vpETH

Every time pETH trades above its mathematically-derived floor, the difference represents its market premium.

That premium reflects what the market believes pETH is worth beyond its floor. It captures expectations about the future growth of Polaris, the utility of pETH across the ecosystem and the confidence participants place in its long-term development.

As shown in the previous page, splitting one pETH transforms it into one fpETH and one vpETH. Together they always reconstruct the original pETH, while allowing users to hold, trade and build strategies around two different sources of value.

While fpETH isolates the steadily growing floor, vpETH isolates the component of pETH through which the market expresses its expectations for the future growth of Polaris

Understanding vpETH

Let’s go back to Bob and Alice.

When Bob split his original pETH, it was worth 1 ETH. At the time, pETH floor was 0.75 ETH, while the remaining 0.25 ETH represented the market premium. Bob kept fpETH because he wanted exposure to the steadily growing floor, while Alice bought vpETH.

Alice saw the opportunity differently, as she believed the market was underestimating how much additional value Polaris would create as the ecosystem continued to grow, and how much of that value would eventually be reflected in the premium of pETH.

For instance, she expected more economic activity to take place across Polaris through higher borrowing volumes, more liquidations, new applications and stronger demand for pETH. If those expectations proved correct, the market would gradually attach a larger premium to pETH long before that additional value became reflected in its floor.

Suppose that six months later the floor has increased from 0.82 ETH to 0.90 ETH, with stronger demand increasing the premium from 0.23 ETH to 0.40 ETH.

Bob still owns one fpETH and Alice still owns one vpETH. Holding those two tokens together continues to make up exactly one pETH, but its composition has strongly changed since the day it was split.

At the split: 1 pETH = 0.82 ETH floor + 0.23 ETH premium = 1.05 ETH
Six months later: 1 pETH = 0.90 ETH floor + 0.40 ETH premium = 1.30 ETH

The premium now accounts for a much larger share of pETH than before, allowing Alice’s vpETH to capture most of that additional appreciation while Bob continues benefiting from the steady growth of the floor.

The two assets still originate from the same pETH, but each responds to a different source of value as Polaris evolves. While fpETH follows the gradual growth of the floor, vpETH reflects how the market values everything beyond it.

A Familiar Mental Model

Users familiar with Pendle may recognize the idea of separating a single asset into two independently tradable components.

Both Pendle and Polaris begin with a yield-bearing asset, but they isolate different components.

Pendle separates future yield from principal, while Polaris keeps the yield mechanism unchanged and instead separates pETH into its steadily growing floor and the market premium above it.

Although the mechanics and the economic exposure are entirely different, both systems allow users to isolate the component they want instead of just holding the merged asset.

Using vpETH

The simplest way to use vpETH is to gain direct exposure to the market premium of pETH.

Some users may simply hold it because they believe the market is underestimating the future growth of Polaris. But others may actively trade it as the premium expands and contracts over time.

Because vpETH represents the portion of pETH that trades above its bonding curve floor, it can also serve as a useful hedging tool. For example, users holding over-collateralised debt positions on Polaris may choose to short vpETH to reduce their exposure to changes in the premium while continuing to hold the underlying pETH position.

This effectively leaves the user exposed only to the ETH/USD price, which also can be hedged on an external venue to remain completely delta-neutral, while still earning protocol-native yield.

As Polaris expands, additional applications may also build around vpETH.