🧮Exchange Rates
Learn more about the exchange rate between vault tokens and liquidity assets (eg. stablecoins)
Vault Token Exchange Rate
Vault Tokens and the Liquidity Asset (e.g. USDC, USDT) are exchanged during investments and withdrawals at a defined exchange rate. This exchange rate translates interest accrued / gains / losses into an on-chain value.
Simple Example:
On Day 1, the exchange rate between the Vault Token and USDC is 1.00.
You invest 1.00 USDC and receive 1.00 Vault Token.
The vault has an interest rate of 5% APY for 365 days.
On Day 366, the exchange rate will be 1.05
This means you can redeem 1 Vault Token for 1.05 USDC; 1.00 USDC being your original principal, and 0.05 USDC being your accrued interest.
Exchange Rate Methods
Vaults have multiple different exchange rate calculation methods which correspond to the type of yield product the vault is supporting.
Compounding
A variable annualised interest rate is converted into a daily exchange rate and compounded each day. This mirrors the exchange rate mechanism for the Flexible Term USDC (and EURC) Vaults.
It is designed to support flexible term loan products pegged to a variable benchmark rate or index rate such as SOFR.
It is calculated by taking the Loan Fee Rate for that day, calculating the Daily Interest Rate by taking 1 day of interest (compounded daily), and adding it to the prior days exchange rate.
Dynamic
The exchange rate rises and falls according to the price of the underlying collateral or benchmark.
This method is used in the High Yield Corporate Bond Vault, where the exchange rate will track the daily gains and losses of the underlying Blackrock SHYG ETF share collateral.
The calculation for a dynamic exchange rate is as follows:
Exchange Rate = [ (Total Number of Collateral Shares / Units ) x ( Collateral Share / Unit Price) ] + (Cash) ]-(Daily Fees) / Total Tokens Outstanding
Linear
A variable annualised interest rate that is not compounded. The annualised interest rate is converted into a rate which increases linearly each day.
It is designed to support products that maintain a fixed interest rate where principal and interest does not compound daily.
Term
A fixed annualised interest rate for fixed term loan products. The fixed annualised interest rate is converted into a rate which increases linearly each day until the maturity date.
It is designed to support products that maintain a fixed interest rate where principal and interest does not compound daily and there is specific maturity date where principal and interest are due to be repaid. This mirrors the exchange rate method currently used in our V4 Fixed Term Vaults
For Fixed Term Vaults, the exchange rate is calculated as:
Value of Principal and Interest at Maturity / Outstanding Vault Tokens
The exchange rate is updated at the beginning of each loan cycle based on the Loan Principal Amount and the Confirmed Loan Fee Rate.
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