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PRISM: Liquidation-Free Collateralized Lending and Derivates


PRISM is a derivatives protocol on Terra that introduces a novel DeFi primitive which enables users to permissionlessly borrow against their collateral without liquidation risk. This is achieved by separating deposited collateral into separate yield and principal components. So users effectively sell their future yield for a specific period of time and borrow against it. The end result is that users gain access to liquidity by borrowing against their assets, but without risk of liquidation, enabling improved capital efficiency and better risk management.


A prevailing theme in DeFi is capital efficiency and optimizing the way in which users can access and further utilize their digital assets. One of the more promising, and popular, approaches is collateralized lending. Many protocols in the space have developed different iterations around this primitive as well as undercollateralized and uncollateralized loans. A key shortcoming, however, is that these approaches also come with significant risk, namely that users can be quickly liquidated as the market dips. This is especially problematic given the volatile nature of the crypto market.

PRISM has developed a novel DeFi primitive that transforms a risky collateralized loan into a self-repaying loan that has no liquidation risk. This is done by separating a user’s collateral into two distinct components, namely a principal portion and a yield portion. So users sell their future yield for a specific period of time, which effectively enables them to borrow against that future yield. This approach entails no liquidation risk and also allows users to maintain liquidity through a derivative of their asset that can be free traded or deployed elsewhere. Overall, this mechanism operates similar to interest rate and currency derivatives markets in TradFi, in which users  can guarantee their returns by swapping variable yields into fixed yields or swapping future payments in one currency into another currency of their choice.

As a result, users can access liquidity by leveraging their future yield. The user’s deposited collateral remains locked while it generates yield that goes towards loan repayment. Meanwhile the user can deploy this capital elsewhere. Once sufficient yield has been generated to fully repay the loan, the user can retrieve their collateral. This approach eliminates the risk of liquidation and creates an essentially risk-free opportunity for the user. The only cost the user pays is the opportunity cost of keeping their assets locked while their loan is repaid. Ultimately this allows for highly customizable strategies in DeFi. 

How it Works: Deeper Dive

Users can deposit their digital assets into PRISM as collateral and begin borrowing against them. These assets are yield-generating and this helps power the protocol. PRISM splits the collateral into a Yield Token (YT) and a Principal Token (PT). This enables users to to isolate the exact risks they wish to speculate on or protect against.

Beyond enabling collateralized lending, PRISM creates more composability by enabling users to trade an asset’s yield and principal components on the open market and to optimize strategies for their individual needs. PRISM’s approach to creating YT and PT derivative tokens opens up a new marketplace that gives users even more flexibility and opportunity. For instance, users can swap variable-rate yields to fixed-rate yields, gain leveraged exposure to an asset’s price or yield, convert their future yield instantly into a stablecoin to manage their exposure to crypto volatility. In addition, users still receive all staking rewards and airdrops associated with their digital assets while they’re being used as collateral all while being able to trade these assets instantly or deploy them elsewhere. 

Overall there are four primary agents that operate within the PRISM protocol. Namely, Collateral Providers, RIsk Buyers, $PRISM stakers, and Liquidity Providers (LPs). Collateral Providers are users that deposit assets on PRISM. These assets are then stored in a PRISM vault, and Collateral Providers receive a $CT token in return, which is immediately converted into a $PT and $YT. Risk Buyers are users that utilize PRISM’s AMM to purchase $PT and $YT on the secondary market. $PRISM stakers stake their tokens to participate in governance and receive protocol fees. Finally, LPs stake token pairs on PRISM’s different liquidity pools and receive a portion of the transaction fees generated by the pool.

Once the user has their $PT and $YT tokens, they have a variety of options. $YT can be staked in PRISM to earn PRISM-specific rewards while enabling the user to continue earning the token’s native staking fees along with any airdrops related to the token. $PT can be staked to enable users to participate in protocol governance. Moreover, $PT and $YT can be added to PRISMs AMM liquidity pool and users can earn liquidity incentives and trading fees. $PT and $YT can also be sold on the AMM (e.g.  users can sell $PT to reduce their risk exposure to only the yield component of the token or sell their $YT to receive a fixed amount). Once the term expires, $PT can be burned to receive $CT.

Mechanism Design and Tokenomics

$PRISM is the native token of the protocol and is used for governance and utility. Token holders can stake $PRISM to receive $xPRISM in return. $xPRISM then enables users to participate in governance voting and proposal submission. Governance on PRISM is limited, and participants can decide liquidity mining incentives, treasury management, and new assets to be added to the protocol. In addition,  $xPRISM entitles users to receive a portion of protocol fees. These fees are generated through transactions on the protocol, the aggregate yield generated by $YT provision, the staking rewards and airdrops from $YTs, fees from swaps performed on the PRISM AMM, as well as limit orders. 

The fees are structured as follows:

  1. 10% of the yield of yASSETs bonded in PRISM
  2. 100% of the yield of unbonded assets (e.g. yLUNA tokens that are being used to provide liquidity)
  3. 0.1% of the value of all swaps generated in PRISM Swap
  4. 0.3% of the value of all limit orders successfully executed in PRISM

Overall, there are 1,000,000,000 tokens and are distributed in the following manner: 

  1. 20% PRISM Treasury
  2. 7% PRISM Forge – TGE
  3. 13% yLUNA Farming Event
  4. 30% Core Contributors and Service Providers
  5. 10% Strategic Partners, Advisors and Collaborators
  6. 20% Community Fund and Liquidity Incentives

Contributor and partner allocations have a vesting period between 6 and 24 months. So approximately 40% of the total supply is locked for at least 6 months. 

Macro View

Currently $PRISM daily volume is approximately $4.7M, with nearly 80% of this volume occurring on Astroport.

Screen Shot 2022 05 06 at 5 44 11 PM

PRISM has now amassed $485M in TVL, making it the 6th largest protocol on Terra and 56th overall in terms of TVL.

Screen Shot 2022 05 06 at 5 50 19 PM

Activity on PRISM has trended downward over the course of the last month, with peak activity occurring in mid-April.

Screen Shot 2022 05 06 at 5 55 32 PM

One concern is that $PRISM is generally limited to Terra-native exchanges. In order to potentially increase liquidity is to further increase exchange listings, particularly those beyond the Terra ecosystem. This will help facilitate more composability throughout the larger DeFi space, rather than confine it to one subsection. It will also help the protocol continue to grow in terms of its TVL. Overall, a concerted effort to add more interest-bearing tokens (e.g. $ETH, $SOL, $DOT) will enable PRISM to expand its user base and ultimately generate more fees to token holders that stake.

Further Reading and Sources

Cryptofunds, market makers, and trading desks can interact with these DeFi protocols with MetaMask Institutional

MetaMask Institutional offers unrivalled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance. We enable funds to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.

Found this research useful? Connect with the ConsenSys Cryptoeconomic Research team at [email protected]

ConsenSys Software Inc. is not a registered or licensed advisor or broker. This report is for general informational purposes only. It does not constitute or contain any individual investment advice and is made without any regard to the recipient’s objectives, financial situation, or means. It is not an offer to buy or sell, or a solicitation of any offer to buy, any token or other investment, nor is it intended to be used for marketing purposes to anyone in any jurisdiction. ConsenSys does not intend for any person or entity to rely on any facts, opinions, or ideas, and any financial or economic commentary expressed in this report may not be relied upon. ConsenSys makes no representations as to the accuracy, completeness, or timeliness of the information or opinions in this report and, along with its employees, does not assume any responsibility for any loss to any person or entity that may result from any act or omission based upon this report. This report is subject to correction, completion, and amendment without notice; however, ConsenSys has no obligation to do so.

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