↗️PRT
Price Recovery Tokens, or PRT, are CruiseFi's unique risk backstop, and they serve as the protocol's alternative to liquidation.
Holding a PRT is a unique way to get long term leverage on ETH, and offers a distinct value proposition from existing derivatives like options or perpetuals.
Unlike options, which are tied to a specific expiry, PRT are eternal. With PRT, you don't need to worry about timing.
Unlike perpetuals, which come with risk of liquidation, PRT are path independent. As long as the strike eventually hits, you get ETH.
In short, PRT is a way to get paid to HODL ETH. You only need to be directionally right, and when the strike hits, you get more ETH.
Example of PRT in practice
PRT is most easily explained with an example.
The ETH price is at $1600.
Alice pays 0.5 ETH, or $800, to buy 1 PRT.
The strike price on this PRT is $2000.
Some time passes, and the ETH price hits $2000.
Alice redeems her 1 PRT for 1 ETH.
In the scenario above, Alice's double her ETH, and she made a dollar denominated profit of $1200. This is 3x the profit she would have made if she had bought ETH instead of PRT.
Unlike perpetuals, Alice did not risk liquidation for this 3x profit.
Under the hood of PRT
With this example in mind, lets get into the details of how PRT actually works. Lets go step by step, from minting to redeeming.
Minting PRT occurs by taking ETH, and depositing it into the appropriate PRT Vault. Each PRT Vault has a strike price, like $2000, which determines when PRT can be redeemed for ETH.
Here is what happens when a minter deposits ETH into the vault:
The ETH is staked into stETH.
The minter receives two tokens: prt2000 and y2000.
The prt2000 token can be redeemed for ETH once the strike price of $2000 hits.
Until the strike hits, the yield from stETH goes to y2000.
Redeeming PRT can happen once the ETH price touches the strike. If the strike is $2000, that means that prt2000 can be redeemed 1:1 for ETH once the price is $2000.
The price only needs to touch the strike once for redemption to be enabled. If the price drops back under the strike, redemption continues.
Calculating profit and loss
The value of PRT can be characterized as follows:
If price never hits, PRT is worth 0
If the price hits, PRT is worth 1 ETH, minus forgone staking yield, and minus the time value of money
The first part is pretty clear. The second part is best explained by example.
Suppose staking yield on stETH is 4%, and the time value of money is 3%. Now suppose you buy a PRT expecting that the price will hit the target in one year. If the price does hit, you will indeed receive 1 ETH, but you need to consider the opportunity cost of not staking that ETH for a year, as well as the time value of money.
To calculate the forgone staking yield, you take the 4% of 1 ETH, which is 0.04 ETH. For the time value of money, you also calculate 3% of 1 ETH, which gives you 0.03 ETH. Together, these two factors amount to 0.07 ETH, which you subtract from the 1 ETH payout of the PRT.
So, in this example, the actual value of the PRT if the price hits within one year would be 1 ETH - 0.07 ETH = 0.93 ETH. This means that while you do make a profit if the price hits, it’s important to consider these additional factors to understand the true value of the investment.
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