In the 1980s, Wall Street revolutionized finance with stripped bonds. A single 30-year Treasury bond could be separated into individual components: one principal strip and thirty interest strips. This innovation allowed different investors to buy exactly what they needed - stable principal or regular income streams.
The 1990s brought mortgage innovation with Collateralized Mortgage Obligations. Banks discovered they could layer mortgage cash flows into different risk tranches. Conservative investors bought A-tranches for safety, while aggressive investors chose C-tranches for higher returns. This risk layering allowed precise matching of investor preferences with appropriate risk levels.
The 2000s introduced volatility trading through variance swaps. Financial engineers discovered that volatility itself could be separated from underlying assets and traded independently. Traders could now buy and sell pure market fear or stability, creating an entirely new asset class focused on uncertainty rather than price direction.
In 2022, Pendle Protocol brought separation technology to DeFi. Yield-bearing assets could now be split into Principal Tokens and Yield Tokens through smart contracts. This innovation allowed users to trade future yields independently from the underlying principal, creating new opportunities for yield speculation and risk management in decentralized finance.
In 2023, f(x) Protocol achieved volatility separation breakthrough. Staked ETH could be split into fETH for stable returns and xETH for volatile exposure. This innovation allowed conservative investors to earn staking rewards without price risk, while aggressive traders gained leveraged exposure without liquidation concerns.