In today’s fast-evolving DeFi and stablecoin markets, investors are increasingly seeking yield solutions that balance attractive returns with strong risk management and token utility. While many Liquid Yield Tokens (LYTs) offer high APYs, they often lack sustainable yield sources, strong risk management or enduring forms of utility beyond passively holding to earn yield.

SIERRA uniquely addresses these trade-offs by blending Real-World Assets (RWAs) with proven DeFi yield sources, creating a single token that delivers sustainable, risk-adjusted returns that supports deep utility across CeFi and DeFi while not compromising on sound risk management.

In this article, we will address what SIERRA is and how it differentiates itself from other LYTs. 

What is SIERRA?

SIERRA is an ERC-20 token issued natively on the Avalanche blockchain. Unlike other governance, gas or utility tokens, all SIERRA tokens are backed by a portfolio of USDC-denominated reserves that passively accrue yield from investments in both RWAs and DeFi yield sources. The net yield for SIERRA is the weighted-average rate of all of the different yield sources where the reserves are deployed.    

SIERRA is primarily designed to enable users to passively earn sustainable, risk-adjusted yields significantly above the money market rate. It is also designed for seamless integration with leading borrow/lend markets, decentralized exchanges, centralized exchanges, and fintech apps, aiming to provide best-in-class utility across all LYTs.

These partnerships will enable users to buy and sell it with deep liquidity and minimal slippage, borrow or lend against it, post it as trading collateral on derivatives platforms and passively accrue yield while using it in other consumer applications across CeFi and DeFi.

How do LYTs Generate Yield?

SIERRA accrues yield through its reserves portfolio, which generates returns from investments in both real-world financial assets (RWAs) and DeFi lending. The net yield for SIERRA is the blended rate of all of the different assets in the backing reserves.    

There is a spectrum of yield sources that generate yield for all LYTs, which have various risk and return trade-offs. At a high level, the main forms of sustainable yield sources are:

Real-World Assets (RWA)

• Treasury Bills: Short-term government securities that provide the baseline risk-free rate of return.

• Corporate Bonds and other Fixed Income Securities: These are typically issued by public companies and provide higher yield in exchange for more credit, duration and liquidity risk.

DeFi

• Overcollateralized Lending: Borrowers take loans but must lock up more assets than they borrow. If those assets lose too much value, they are sold to make sure lenders get paid back.

• Perpetual Futures Basis: A strategy that earns from funding payments in futures markets. By holding opposite positions, investors stay market-neutral while collecting steady income.

• Under/Uncollateralized Lending: Loans made to vetted institutions without requiring extra collateral. Instead, credit checks and legal processes are used if borrowers fail to repay.

• Principal Tokens (PTs): Similar to zero-coupon bonds where they are purchased at a discount and redeemed at face value when they mature, with the difference being the yield earned.

• Market-Making Vaults: Pools of capital managed by trading strategies that earn from profits, fees, funding payments, and liquidations. Even though they carry some risk, they can provide strong returns.

How does SIERRA differ from other LYTs?

Each LYT differs along three main dimensions, including their choice of reserves management, user experience as an LYT holder and available utility for the LYT across CeFi and DeFi. 

Most LYTs have a singular focus for their choice of reserves management. For example, Ethena’s sUSDe and Resolv’s wsUSR and RLP tokens all primarily generate yield for holders via perpetual futures basis strategies. Maple Finance’s syrupUSDC primarily passes along yield generated via overcollateralized loans to institutional borrowers.

In contrast, SIERRA is the only LYT with a flexible reserve management strategy that includes all major forms of sustainable yield sources. Additionally, SIERRA’s reserves can be reallocated daily to different yield sources in response to changing market conditions. As new yield sources emerge, SIERRA can flexibly incorporate them into its reserve management strategy provided the yield source passes a risk assessment.

There are considerable differences in user experience across LYTs. Some LYTs have a multi-token model, such as USDe and sUSDe for Ethena and USR, wsUSR and RLP for Resolv. This approach fragments liquidity across multiple different tokens and offers different value propositions for different users. By requiring users to stake their USDe and USR to accrue yield, non-stakers are effectively diluted and yields are artificially higher.

This is because 100% of the reserves are used to generate yield but yields are paid out to a subset of holders staking. SIERRA aims to have the simplest user experience by having a single-token model, where yield is distributed equally across all tokenholders. There is no staking, claiming, locking or other actions required and all holders simply passively accrue yield over time.

Token utility refers to the different use cases that a LYT has available. Utility can range from passive yield accrual to providing liquidity and lending in DeFi. On CeFi, utility includes making payments and posting as trading collateral on derivatives trading platforms.

Many LYTs have developed significant liquidity across DeFi through integrations with major apps like Pendle, AAVE, Morpho, Euler and Uniswap. However, there has been significantly less support for LYT utility across CeFi, especially around trading collateral on derivatives trading platforms.

This is a central form of utility that SIERRA aims to deliver for its holders shortly after launch and future articles will elaborate further on protocol design choices that help to enable this utility.