To lend, you first access the "Lend" tab in the Yield v2 App. Read our Quick Start Guide for instructions.
When you lend in Yield, you are buying future cash payments at a discount. These future cash payments are represented by tokens that we call “fyTokens”. A fyToken is a token that can be redeemed one-for-one for a base asset on some future date. FyTokens don’t pay interest themselves, rather the interest is determined by the difference between the face value of the token and the price you pay for it.
The fixed interest rate you receive when lending is determined by a built-in automated market, and the more you lend, the lower your interest rate may be.
To lend at a fixed rate, you simply buy fyTokens at a discount to their face value. The discount you receive is equivalent to locking in a fixed return that can be calculated based on the time until a fyToken can be redeemed.
For example, if on September 31, 2021, you buy 100 fyDai that matures in December 2021 for 98.8 Dai you will earn an implied rate of interest of 5% APR.
fyTokens can be held until the maturity date, upon which they may be redeemed for principal plus interest.
You can also exit your lending position early by selling your fyToken for an underlying asset. Because fyTokens are traded freely, changes in interest rates may affect the amount of underlying assets you receive when redeeming early.
To compensate lenders who do not redeem fyTokens right away, after maturity they begin earning interest in the form of an increasing redemption rate.
If you own fyDai after maturity, you may be paid interest after maturity. Currently, you will start to earn the Compound Dai Lending rate on your fyDai, until you decide to redeem it for Dai. Other fyTokens (such as fyFRAX) do not pay interest.
Interest paid on mature fyTokens may be necessary to encourage users to lend on the protocol and to not immediately redeem at maturity. However, since borrowers can pay back after maturity, it is possible for fyTokens to exist that are not backed by a loan. Because the protocol does not automatically re-lend funds deposited to pay off previous loans, the protocol can lose money over time. However, because the interest on fyTokens is earned over time, only after maturity, and only results in losses if there is an imbalance in redemptions versus repayments, it is not currently expected to result in significant losses. Furthermore, any losses can be mitigated by turning off interest paid on mature fyTokens or by adding fees when loans are created.