Text | Liang Yushan
Basically, all financial innovations in traditional markets are built on this basis: amplifying returns (increasing leverage) and reducing risks (providing fixed income). The DeFi market is no exception.
In terms of amplifying income, the most obvious use case recently is Alpha Homora , which greatly increases the income of DeFi farmers and borrowers by adding leverage to aggregate mining and providing annualized returns on deposits higher than those of “competitors” , And therefore “break out of the siege”, not only the amount of locked positions surpassed Yearn, ranking among the top ten, and the amount of borrowing also surpassed Aave V2 .
In terms of risk reduction, we have previously published an article introducing Swivel, a fixed-rate loan and interest rate derivative agreement . Today, we mainly talk about BarnBridge, which is blessed by institutions such as ParaFi and favored by the founders of Synthetix and Aave : a DeFi project that not only hopes to provide fixed income for conservative investors, but also hopes to meet the risk appetite of radical investors.
1. What is BarnBridge?
BarnBridge is a cross-platform hierarchical derivatives agreement, which aims to classify the risks of DeFi products based on dimensions such as yield and volatility, and provides choices for investors with different preferences.
The so-called “grading” refers to the classification of the floating returns of DeFi liquidity mining according to the level of risk, providing high returns for investors who can bear high risks, and fixed income for investors who can bear low risks.
That is, BarnBridge not only hopes to provide fixed-income products that are currently in shortage in the DeFi market, but also hopes to target more investors and potential users with different risk preferences by grading and tokenizing risks.
BarnBridge mainly implements risk grading through two types of products, namely smart yield bonds and smart Alpha bonds, to meet the needs of different investors.
2. Smart Yield Bonds ( Hedging against fluctuations in return on assets )
BarnBridge believes that the current DeFi market mainly provides floating rate annuity products. MakerDAO, Synthetix, AAVE, Compound, Curve and other projects can provide users with revenue, but the rate of return is scattered across different platforms. There is no smart contract that can combine these agreements in the market to allow the generation of standardized risk curves and based on The curve is a derivative of risk hedging.
Based on this, BarnBridge hopes to allow DeFi users to obtain fixed income through the construction of “smart yield bonds”, and can aggregate the benefits of many agreements in the entire ecosystem, thereby creating a more efficient market, smoothing the yield curve of the entire industry, and using debt derivatives Hedging yield fluctuations.
Specifically, BarnBridge will deposit the user’s assets into the loan agreement or DeFi project to obtain revenue, which will be classified and tokenized. Users can choose the level with low risk and low return, or the level with high risk, and the return will increase accordingly.
(Capital pool structure)
For example, currently investors Bob and Alice both decide to invest their funds in the smart income bond pool. At this time, the two need to choose different income bond pools according to different risk levels:
1. Low risk ( Senior tranches );
2. Medium risk;
3. High risk (Inferior tranches , Junior tranches )
Different risk levels correspond to different ownership tokens.
1. Low risk level: Corresponding to priority tokens (fixed interest rate, fixed income can be obtained);
2. High risk level: corresponding to inferior tokens (interest rate fluctuations, high interest rates/high returns, low interest rates/low returns).
Now, let’s assume that the total amount of pledged assets in a DeFi application is 1000 DAI, and the annualized rate of return (APY) is not fixed. Among them, 700 DAI are classified into the low-risk level (red part), with a fixed return rate of 5%; 300 DAI are classified into the high-risk level (blue part), and the return is not fixed.
Situation one ( annualized rate reaches 10%) :
If Bob selects priority classes (fixed income 5%) tokens, Alice bad choice after class (high risk / high return) tokens, in the case of application of the final annualized rate of 10% (annual yield 100 DAI) at:
1. Bob will get 35 DAI (700 * 5% = 35);
2. Alice will get 75 DAI, which is 21.6% higher than the principal (300 DAI).
Situation two (annualized rate of 3%):
If Bob chooses the priority (5% fixed income) tokens and Alice chooses the inferior (high risk/high return) tokens, with the final annualized rate of 3% (annualized income 30 DAI):
1. Bob will still get 35 DAI (700 * 5% = 35);
2. Alice will make up the 5 DAI that has lost.
In addition to providing liquidity for the bond pool, Bob and Alice can also sell their tokens and exit positions before the fund pool expires. In essence, smart yield bonds are a tool for trading yield risk, and all pricing is entirely driven by the market.
3. Smart Alpha bonds ( hedging the volatility of the price of the asset itself )
“Smart Alpha Bonds” do not grade returns, but are constructed through different market price exposures. In essence, smart income bonds have the same principles as smart Alpha bonds, except that the latter changes the target of reducing volatility from the yield to the asset itself.
According to the “Smart Alpha Bond” design mechanism, in the entire risk curve, each part of the price exposure does not need to be flat, which means that the initial $100 price exposure does not need to bear the same upward and downward fluctuations. This is equivalent to having “partial ownership”, but different parts have different risks/rewards.
For example, if the current price of 1 ETH is 100 US dollars and then falls to 90 US dollars, the first part (the most risky part) will bear a higher proportion of losses. On the contrary, if the current price of 1 ETH is 100 US dollars and then rises to 110 US dollars, the first part (the most risky part) will receive higher returns.
In the actual process, if Bob puts $100 in ETH into the bond pool and chooses priority tokens (face 30% token risk exposure) , when the fund pool expires, he will face the following two situations:
1. ETH rises to $110 at maturity, and Bob gets $3 (30%) from the $10 profit;
2. At maturity, ETH fell to $90 and Bob lost $3 instead of $10.
The measurement and distribution of these gains and losses can be done through smart contracts. Each risk level can be traded as a unique digital asset. For example: jETH (low price risk), mETH (price risk mezzanine) and sETH (high price risk). These different levels will be used as a risk RAMP (Risk Assessment & Mitigation Plan) to provide users with different risk preferences.
Fourth, token distribution
The BarnBridge ecosystem has two types of tokens: BBVOTE (governance currency) and BOND (governance mortgage).
BBVOTE is the governance token of Launch DAO (the organization that incubates BarnBridge). It is mainly used for voting decisions and is responsible for initial incubation projects. Founders accounted for 45%, seed investors accounted for 45%, and advisors accounted for 10%.
BOND is the native community governance coin of BarnBridge DAO (Management Smart Contract Organization). It is used to govern mortgages. The total circulation is 10 million, of which 68% of the tokens are held by the community.
According to the token issuance rules, starting from October 2020, BOND will be distributed within 2 to 3 years. Market data shows that BOND currently has a circulation of 1,352,200, with a market value of over 80 million U.S. dollars, and the token price is currently at 62 U.S. dollars, a 168% increase in the past 30 days.
From the perspective of BarnBridge’s product design, it targets two different user groups: conservative and radical, which is conducive to expanding the user base of the project.
In particular, it should be noted that the fixed income provided by BarnBridge is expected to attract institutional investors to enter the market. Because, for institutional investors who prefer low risk, how to obtain stable returns in the DeFi market has always been an important concern.
“DeFi Project Spotlight: BarnBridge, an Institutional Bridge to DeFi”