Analyzing Risk-Weighted Derivative Agreements BarnBridge: Will DeFi Risk-Free Products Give Birth to New Blue Chips?

This article is from ContinueGroup, authored by Kriss.

Narrative and Development Direction of DeFi

When we think about the value of DeFi products, we simplify all complex products into two main categories: lending and trading. We experience the products themselves through a few basic indicators, such as interest rates, yields, and depth. When we return to the most essential form of the business, we can primarily consider why funds flow into certain promising DeFi products, why the TVL (Total Value Locked) that we track daily is such an important indicator. Of course, good products also require the innovation of the team, a good token model (innovation in Farm distribution), and compelling narrative capabilities.

When history returns to details, we marvel at how DeFi has grown into a giant under the impetus of macro narratives, stumbling yet exponentially, and how it has been triggered by a series of innovations. What if there were no Metamask plugin for the Chrome browser? What if Synthetic had not first proposed token mining, and then the token economy beautifully supported product value, until YFI sparked the Fairlaunch craze? What if there were no amazing innovations like AMM and flash loans?

As we seek innovation in DeFi's product capabilities, we also contemplate how narrative and intrinsic value drive the industry back to certain inevitable paths, guiding our investment mainline. When Ethereum returns from the "imagined world computer" revolution to the "business-driven DeFi" valuation reconstruction, we must consider how the financial evolution on the blockchain occurs and how it will continue to develop.

Imagination and narrative ability are the driving forces behind the development and progress of human civilization. This imagination in the economic field is "the creation of credit." Finance, in essence, is the risk pricing of created credit. Credit can be:

1. An imagination of the purchasing power of a currency, which can come from sovereign national credit or consensus mechanisms;
2. An imagination of asset value, which can come from discounted future cash flows or narrative value, with expectation differences;
3. An imagination that a certain debt can be repaid, which can come from future cash flows or collateral, with interest differentials;

We may currently be experiencing the third fundamental logic shift in the Crypto field. When BTC brought intrinsic value to digital assets, and when Ethereum provided infrastructure capable of carrying business and value, the expectation-differential trading business and traditional financial lending business originally supported by centralized exchanges were impacted by DeFi.

The maturity of DeFi makes it possible to approach a zero boundary that breaks the dimensional wall. A large amount of traditional capital has gradually built trust while observing the development of DeFi, but there is still no "risk-free" mature entry for funds. Fixed income and risk exchange are, on one hand, equivalent to the source demand for lending, trading, and assets, which is an immensely large market in traditional finance. On the other hand, products like risk-tiered products are also possible main directions for DeFi product innovation.

And this is the vision of BarnBridge:

1. To help traditional financial investors more easily and safely access DeFi products and services;
2. To structure risks, providing high returns for those who can bear high risks and stable returns for a broad range of investors;
3. To address the pain point of "protocol homogeneity risk" in the DeFi field, where interest rates are unstable;

What is BarnBridge

BarnBridge is a tiered derivatives protocol that uses fixed interest rates and volatility to mark product risks. The products include:

1. Smart Yield Bond, a fixed and floating interest product guaranteed by DeFi yields;
2. Smart Alpha Bond, a derivative tool that can hedge against market price fluctuations of any ERC20 token.

Its development history is:

1. On September 11, 2020, completed a seed round of $1 million financing;
2. On October 14, 2020, launched liquidity mining, with a TVL of $120 million in 12 hours; nearly $500 million in two weeks;
3. On November 16, 2021, launched Bond staking mining;
4. On February 5, 2021, launched BarnBridge DAO;
5. BarnBridge launched the Smart Yield product on March 15.

BarnBridge's Products

Smart Yield Bond

It can be simply understood as the coins in the Pool obtaining yields from various protocols, then tiered into two types of yield derivatives:

1. Senior Tranche (sBONDs) priority tokens: fixed yield;
2. Junior Tranche (jTokens) subordinate tokens: higher interest rate volatility.

Example:

In a Pool of 1000 DAI, where Senior is 700 DAI and Junior is 300 DAI:

1) Senior Yield:

Locks in a fixed interest rate of 5%.

2) Junior Yield:

If the Pool yields 10%, Junior yield (1000 * 10% - 700 * 5%) = 65 DAI, 65/300 yield rate 21.6%.

If the Pool yields 3%, Junior yield (1000 * 3% - 700 * 5%) = -5 DAI, -5/300 yield rate -1.6%.

BarnBridge just launched SMART Yield on March 15, first introducing the Compound Pool:

Smart Alpha Bond

Various ERC20 tokens can be placed in the Pool to re-tier risk exposure:

For example, in an ETH Pool:

1) jETH (A junior tranche of ETH price exposure) bears a large risk exposure of 70%:

If ETH rises by 10%, then jETH enjoys a 17% increase.

2) sETH (A senior tranche of ETH price exposure) bears a small risk exposure of 30%:

If ETH falls by 10%, then sETH only needs to bear a 3% smaller decline.

BarnBridge's Token Structure

BarnBridge allocates 1/3 of the tokens for mining and 1/3 for future community:

BarnBridge's mining will last for 100 weeks:

In the early chip allocation phase, there was already over 500 million in locked volume, indicating the high expectations of the market for BarnBridge:

BarnBridge's Team Background

Supported by mainstream investment institutions:

The team has been deeply involved in the industry for many years:

The technical team comes from the blockchain technology company Digital M.O.B with a ConcenSys background;

The operations team has provided marketing services to ConcenSys through Proof Systems;

The team from Proof Systems is based in North Carolina, Florida, and Ukraine, with Co-founder Tyler (main) and COO Mark.

The team from the blockchain technology company Digital M.O.B and ConcenSys is based in Romania, with Co-founder Bogdan and Tech Lead Stefan.

The team from Rude Labs is based in Arizona, USA, with Co-founder Troy.

"Risk-Free" Product Comparison

Type Comparison

1. Zero-Coupon Bonds: Yield, Notional;
2. Interest Rate Markets: Horizon, Swivel;
3. Risk Tiering: Barnbridge, Saffron.

In the early stages, we follow the principle of prioritizing product usability. For example, zero-coupon bond products and interest rate markets have higher thresholds and more complex rules, while risk-tiered products only require selecting different yield products based on risk tolerance.

Data Analysis

BarnBridge just launched on March 15, with only the Compound Pool, and the data is insufficient for analysis. We borrow some data from similar products like Saffron for analysis.

In Saffron's locked volume:

1) The tranche accounts for 36.4%, indicating that the core product has spontaneous demand.

2) In the tranche, S:A=7, most of which is still low-risk demand, indicating that "risk-free" demand has immense potential.

BarnBridge Has the Potential to Become a New Blue Chip

1. It has a first-mover advantage in the tiered derivatives direction, forming a network effect; the team's innovation and execution capabilities are excellent;
2. The team maintains good relationships and connections with many leading DeFi projects, having received support from AAVE founder Stani and Synthetix founder Kain, and continues to receive recommendations from both on Twitter.
3. There is potential to break out and enlarge the capital pool (with a TVL of $500 million in two weeks); fully leveraging DeFi's composability, it is expected to become a "hedge blue chip" alongside AAVE, Uniswap, and others.