> For the complete documentation index, see [llms.txt](https://docs.sierra.money/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.sierra.money/building-with-sierra/exchange-rate-mechanism.md). # Exchange Rate Mechanism ## Yield Generation Based on the [Reserve Management Strategy](/building-with-sierra/reserve-management-strategy.md) for a given Vault or LVT, the reserves will be deployed into one or more OpenTrade vaults. For example, allocating reserves to PGIM's AAA-Rated CLO ETF called PAAA is achieved via lending to the xUSCLO vault. Over time, the performance of the underlying PAAA ETF, including monthly dividends and net of OpenTrade's fees, is reflected through the change in the xUSCLO vault's exchange rate. In general, all [Available Yield Sources](/building-with-sierra/available-yield-sources.md) are deployed as standalone vaults on the OpenTrade platform. Irregardless of whether its an RWA that is publicly traded or a private fund, or an onchain yield source on Ethereum or Solana, the performance of that yield source is tracked and reflected through the vault's exchange rate. As the underlying assets appreciate in value, earn interest, accrue dividends, trading fees, protocol rewards or any other form of return, the return is reflected through an appreciation of the corresponding vault's exchange rate. Therefore, the change in an OpenTrade vault's exchange rate over time reflects the yield that has been generated by the underlying yield source. For RWA yield sources, each vaults' exchange rate is updated once per business day. For DeFi, each vaults' exchange rate is updated once per hour if sufficient yield has been generated. ## Yield Accrual Vaults or LVTs can effectively be viewed as "vault of vaults", where the performance of Vaults or LVTs is the aggregate performance of all of the underlying OpenTrade vaults that reserves have been deployed into. As each underlying OpenTrade vaults' exchange rate is updated, the exchange rate of each Vault or LVT issued by Sierra updates accordingly. This change in each Vault or LVT's exchange rate reflects the yield accrued by the portfolio of reserves backing the Vault or LVT. On each Vault or LVT's respective Transparency Dashboard, Current APY represents a 7-day average of the realized performance of the Vault or LVT's exchange rate. The realized performance is variable and depends on the performance of the underlying yield sources that the reserves backing the Vault or LVT have been deployed into. **Here is an illustration of how the exchange rate mechanism will work in practice with a sample reserves portfolio:** | U.S. Treasury MMFs | 30% | 4.5% | | ------------------ | -------- | --------- | | Commercial Paper | 15% | 5.5% | | DeFi Yield | 55% | 10.0% | | **Current APY** | **100%** | **7.68%** | Through increasing the exchange rate of each Vault or LVT over time, this mechanism is how yield accrues to holders of Vault tokens and LVT. Therefore, there is no rebasing so the amount of tokens held remains constant over time. The difference between a holder's sale and acquisition prices reflects the total yield they have accrued. This mechanism ensures LVTs behave exactly like any other ERC-20 token, which enables seamless composability and utility across DeFi and CeFi while still delivering institutional-grade yield intrinsically. The Vault or LVT's updated exchange rate is the prevailing price used by [Authorized Participants](/additional-resources/authorized-participant-onboarding.md) for [Mint and Redeeming](/building-with-sierra/minting-and-redeeming.md). If the secondary market price of LVTs differ from the prevailing exchange rate for minting and redemptions, then Authorized Participants can perform arbitrage. This economic incentive helps to ensure that secondary market prices of LVTs on decentralized and centralized exchanges trades closely to the prevailing exchange rate for minting and redemptions. For example, if an LVT is trading significantly below the prevailing minting and redemption price on a decentralized exchange, an Authorized Participant can purchase the LVT off the secondary market with USDC and redeem the LVT with Sierra, earning the spread. --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. 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