Unreal protocol is based on the simple construct that enables a user to divide the Interest Bearing tokens from any platform like Yearn, AAVE, Compound etc. into two ERC-20 tokens, namely Ownership tokens (OTs) and Yield Tokens(Yts). Now the ownership tokens represent the principal amount added by the user to one of these platforms, and the yield tokens represents the yield generated by these platforms.
To understand this properly let's take an example.
Let's say that you have 1000$ and you want to get some interest on that so you go ahead and deposit that in some interest-bearing organisation and let's say they provide you with an interest rate of 10% for a period of 1 year and they provide you with two tickets, ticket 1 would get you your principal amount and ticket 2 would get you your interest at the end of the term.
Now after a month, you need the liquidity as another organisation is providing 20% interest and you want to be exposed to that. So you went to a friend and sold ticket 1 to him at a discounted rate of 900$. Now, this is a win-win situation for you and the friend as after 11 months the friend would receive 1000$ for his initial investment of 900$, Hence getting him an interest of 11.11% approx and you could use that money to invest in the second organisation and get exposed to 20% interest. So at the end of the term, you'll receive interest from ticket 2 which is 100$ and the principal and interest from the second organisation i.e 1080$ in total making it 1180$.
Here Ownership tokens are ticket 1 and yield tokens are ticket 2.
Fixing the yield rates
Unreal Finance protocol fixes the yield rates by providing a time convergent AMM for its ownership tokens. This means that by the end of the term, OT is gonna maintain a 1:1 ratio with the underlying asset. Any user looking to get the fixed rate interest can get that by buying some of the discounted OTs from this pool and holding them till the end of the term to get that interest.
Variable Interest Flexibility
With the Yield Tokens being fungible, users have the ability to take higher exposure to variable interest. A yield token for a 10% APY on 1 ETH will pay out 0.1 ETH annually. A user can opt to increase exposure to a large sum of yield tokens before maturity and earn the remaining variable interest accrued during that term period.
By performing this action, the user facilitates exit liquidity for a seller to recognize their gains in the form of current accumulated yield.
A user who wants to utilize the entire value of their capital towards variable interest, can do so and gain a very high return if the average APY of the vault utilized stays consistent.