Happy Saturday, everyone! It's time for another edition of Lending, Simplified.
Previously, we covered the basics of Liquidations on Pike, and what you can expect as a borrower.
This week, we'll explore the meaning of Pike's pTokens!
Let's get started 🧵 👇
2/ Starting with a brief introduction; pTokens represent the share of your deposit into Pike based on a contract-enforced exchange rate.
pTokens are minted when you deposit, and they're burned when you withdraw.
If this model sounds familiar, then you might've heard of cTokens!
3/ cTokens, pioneered by @compoundfinance, are interest-bearing tokens which represent your position in the lending market. When withdrawing from the protocol, you will cash-in these cTokens for your deposit, in addition to any rewards you've earned while supplying liquidity.
4/ The difference between cTokens and pTokens is how they are issued.
cTokens are minted and burned by each cToken contract when you enter or withdraw from Compound.
However, pTokens are minted and burned by Pike's Hub contract on Base, and they're held in your Base account.
5/ But how do you earn rewards on pTokens?
As the protocol captures revenue from the borrower fees, the rate-of-exchange will rise, raising the value of the pToken.
Here's an example:
6/ Let's assume you put deposited 100 USDC on Base, and the redemption rate of the USDC pToken is 0.02. You would receive 5000 bpUSDC for that deposit.
100 / 0.02 = 5000
Over time, the redemption rate is expected to increase, raising the value of your deposit position.
7/ Now, imagine the redemption rate has increased to 0.025, and you still have 5000 bpUSDC.
If you choose to withdraw at this time, you would cash-in 5000 bpUSDC for 125 USDC, earning $25 in rewards for supplying into Pike.
5000 * 0.025 = 125
8/ This redemption rate allows DeFi strategies to be built on top of or performed with pTokens, such as arbitrage.
After all - a pToken is just an ERC20 token, and can be freely sent to anyone or used in DeFi applications like liquidity pools.
9/ However, if you choose to send your pToken to another wallet or protocol, you are transferring the ownership of your deposit position.
This can have serious implications on your health factor if you have open loans, so be cautious when sending any pTokens!
10/ Fortunately, there is one protection offered by the pToken model: if you try to send your pToken, and doing so would put your account into a possible liquidation state - the send will fail.
11/ This protection is inherited from the cToken model, and is designed to prevent instant and forced liquidations of a portfolio.
It can be a devastating mistake, so you should always verify your balances when sending pTokens.
We hope you enjoyed this latest episode of Lending, Simplified.
Our goal is to empower all users to feel comfortable lending - no matter the size of their portfolio or the skill they may have.
If you want to learn more about pTokens, visit our docs!
