BarnBridge (BOND): Risk-Adjusted DeFi Derivatives

Launched in September 2020, BarnBridge is a decentralized finance (DeFi) platform that aims to tokenize risk itself by aggregating exposure across the DeFi ecosystem via financial instruments. The project aims to provide more flexibility and control over risk in DeFi so that you can choose an appropriate amount of risk exposure for your investment strategies by purchasing tokens that represent investment and participation in various DeFi products.

By tokenizing risk exposure, BarnBridge can either increase volatility for speculative traders, or decrease it for more conservative investors, long-term holders, and risk-averse institutions. BarnBridge seeks to provide an opportunity for what it terms “riskless” product offerings in the DeFi world in order to attract more risk-averse investors to the space. While BarnBridge is still in its nascency, the project has massive potential to impact the DeFi industry by bringing flexibility and efficiency to risk management — breaking down the barriers of risk and volatility, and attracting a wider range of participants from the traditional finance (TradFi) industry.

BarnBridge Roadmap

BarnBridge was originally conceived in 2019, secured seed funding in August 2020, and launched in September of the same year. The platform’s native utility token, BOND, and the staking smart contracts that enable BOND token staking were each added the following month in October 2020. January 2021 saw the launch of the BarnBridge DAO and the implementation of community governance using the BOND token.  

BarnBridge Fluctuation Derivatives Protocol

BarnBridge builds derivative products that act as hedges against fluctuations in the DeFi space. BarnBridge products are initially focused on token-based derivatives that track the yield sensitivity of DeFi protocols and the market price of DeFi assets. BarnBridge provides a method for managing — by either reducing or increasing — the risk of digital assets and their yield sensitivity. This method relies on taking digital assets and breaking them down into smaller portions called tranches, which are then combined with formulations of other assets and offered as derivative products.

Here’s an example of what this looks like on BarnBridge: Digital assets are supplied to a pool, exchanged for various other assets, and then used to supply different lending protocols, with each loan having its own respective yield. Then the loans are bundled together in a security similar to a collateralized loan obligation (CLO). That security is subsequently divided into tranches, with each tranche having its own yield and risk. The tranches are tokenized and sold back to the original investors of the pool who have the ability to buy riskier or safer tranche tokens based on their appetite for risk, without having to be exposed to the entire risk curve.

While various DeFi platforms offer different market-driven yields, BarnBridge aggregates the risk from all these DeFi protocols and provides derivatives for risk mitigation. BarnBridge also provides the ability to pool the yield from token contributions to various DeFi protocols and divide that pooled yield into tranches with varying cumulative degrees of yield. BarnBridge provides risk differentiation across multiple platforms, which allows for more complex structuring of strategies than by simply participating in DeFi platforms in a singular manner.

Currently, the DeFi ecosystem primarily offers variable rate annual percentage yield (APY). However the eventual implementation of fixed yield in smart contracts is likely to provide reduced complexity and simpler financial planning for risk-averse investors. It is also worth noting that BarnBridge will remain platform- and asset-agnostic to facilitate these cross-platform initiatives. It will not create a native platform for lending, but will instead pool lending from all across the DeFi ecosystem.

BarnBridge SMART Products 

February 2021 saw the release of one of BarnBridge’s flagship products: SMART Yield bonds. The SMART acronym stands for Structured Market Adjusted Risk Tranches. When a user purchases a SMART Yield bond, they’re purchasing a tokenized tranche that represents a chosen degree of risk and yield from a group of loans deployed on various DeFi lending protocols. SMART Yield bonds are designed to mitigate interest rate volatility using debt-based derivatives.

Here’s an example of what a SMART Yield bond might look like: Several investors supply a lending pool with 1000 DAI. The pool they’ve chosen has set parameters. It lends DAI to Compound and offers two tranches — a senior tranche with a fixed 5% interest rate, and a junior tranche with a variable interest rate. The pool has a 70/30 risk split and is balanced for 70% senior tranche allocation and 30% junior tranche allocation. When investors supply the lending pool, they choose which risk tranche they desire. If one side is overcollateralized, the opportunity to earn is greater for the other side.

Now assume the entire loan has a return rate of 10% (or 100 DAI), and is perfectly balanced. After repaying the senior tranche holders’ 5% fixed interest rate on 700 DAI (or 35 DAI), there is 65 DAI left to distribute to junior tranche holders — in this instance with an approximate annual percentage rate (APR) of 21%. However, if the portfolio had a return rate of only 3% (or 30 DAI), the senior tranche holders would still receive their fixed 5% interest rate on 700 DAI (or 35 DAI), while the junior tranche holders would take a loss of about -1.6% APR and be left with only 295 DAI from their initial investment of 300 DAI.

These SMART Yield bonds enable investors to buy tokenized exposure to risk-adjusted tranches that are driven by the market. In this example, investors can opt for low potential yield and low risk, or higher potential yield and higher risk depending on the tranche they buy. With the use of smart contracts, the exact gains and losses — no matter how complex — can be algorithmically calculated and carried out trustlessly. So an investor can choose their level of risk without being exposed to the entire risk curve. They can have exposure to ETH, for example, and choose whether they want exposure to high, medium, or low risk and yield.

Such fine-tuned risk-flexibility will likely become very attractive to TradFi investors looking to get started in DeFi, with smart contracts carrying out higher degrees of customization while reducing the role of middlemen, trust, and overhead costs.

The BarnBridge BOND Token

BarnBridge’s native utility token, BOND, is an ERC-20 token that is used for staking and governance on the platform. As a governance mechanism, BOND holders are able to vote on updates to the BarnBridge platform.

There is a circulating supply of about two million BOND as of April 2021, and a hard limit of 10 million tokens, which will be released as various types of rewards over a two-to-three year period. 22% of the total amount of BOND tokens (or 2.2 million tokens) are allocated to founders, seed investors, and advisors, with 22,000 tokens released from vesting each week. Through this vesting schedule, the initially allocated tokens will take 100 weeks to be fully released, beginning with the launch of the platform’s first yield farming mechanism: SMART Yield bonds.

The Future of BarnBridge

SMART Yield and the forthcoming SMART Alpha product are only the first two tokenized derivatives that BarnBridge has prioritized. In the future, the platform intends to deal with rates of return, market prediction odds, default rates on mortgages, and a seemingly infinite number of other market forces.

It is with technological innovations like SMART Yield bonds and SMART Alpha bonds that BarnBridge hopes to lure investors from the TradFi world to the future of DeFi.

If BarnBridge can help lessen the risk involved with joining the DeFi industry by making it more predictable and providing tools for fine-tuning risk to fit any investment strategy, DeFi adoption might accelerate exponentially.