Yield Stripping

Yield stripping is a financial strategy where the interest-bearing component of an asset is separated from the principal investment. In the context of decentralized finance, this involves creating two distinct tokens from a single yield-bearing asset: one representing the right to the principal and another representing the right to the accrued interest over a specific period.

This allows investors to trade the yield separately from the underlying asset, catering to different risk profiles. Those who purchase the yield token are essentially betting on the interest rate, while those who hold the principal token are protected from interest rate volatility.

This process increases the granularity of financial products available in the digital asset space. It requires robust smart contract architecture to ensure that the separation and eventual reconciliation of principal and yield are handled accurately.