How are the rewards earned?
Fluidity borrows from the yield generation concept to create a 'no-loss' rewards savings pool.
As mentioned earlier, to mint a Fluid Asset a principal token is required to be locked up. When you mint 1 ƒUSDC you have to deposit 1 USDC token in exchange.
Fluidity earns yield on the deposited USDC token and distributes it to the reward pool, which is only accessible to people who utilise the respective Fluid asset.
The yield is generated from lending the principal asset into Decentralised Finance protocols such as Compound or Solend, or utilise in yield generating strategies. When a Fluid Asset is swapped back for the principal, the contract withdraws the tokens from the Defi Protocol.
This way Fluidity does not charge any fees to utilise Fluid assets, and rewards can be sizeable.
In the next section, we explore how these rewards are sized, the expected payouts, probabilities and how Fluidity protects itself.