Split the Yield, Share the Risk: Pricing, Hedging and Fixed rates in DeFi
The authors introduce yield tokenization, a mechanism that splits assets into principal and yield components to manage risk in DeFi. They develop a mathematical model using stochastic differential equations to price these tokens without arbitrage, allowing lenders and borrowers to hedge interest rate risks. The work also proposes automated market makers and a fixed-rate lending protocol for stable yield markets.