Introduction and Design
Timeless is a brand new experimental new defi protocol.
Timeless is a protocol that allows users to speculate on tokenized interest rates in either direction.
Timeless does this by offering a yield token that differs from current yield tokens (Element/Pendle/APWine) in that Timeless’ yield tokens will never expire, allowing holders to collect yield on underlying assets infinitely. These are called Perpetual Yield Tokens, or PYT for short.
In order to access these PYTs, users must deposit their interest bearing collateral to a Timeless Vault. For each 1 of the underlying asset, the user receives a PYT and something called a NYT in return. In order to get their interest bearing collateral back, the user must return their PYT and a NYT back into the Timeless vault. As a result, the price of one PYT and one NYT should theoretically always equal the underlying asset.
Now you might be wondering what a NYT is, and here’s the answer: it’s a Negative Yield Token. The name is a little bit misleading, but I’ll do my best to explain what these NYTs are.
When you deposit your interest bearing collateral and mint a PYT and a NYT, what happens is that Timeless gives the PYT all of the future yield of your collateral to the PYT, and none of it to the NYT. This essentially means that a PYT is levered 2x, since it gets the extra multiple of yield from the NYT. But because you need the one PYT and one NYT to get your collateral back later, a relationship is formed between the two asset’s prices- PYTs and NYTs have their price directly tied together. This elegant splitting mechanism makes Timeless capital efficient, as the full value of the underlying token is used to create a PYT and NYT, leaving no idle capital.
Thus, assuming yield is positive, the following is true:
1 PYT + 1 NYT = 1 Underlying Asset
PYTs can approach 1, but never reach 1, as long as the Underlying Asset has a value greater than 0, due to the need to redeem.
The inverse is true as well: NYTs can approach 0, but never reach 0, assuming yields are positive, as long as the Underlying Asset has a value greater than 0, due to the need to redeem.
Additionally, if the amount of interest the underlying asset earns increases, then naturally the price of the PYT goes up as the extra yield increases the value of the PYT. And because 1 PYT + 1 NYT = Underlying Asset, the NYT goes down in price as the PYT goes up. The inverse is true as well, if interest rates go down on the underlying asset, then the PYT is worth less, which makes the NYT worth more.
It’s worth nothing that this relationship does not necessarily make the price of PYT and NYTs so that when one goes up, the other goes down. The above example assumes that the only thing changing is the yield, and not the price of the underlying asset. If the underlying asset goes up in price, then PYTs and NYTs will both go up as well.
This is reinforced by outside arbitrage, as people can buy cheap PYTs and NYTs on the open market and redeem for the underlying asset if is profitable to do so. This buying pressure will drive the price of PYTs and NYTs up until it is no longer profitable to do so, which theoretically should be when the price of PYTs and NYTs equal the price of the underlying asset.
Similar things occur in the opposite scenario. When the price of the underlying asset drops, then it is profitable to deposit the underlying asset into the Timeless vault to redeem for overpriced PYTs and NYTs, and sell those on the open market. This sell pressure will bring PYTs and NYTs back to fair value.
How exactly should we value PYTs and NYTs? The Timeless whitepaper mentions something called exponential discounting, which essentially means that money in the future is worth less than money in the present because we can do things with our money to earn more in the present vs waiting for the future money to come into existence. This makes sense, and I’ll provide a quick example why. If I offered you the option between $100 today and $100 in a month, which would you take?
Thus, in my opinion, the market will ultimately be the one pricing PYTs and NYTs, as people collectively vote with their buys and sells how much future money in the form of a PYT is worth to them.
Timeless is also extremely flexible. One current flaw in current similar token products is that they have expiration dates, which create limitations in how they can be priced and used. Because Timeless yield tokens don’t expire, you can integrate them much more easily into other protocols. Imagine being able to deposit PYTs as collateral, continue collecting yield on PYTs, and then borrowing against deposited PYTs to buy more PYTs to repeat the process with, effectively creating a folded PYT yield farm- all without worrying about the underlying token expiring.
Usage
Now, how can Timeless be used?
The simplest way to use Timeless is to obtain PYTs of interest bearing tokens you like. For example, if we could buy PYTs of the 3pool LP token, and this would earn us 2x the yield compared to the regular 3pool LP token. Alternatively, we could deposit 3pool LP tokens to Timeless, mint PYTs and NYTs, sell your received NYTs to buy more PYTs, and then collect even more yield.
NYTs offer an interesting hedge on interest rates for users. For example, defi farmers can buy the NYT of the token they’re farming as a hedge against drops in yield. Another interesting hedge is that lenders to protocols like Aave can use NYT to hedge against falling lending rates.
Personally, I believe the killer use case for Timeless is for good stablecoins and related products (ex. stablecoin LPs). Because stablecoins do not move much in price, all changes in the price of associated PYTs and NYTs can be attributed to changes in interest rates and not underlying asset price fluctuations. This is pretty important because 1 PYT +1 NYT = 1 Underlying Asset, which means if the Underlying Asset fluctuates down to 0, the PYT and NYT do too. But, if your stablecoin is good then it will never break peg and your PYT and NYT will always have value. A good stablecoin creates a solid foundation that Timeless users can speculate safely on.
This speculation is key: I believe with enough liquidity, Timeless can become the newest crypto pvp battleground.
Disclaimer: Timeless is a very experimental protocol. I would not consider this a “safe investment” by any means, and this post is purely for educational purposes and is not in any way financial advice. I am a seed round investor.