The content is divided into the following sections:

1. Just 2 minutes of history, we promise.

2. The Uniswap<>Spectra analogy explained

3. Benefits for pool creators, end users, and a project's community as a whole

4. Setting up a pool [step by step]

5. Understanding APY breakdowns

6. What are my earnings, and where do I claim them?

7. Extra Notes

8. What's coming in Part II

1. Just 2 minutes of history, we promise.

Remember what Uniswap did for DeFi? It allowed anyone to create a pool permissionlessly, sparking a Cambrian explosion of projects releasing their ERC-20 tokens for everyone to trade.

To date, token trading is DeFi's main activity.

Token innovation did not stop there. Crypto projects expanded to offer services like lending and staking, allowing ERC-20 token holders to earn yield.

This gave rise to interest-bearing tokens (iBTs).

For example, depositing USDC in a lending protocol such as Aave returns aUSDC, a token representing the initial deposit and the entitlement to future yield.

Today, there are more than 11,000 yield-generating strategies across DeFi, each with its own interest-bearing token (iBT), acting as a receipt/proof of funds and entitlement to yield.

The most common concern for iBT holders is exposure to interest rate volatility.

You might earn 15% on USDC one day, only to see it drop to 7% a week later. Rate volatility makes financial planning in DeFi difficult.

Spectra addresses that problem, and here's how:

2. The Uniswap<>Spectra analogy explained

Uniswap revolutionized ERC-20 token trading. Spectra aims to do the same for ERC-4626 tokens, representing interest-bearing tokens from major protocols like Aave, Morpho, Yearn, and Balancer.

Spectra lets anyone create a pool for any ERC-4626 token, enabling users to exchange floating interest rates for fixed interest rates and vice versa.

Without going too technical, Spectra creates yield derivatives called Yield Tokens (YTs) and Principal Tokens (PTs) on top of interest-bearing tokens. See the simplified explanation below:

In short, Yield Tokens offer exposure to interest rate volatility, while Principal Tokens offer fixed rate capabilities.

These financial activities would not be possible with a standalone interest-bearing token.

3. Pool benefits for liquidity providers, end-users, and a project's community as a whole

Now, let's break down the benefits for different market players:

Pool creators/liquidity providers

• Earn pool fees on yield swaps

• Maintain exposure to the yield of their iBT

• Can earn Spectra's native APW incentives

• Can benefit from incentives provided by third parties

In summary, interest-bearing token holders have the opportunity to increase their earnings, as opposed to passively holding them in their wallets.

End-users

• Can trade yield akin to price trading

• Can hedge from APY volatility

• Can purchase their favorite crypto at a discount (Principal Tokens design is akin to zero-coupon, offering a fixed value at maturity)

• Can join as a liquidity provider to existing pools

Project's communities

• Can unlock new financial tools on top of their existing vaults: fixed rates and yield trading, which can be further abstracted into following narratives, such as discounted tokens or fixed savings

• The enhanced Spectra pool APYs generally exceed those of a standalone interest-bearing token, making Spectra an exciting venue to source new liquidity

• Can integrate Spectra's technology into their products, allowing users to, e.g., fix interest rates directly in their app and charge an extra service fee for it

4. Setting up a pool

To get started, head over to the Spectra App -> Pools page.

-> https://app.spectra.finance/pools

You will see the [Create Pool] button in the top area.

A compatible interest-bearing token following the ERC-4626 standard is the primary ingredient for starting a pool.

ERC-4626 is a popular vault standard adopted by many projects such as Aave, Balancer, Frax Finance, Yearn, Morpho, Maker, or Ethena.

See https://tvl.erc4626.info/ for a comprehensive list.

How do I know if my interest-bearing token is ERC-4626 compatible?

The easiest way to find that out is by clicking on [Select IBT] to be presented with the following token selector view:

Here, by default, Spectra displays a few ERC-4626 compatible tokens. If you don't see yours on the list (you don't have to have it in your wallet to check ERC4626 compatibility), get the iBTs address from, e.g., Etherscan and paste it into the search field:

If a result appears, your iBT adheres to the ERC-4626 standard, and you can proceed.

Next, you need to set the maturity date and initial implied APY.

Maturity sets the expiration date for yield derivatives. Depending on the pool creator's needs, it can range from 2 days to decades.

The starting date is pre-defined and cannot be changed.

The 3-4 month period is a great choice for those who are just getting their feet wet with Spectra.

Setting a pool maturity doesn't mean your iBTs will be locked until then. It just sets the expiry/maturity date for yield derivatives.

On that note, we'd like to point out that 'expiry' is more commonly used for all things related to Yield Tokens and yield trading, while' maturity' is a more commonly used term when discussing Principal Tokens and fixed rates.

Initial implied APY

To set this value, check the original platform of your interest-bearing token for APY details. Most platforms, like Aave or Harvest Finance, provide APY breakdowns that can be used as a reference.

Example from Aave's market details page:

Example from Harvest Finance farm's details page:

The Initial Implied APY is the discount rate applied to the Principal Token on day one. For example, setting a 10% Initial Implied APY means the pool's PTs are priced with a discount that reflects this annualized APY.

As of July 2024, Spectra is DeFi's only platform allowing permissionless pool creation for yield derivatives.

Thus, most users setting up a pool for the first time for a given iBT will find no clear reference elsewhere. That's why, to set this value, we recommend looking up the historical average APY of a given iBT.

If a platform does not offer historical APY data, an independent source, such as DeFillama's yield page, can be of help.

If an iBT has little to no historical average APY available, the live APY can be used to set the Initial Implied APY.

Lastly, there's a Pool Fee parameter, which is pre-set by the Spectra App.

The Spectra App automatically adjusts the Pool Fee parameter to ensure an efficient trading environment from the start. This fee goes to liquidity providers and can be subject to underlying AMM protocol fees, such as Curve's AMM 0.005% DAO fee.

Once you have the maturity date and initial implied APY, here's what the setup might look like using sUSDT iBT:

The pool creator receives an LP token composed of iBT and Principal Token. Yield Tokens also result from the yield tokenization process; however, they are not a part of the pool composition.

LP token holders remain entitled to fees from Yield Token (YT) swaps as they are driven by flash swaps utilizing the PT<>iBT pool.

Note: Selling yield tokens (YTs) immediately after creating the pool is not advised. During the yield tokenization process, YTs are issued to the creator's wallet. Since liquidity often comes from the same person who then tries to sell the YTs, this can imbalance the pool's liquidity and undermine its stability.

After creating a pool, you can preview its existence on the Spectra App's Pools page.

To quickly find your pool, check the Tokens in my wallet box or search for its name.

You will find LP Tokens on the Portfolio page under the Liquidity tab.

5. Understanding APY Breakdowns

Whether you're the pool creator or joining an existing pool, the best way to preview the yield source is to hover your mouse over the Pool's APY on the Pool's page.

Typically, one of the following breakdown types will appear:

A. New Pool APY Breakdown

This is a typical APY breakdown for a newly created pool, comprising only iBT yield and PT's fixed rate. The LP Fees show 0% because this pool has not facilitated swaps, while LP Rewards show 0% because APW incentives have not been streamed to it yet.

Spectra may display a different iBT APY than the issuing platform (e.g., Aave) or a yield tracker (Defillama).

This discrepancy occurs primarily because of the difference in the range of historical data used for APY computation.

B. Early Stage Liquidity Pool Breakdown

Besides the standard PT and iBT yield, this breakdown displays fees from facilitated swaps and APW incentives. As we can observe, while swaps have occurred within the pool, they contribute little to the overall APY and are displayed as <0.01%. APW incentives are the main APY driver.

This APY breakdown is common in the early stages of a liquidity pool, where incentivizing liquidity is essential to overcome the 'cold start' problem and facilitate significant swap volumes. During this phase, incentives make up most of the displayed APY, while swap fees typically remain low.

C. Underlying Platform Incentives Breakdown

In this case, in addition to the yield streams outlined in A and B, underlying platforms issue incentives to iBT holders. These incentives are typically issued for a certain period and claimable at the end of it.

Typically, if you see additional tokens underneath iBT in Pool APY breakdown, it results from manual integration. Pool creators and liquidity providers should monitor announcements from the underlying platforms to understand when these incentives will be distributed.

Note that even if the underlying platform issues the incentives to iBT holders, the Spectra team might need additional time to relay and make them claimable within the Spectra App.

D. Points Programs Breakdown

In addition to the yield streams outlined in A and B, iBT holders might be entitled to various points programs. Points programs are manual integrations and do not contribute to the displayed APY.

6. What are my earnings, and where do I claim them?

Several yield sources can contribute to the pool's overall APY. Here's a detailed explanation of where each is reflected in the Spectra App and how to claim them.

LP Token Overview (iBT + PT Fixed Rate + LP Fees)

The LP Token you receive from pool creation contains interest-bearing tokens (iBT) and their corresponding Principal Tokens (PT).

When a swap occurs within the pool, a fee is charged and distributed proportionally among all LP token holders, increasing the value of their tokens.

The $ value of the LP token, which includes swap fees, can be found under the Balance column in your Portfolio.

Stablecoin Pools:

• Value increases from swap fees are most apparent in stablecoin pools.

Volatile Asset Pools:

• In pools with volatile assets (e.g., aWBTC and PT-aWBTC), the Balance column reflects both the increased value from swaps and the underlying asset's price fluctuations.

APW & Other Rewards

Rewards issued to LP Token holders, such as APW or third-party incentives, can be claimed by clicking the Manage button -> Claim Rewards.

This action opens a drawer displaying rewards for this particular LP Token:

To preview rewards for all your LP Token positions or those you are still entitled to after winding down the LP Token, click the See Rewards button on the Portfolio page.

Note: If Claimable Rewards show a different $USD value than the Rewards column, it means you have already claimed a portion of the accrued rewards. The Claimable Rewards $USD value displays only what's left or yet to be claimed.

Points

Spectra App offers a dedicated Points page where pool creators and liquidity providers can check the status of their LP Token and respective points allocation. Links to underlying platforms for previewing allocations are also available.

Points are manually integrated with underlying projects, which can cause delays in the Spectra UI reflecting the most current data on that page.

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In the next guide, we'll discuss how to participate in gauges and share tips on promoting your pool.

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Extra Notes

• Interest-bearing tokens can have short and elegant names, such as aUSDC, while some may represent a complex yield strategy with a far more complex one, such as LQIDETHFIV1 or auraB-rETH-STABLE-vault

• Most iBTs do not have a token icon, so Spectra displays a default grey icon. If your iBT has an icon that Spectra doesn't detect, please reach out to us on Discord, and we will implement it.

• After you create a pool, when someone else joins the pool with more funds, your percentage ownership decreases as new LP tokens are issued to the new provider. Still, your absolute share of the pool’s total value remains proportional to your initial contribution.

• Impermanent loss inside Spectra pools is negligible due to the following factors:

  1. PTs are redeemable for one underlying value at maturity (unless there is a negative yield)

  2. IBTs increase in underlying value within the pool

  3. PT and IBT values are highly correlated

• When providing liquidity to Spectra pools, there's no time lock

About Spectra

Spectra is a permissionless protocol for interest rate derivatives. Anyone can create new markets at will, swap yield derivatives, or become a liquidity provider.

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