Pay Token

The pay token is the cryptocurrency that investors use to purchase Liquidity Notes. It is often a widely accepted or stable cryptocurrency, such as ETH, USDT, USDC.

Investor Contribution: Investors provide the pay token when buying Liquidity Notes.

Liquidity Pair Formation: The pay token forms the other half of the liquidity pair in the liquidity pool alongside the underlying token.

Investment Denomination:The amount invested is denominated in the pay token.

Return Calculation: Returns and yields are often calculated based on the value of the pay token invested.

Considerations for Choosing the Pay Token in a Liquidity Note

Selecting the appropriate pay token is a fundamental decision when configuring a Liquidity Note. The pay token is the cryptocurrency that investors use to purchase Liquidity Notes, and its choice significantly impacts the note’s performance, risk profile, and overall attractiveness to investors. This section outlines the key considerations for choosing between Ethereum (ETH) and various stablecoins, as well as factors to consider when selecting a specific stablecoin.

Key Considerations

1. Volatility and Risk Profile

   • Ethereum (ETH)

     • Characteristics: ETH is a highly volatile cryptocurrency with significant price fluctuations.

     • Impact on Liquidity Notes: Using ETH as the pay token introduces higher risk and potential reward dynamics. The volatility can affect the stability of returns and the effectiveness of downside protection mechanisms.

   • Stablecoins

     • Characteristics: Stablecoins are designed to maintain a stable value, typically pegged to a fiat currency like the US Dollar (USD).

     • Impact on Liquidity Notes: Utilizing stablecoins reduces volatility, providing more predictable and stable returns. This stability enhances the reliability of downside protection and yield distribution.

2. Stability and Predictability

   • ETH

     • Pros: Potential for higher returns during bullish market conditions due to price appreciation.

     • Cons: Price volatility can lead to unpredictable returns and increased risk of losses, which may complicate the implementation of downside protection features.

   • Stablecoins

     • Pros: Provide consistent and predictable value, making it easier to calculate and distribute yields and manage downside protection.

     • Cons: Limited potential for price appreciation compared to volatile assets like ETH, which may result in lower upside potential for investors.

3. Regulatory Compliance and Trustworthiness

   • ETH

     • Regulatory Status: Generally considered a decentralized asset with a relatively clear regulatory status, though subject to changes based on jurisdiction-specific regulations.

     • Trustworthiness: Highly regarded within the cryptocurrency community for its security and decentralized nature.

   • Stablecoins

     • Regulatory Status: Varies significantly among different stablecoins. Some, like USDC, are fully regulated and audited, while others may face regulatory scrutiny or lack transparency.

     • Trustworthiness: Choose stablecoins with strong backing, regular audits, and transparent governance to ensure investor confidence and regulatory compliance.

4. User Preferences and Accessibility

   • ETH

     • Pros: Preferred by investors seeking exposure to a leading cryptocurrency with high growth potential.

     • Cons: Less attractive to risk-averse investors due to its volatility.

   • Stablecoins

     • Pros: More appealing to conservative investors looking for stability and predictable returns.

     • Cons: May not attract investors seeking high-growth opportunities inherent to volatile assets like ETH.