Principal Tokens

Definition ∞ Principal tokens are digital assets representing the underlying capital or initial investment within a financial instrument. In a tokenized bond or loan, for example, the principal token represents the original amount loaned, distinct from any yield or interest components. This separation allows for the independent trading and management of the principal and yield components, offering greater flexibility for investors. They are often utilized in advanced decentralized finance strategies.
Context ∞ The discussion around principal tokens often occurs within the context of structured finance and decentralized derivatives, where financial instruments are disaggregated into their constituent parts. A key debate involves the liquidity of these separated components and the complexity they introduce for retail investors. Future developments will likely see more sophisticated financial products built upon tokenized principal and yield, enhancing capital market efficiency on blockchains.