an
interesting instrument.

42:38 • Jose
It’s kind of like building Alchemix if you do that, right?

42:42 • Hyperion
There’s a protocol on Terra which is doing something similar to Alchemix called
Kinetic which is offering you these self-repaying loans, like Alchemix is. I guess
the difference between our protocol and Alchemix, for example, is…aUST you
can’t create perpetual instruments on – you’d have to create maturity instruments
on. You would sell your aUST yield for six months or nine months or twelve
months or three years or something like that. It opens up these really interesting
things where, if I wanted to raise money against my UST, say I have a thousand
dollars, I could mint a three-year Y-token and P-token for aUST. Because Anchor
yields 20% at the moment, I might end up being able to sell my three-year yield
token for say $500 when I put $1000 in.

43:45 • Hyperion
You get quite a similar result to Alchemix except, in this instance, you’ve sold
your yield token but you also maintain your liquid principal token. In Alchemix,
you don’t have a fixed maturity. You don’t know when your loan is going to be
paid off. It’s invested in Yearn and as it earns yield your loan’s paid down. For us,
you know that if you sell a three-year yield token you know exactly how much
cash you’re getting upfront and you know that in three years time you’re going to
be able to redeem your full amount. In the meantime, you could buy it back and
close your position by trading on the AMM, but you have a fixed maturity where
you know exactly when your loan is going to be paid off which I think is an
interesting situation.

44:33 • Hyperion
We’re really excited to potentially work with people like Kinetic who can use our
perpetual instruments like yLUNA or yDOT or ySOL to help people pay down
their loans in UST. I think there’s lots of other use cases as well.

44:48 • Jose
Other than integrating additional tokens, are you thinking of building any
additional functionality into Prism?

45:00 • Hyperion
Fixed maturities is something we want to build out on. We also want to enable
governance voting via your P-token. Say, for example, there are important
governance votes on Terra going on. We think it’d be really cool to enable people
who hold pLUNA to be able to pass governance votes through Prism and that get
passed on to Terastation. So, aggregating votes on Prism and then passing it over.
That’s going to allow people to put a value on governance which is hard to isolate
at the moment. Generally, yield tokens and principle tokens we believe are
building blocks on which a lot of other protocols can integrate. As an example,
we formed this partnership with Pylon Protocol which is going to allow users to
deposit yield tokens and swap their yield for new protocols launching in Pylon.

46:06 • Hyperion
Potentially looking at which DEXs we can partner up with – there are some very
exciting DEXs coming to Terra soon. We want to partner up and do LP tokens for
those. Refracting tokens of money market protocols is really interesting because
you’re going to be able to go from floating rate to fixed rate. As you know, there
are some good money market protocols coming to Terra soon. Also, allowing
people to be leveraged yield farmers and auto-compound these yield tokens is
going to be really interesting. I think the use case we just mentioned with the
Alchemix-style being able to sell a three-year aUST token… it’s going to be really
interesting for people when you have some of these off-ramps that are on Terra
at the moment like Tick, Alice, and Cash, where anyone in the world will be able
to sell a three-year yUST token and everything can get abstracted away, and
they’re effectively selling their future yield and receive that amount upfront.
47:07 • Hyperion
I think there’s going to be tons of wood to chop. One of the other things that
we’re going to be doing is: we want to be able to enable leverage trading on
these products and margin leverage trading which we discussed earlier on. That’s
definitely something on our roadmap and we want people to be able to easily
leverage long and short these products as people do in traditional finance.
There’s going to be plenty of wood to chop on the future roadmap. If that’s what
governance decides then that’s definitely something that’s going to be really
exciting.

47:42 • Jose
We are investors in Alchemix and are helping out with Kinetic…but with Alchemix,
I never realized that it was a subset of this token splitting. That’s really interesting
to figure out. You mentioned governance. How does the Prism token work? How
does it capture value and what does it govern?

48:08 • Hyperion
We’re running a Prism and xPrism model, modeling it after the xSushi model. The
Prism token itself is going to be the base asset in all liquidity pools. The reason
we’re doing that is similar to THORchain where, as we spin up more and more
assets, (initially we’re going to start off with six liquidity pools),…but for every asset
you have, like LUNA for example, we’re going to have a yLUNA Prism pool, a
pLUNA Prism pool, a cLUNA Prism pool, and a Prism/LUNA pool. Every time you
add a new asset, you’re going to have another four pools. If you start adding
maturities for those assets, you’re going to have even more pools for each of
those assets because you’re going to need to have a six-month yLUNA pooled or
a six-month pLUNA pool.

48:57 • Hyperion
Having Prism as the base asset in each of these pools means that you can swap
from any one asset to any other asset in a maximum of one swap because you
would go yLUNA to Prism to pSOL, for example. That’s how it’s going to be used.
That means that as the TVL in the protocol grows, the amount of Prism token
that’s required in the liquidity pools this is also going to increase.

49:25 • Jose
That makes sense. Do you not think that it has some detrimental effects on the
UX? Users generally price things in UST and even LPs for a yields-bearing LUNA
token might not necessarily want Prism exposure. They might just want to LP that
with UST. Did you think through that? What made you decide on this?

49:48 • Hyperion
Agreed. The fundamental view for liquidity providers was actually in: if I pair
something against UST, that UST is a dead asset for me. 50% of my exposure in
the pool is to something that I really like, and the other 50% is being exposed to
UST which is great for all the reasons we spoke about before, but as an
appreciating asset, isn’t great. I do think there’s something that’s really interesting
to be said about pairing things with aUST which is a 20% compounding asset.
Aside from that, if you pair your asset with Prism the same way that Uniswap
pairs a lot of assets with ETH, then potentially you’re going to have exposure to
two assets you really like in the liquidity pools.

50:38 • Hyperion
As a liquidity provider, it could be attractive from that perspective. From a
denomination perspective, I agree with you. I think people won’t want to
denominate their yLUNA in Prism terms. Our UX is going to allow people to
choose what they want the denominator to be because, not only will people
want to denominate their tokens in UST and understand what the value of it is in
actual dollar terms, I also think people would want to denominate pLUNA in
LUNA terms. It’d be like, “What’s my pLUNA relative to LUNA?” That’s something
we’ve seen with the bLUNA/LUNA pool. People really like seeing what the value
of bLUNA is relative to LUNA. Our UX is going to give people the optionality to
decide exactly how they want to visibly see each token is denominated so that
they can trade based on whatever metric they want.

51:29 • Hyperion
You can either trade based on LUNA terms or you can trade on UST terms or you
can trade in Prism terms if you want. So, I agree with you. It’s something that I
think it’s going to be really important for people.

51:40 • Jose
Interesting. That makes sense. What does it govern?

51:47 • Hyperion
If you want to participate in governance of the protocol then you can use your
Prism token to mint xPrism and xPrism is effectively a pool of Prism tokens, and
every day, as the protocol makes fees, which will be a percentage of the yield
generated by the underlying assets in the vault… Similar to how validators take
fees or similar to how LDO takes fees which is just a percentage of the yield –
that’s what Prism is going to do. Every day, the percentage of yield that’s taken is
converted to Prism on the AMM. That Prism is then

distributed into the xPrism pool. So, xPrism is a compounding token where the
value of it increases like aUST or xSushi. With your xPrism token you can
participate in governance, and governance is going to be extremely important in
deciding which assets we end up listing, what are the various parameters of the
protocol around fees, and other important things like that.

52:50 • Hyperion
The aim is to make xPrism extremely important and valuable for governance
because there’s going to be lots of really important decisions that xPrism holders
need to make.

53:10 • Jose
One aspect that doesn’t exist in TradFi is the composability for these interest rate
derivatives, so using them as collateral, or in LP shares – what are the
composability use cases that you’re most excited for with Prism? I know we’ve
touched on a few like the perpetuals and the leverage, but I’m curious if there are
any others.
53:34 • Hyperion
What it comes down to is: if you create these fundamental building blocks, which
I think yield tokens and principle tokens are, it’s how they’re going to be used
elsewhere. Using them to raise cash by getting cash flow-based loans, being able
to combine them or use them separately, to be able to do this margin trading that
we discussed… how all these other protocols are going to integrate with them has
been really interesting. We haven’t launched yet, and we’ve had multiple
conversations with other protocols, like the Pylon partnership. All these other
protocols are thinking, “How can we integrate these into our protocols?” It’s
going to be a fundamental building block of the money Lego of DeFi that is going
to be really exciting to see how it gets used.

54:21 • Hyperion
There’s tons of use cases, some of which we’ve touched on already. There’s
going to be so many more that we haven’t even thought of that emerge once
these protocols start trading and people start thinking about how they can use it.
This is something that isn’t available in TradFi because you’re not able to self-
custody your assets like this in TradFi. You don’t have a seat at the table with
your ISDA where you are able to trade these with investment banks. It really
democratizes everything and gives everyone custody and the opportunity to
isolate out what risks they want to take with these fundamental building blocks. I
know that’s a bit that might sound a bit wishy-washy, but that’s what I’m excited
about.

55:06 • Jose
That’s good. I’m way more excited after hearing you explain everything. The ways
that this can be used are really cool. I’m already thinking of a few with some of
the projects that we’re incubating. This is a massive market in TradFi, like you
said, right? You said it was 600 trillion or some silly number, but for some reason
it’s yet to take off in DeFi even on other chains like Ethereum. You’ve had Pendle
launch and that doesn’t really have any traction. APWine I don’t believe is
launched yet but… there’s a few others there. Why do you think they’ve failed to
achieve traction so far?
55:47 • Hyperion
I’ve looked a bit at those other protocols. Fundamentally, this is kind of coupon
stripping, which is something that happens in TradFi and that’s what we’re doing.
That’s what these other protocols look like they’re doing on ETH. The difference
for us is going to be that we’re doing proof of stake assets and perpetual
instruments. Maybe one of the things that users might have found hard is: when
you start with maturities and when you start with your underlying assets as DAI
and USDC, I think that in a bull market, people get less excited about splitting
yield on DAI or USDC in Yearn. People are excited about their own assets. People
are excited about which DeFi degen yield they want maximum exposure to.

56:44 • Hyperion
Nomenclature, i.e. the way these things are actually written down, they have
about 15 different letters in them and stuff like that, I think it becomes hard for
people. Even though it’s simple when you understand it, I think it’s hard for
people to understand. Also, I don’t think an initial focus on stablecoins in a bull
market resonates as much with people because it’s whether you want to lock in
an extra 2% yield or something like that. I have every faith that those protocols
will take off, and I have every faith that there’s going to be lots of other protocols
that spin up as well because it is such a huge market in traditional finance. In the
first instance, I think people are going to be really excited to take leveraged
exposure to price or yield of asset on a perpetual basis of assets that they really
like fundamentally, and they are just choosing which bit of the asset they like the
most.

57:42 • Hyperion
That’s potentially why there’s issues with traction. As an aside which maybe gets
a bit technical: if you are trading assets that have a fixed maturity, so say, for
example, I trade a one-year yield token… As I approach the end of that year, the
value of that yield token gets less and less because the right to receive that yield
gets less and less. That adds quite a lot of complexity into AMM design Because
one of the assets in the AMM, this yield token, is approaching zero value as it
goes to expiry which kind of guarantees impermanent loss. In turn, for a lot of
these protocols you need liquidity. Liquidity is everything. I think there’s a lot of
complexity for people in trading and in providing liquidity on some of these
bespoke AMMs that account for this decay in value of the assets.

58:50 • Hyperion
That can sometimes be a barrier to entry for some of the more normal users.
Hopefully, with perpetual instruments, that isn’t something we’re going to have.

58:59 • Jose
That all makes a lot of sense. It’s a case of choosing the wrong products to start
with because in a bull market no one really cares about an extra 2% yield on
stables, or maybe just a few people do. I think focusing on Layer1 assets makes
more sense. Also, focusing on the composability on top, like cheaper leverage to
LUNA and stuff like that. I agree that the nomenclature is a problem. That’s like an
Ethereum thing generally, right? Yearn started it with their “yvxUSD” or whatever it
was. We’re pretty in-the-weeds with that stuff, and even we struggle to
remember what all the assets mean. I think perpetual is the right way to start, for
sure. It’s easier for people to understand and you don’t have the time decay issue
with the AMM.

59:41 • Jose
This is really helpful to understand Prism and understand interest rate derivatives.
On a more philosophical level, interest rate derivatives really matter and in
TradFi because there are these central-backed interest rates that act as the
gravity by which all asset prices are measured. To an extent, we’re all dependent
on the decisions of the Fed and what they do there. Is there an equivalent in
crypto? Is there something like that to hedge in crypto? Do you think staking
yields for different chains will eventually be that for the chain or how are you
thinking about it?

01:00:16 • Hyperion
For me, it is a super interesting question. Something that I have quite a strong
view on (and maybe I’m a little bit biased) is that I think the decentralized finance
has to have a decentralized interest rate and the rate that people will use to
discount future cash flows, in my opinion, as the market matures, people will
realize that this has to be a decentralized rate. Like it or not, I think people are still
going to denominate their wealth in dollars, and dollars is going to be the key
currency. For me, the core components of the interest rate have to be that it has
to be the interest rate on a dollar stablecoin. To my mind, there is only one
battled tested dollar stablecoin out there at the moment.

01:01:09 • Hyperion
I think that is UST because I think anything where you don’t have custody of your
underlying dollars, like is the case with Tether or Circle of DAI, or where they’re
not as censorship-resistant, I don’t think can form the fundamental basis of the
DeFi risk-free curve. Decentralized finance has to have decentralized money
which will have the decentralized risk-free curve. The yield at the moment that
applies on that is the Anchor yield for UST which oscillates around 20 to 19.5
percent at the moment. When something is the risk-free rate, you have to talk
about something in it’s risk-minimized state. For me, when you’re talking about
risk-minimizing something, that means that you’re de-risking the underlying UST
even more. For me, you’re taking out peg insurance on that and you’re then
taking out smart contract insurance on that.

01:02:15 • Hyperion
For me, I think that the true DeFi risk-free rate is going to be the Anchor yield less
the cost of all the relevant insurances, i.e. the cost of peg insurance and the cost
of smart contract insurance. I think that currently gets you to somewhere around
15% which I believe is the risk-free rate. I think there’s Aave’s own insurance
launching on Anchor soon. There’s Mars Protocol which is going to provide an
interest rate for aUST. Fundamentally, I think that’s going to be the basis. “What is
the yield on aUST or UST and what is it in its most risk-minimized state that’s
available, which is after smart contract, pegging, etc.?” I realized I’m a bit biased
but those are my views on where it comes from.

01:03:03 • Jose
When you started off I thought you were going to say something like an index of
yield tokens of different Layer1 chains, but I guess that’s what Anchor is, in a
sense, right? The terminal rate will probably be like an Anchor rate of all the
different Layer1 yields, right? That’s basically what it’s doing which is interesting.

01:03:28 • Hyperion
As Layer1 assets mature and prices move up and yields come down, the Anchor
rate itself, because of market forces, will come down. At least for the foreseeable
future, I think that is going to be the key component of the DeFi risk-free rate.

01:03:50 • Jose
Is there anything you wanted to touch on in terms of… I know you’re planning on
potentially doing some sort of token launch event…anything you want to talk
about there or anywhere people can go find out more about that?

01:04:09 • Hyperion
We’ve started our audit now, so we’re hoping to go live in a matter of weeks. We
have been inspired by some of the launches that have happened on Solana
recently, and we want to try and do our best to make this as fair as possible.
We’re going to be using a method similar to Mango Markets with a couple of
small tweaks which hopefully benefit smaller users and allow for less
manipulation. We have published details of that, but we’re going to provide a
much more detailed roadmap about our launch. If people want to end up getting
hold of the tokens they have the option to do that. Or, once we’ve actually
launched, we’re going to do this partnership with Pylon Protocol where people
will be able to deposit their yLUNA tokens and farm Prism tokens doing that.

01:05:05 • Hyperion
Hopefully those are going to end up in some fair experiences for people and
avoid some manipulation. If anyone wants to catch up, we have a pretty active
Discord. We have Twitter. We try to be pretty engaged with people on that. We’re
always really interested to hear from what potential future members of the
community think or ideas they have. I really appreciate the opportunity to come
to the podcast. I’ve been listening for a long time now and really appreciate it. It’s
great to come on and talk about Prism.

01:05:42 • Jose
That’s awesome. We were inspired by the Mango Markets sale as well. We used
some concepts for that in some of the stuff we’re incubating and working with.
This was really helpful. I think this will help a lot of people understand not just
Prism but the potential for these underlying tokens and the composability that
they can enable in general. Really appreciate you coming on. Really appreciate
your time. And looking forward to moving all my LUNA perp exposure to pLUNA
instead.

01:06:18 • Hyperion
Thanks very much really. Appreciate it.

01:06:19 • Jose
Thanks very much.