We are excited to release the specifications of the SMART Yield as we approach the launch date in the coming weeks. Our team has been anxiously waiting on audits for the SMART yield so we can share our first fixed income product with the BarnBridge and DeFi community. We will dive into how SMART Yield, tranches, and the secondary markets will work.
SMART Yield allows users to tranche out the yield from the debt pools of other projects, such as Aave, Compound, Cream, or Yearn Finance to normalize the risk curve by creating derivatives for risk mitigation.
BarnBridge is proposing a system where there are 2 types of participants:
- Junior token holders — jTokens (More risky)
- Senior bond holders — sBONDs (Less risky)
Junior and Senior Tranches: DeFi Risk Hedging Primitives
The concept of tranching is derived from traditional financial markets. Tranches are common with mortgage-backed securities (MBS), which are a basket of mortgage loans that are pooled together for investors to buy.
BarnBridge junior tranches are riskier (How is the junior tokens APY calculated?) since they provide more risk exposure to the generated yield. At the same time, senior tranches (How is the senior bonds APY calculated?) represent the first to earn and last to lose concept.
Junior tranches are ERC-20 tokens (jTokens) and senior tranches are ERC-721 non-fungible tokens (NFTs).
Junior token holders provide liquidity and buy risk from Senior bond investors. The risk in the case of SMART Yield is the risk of variable rate annuities going down.
Investors that buy the Senior bonds (sBONDs) will have a guaranteed yield for the life of the sBOND, which will be one of the 2 main properties of the sBOND (along with TVL).
The liquidity provided by the Juniors and the value locked in the sBONDs are invested in various DeFi lending platforms and the resulting rewards cover the guaranteed reward for senior sBONDs. Some of these rewards come in the form of governance tokens which our system will sell on Uniswap for the native token of our pool.
As an example, let’s consider Compound as a lending platform and USDC as a pool token.
The Juniors will benefit from the extra rewards generated by liquidity (USDC) locked in sBONDs by Seniors in situations where the variable APY of Compound (including the COMP rewards) is higher than the guaranteed yields of current sBONDs. On the other hand, in the event of falling rewards from Compound, the returns of Juniors are diminished and if need be, their locked funds will be used to pay for the guaranteed returns of sBONDs.
In order to provide the best UX for Juniors and encourage them to participate in SMART Yield pools, the system will allow them to join the pool at any time. To do that, we calculate the profits and losses of the pool very efficiently. We do that by averaging all existing sBONDs into one “weighted average” sBOND.
Moreover, Juniors will have a possibility of instant withdrawal of at least part of their funds, without affecting the integrity of the system and keeping the guarantees. Since jTokens are fungible, they can also be sold on the secondary markets.
In case the junior token holders want to withdraw liquidity through the BarnBridge platform without leaving a % of it in the pool in favour of seniors, they should initiate the normal withdrawal process. The system will allow users to buy a junior bond and deposit some or all their junior tokens into it. This bond locks the junior tokens until the weighted average maturity of the current seniors is reached (More about junior bonds).
The other reason for Juniors to provide liquidity for Seniors is the added incentives they will accrue from the secondary market liquidity mining programs that will be established by the BarnBridge DAO
BarnBridge protocol fees on Senior bonds are 5% of returns and collected at maturity.
Fees on Junior tokens are collected on deposit since they are fungible and immediately tradeable, they would be infeasible to track and collect fees at maturity. Junior deposit fees are set to 0.5%.
The percentage of the fee can be adjusted by the BarnBridge DAO along with the fees split between treasury and other utilities.
The Junior Tokens are ERC-20 compatible since they are fungible. Secondary markets can easily be created for these (e.g. Uniswap). This will allow jToken holders that need liquidity to exit quickly, probably with a discount. Secondary market liquidity could be incentivized with the reward pools if the community submits and passes a proposal through the BarnBridge DAO.
The Senior Bond tokens (sBOND) are non-fungible (NFTs), but transferrable. One could sell these tokens before their maturity date at a discount to someone who is willing to wait until the end to claim the principal plus the guaranteed reward.
BarnBridge is building a marketplace for selling and buying senior tokens. The pool is permissionless so others can build marketplaces as well.
We have listened to your feedback to our Twitter pool and put together How-To Guides in the form of video recording and text instructions. Here the list:
- How to buy junior tokens?
- How to buy senior bonds?
- How to redeem senior bonds?
- How to sell senior bonds?
- How to withdraw junior tokens?
- How to sell junior tokens?
All other documentation is published under the docs.barnbridge.com subdomain and we have also updated the Discord FAQ bot. Feel free to check it out.
We would also like to thank the community for being patient with us while audits have been going on. We could have already launched but we wanted our smart contacts to be perfect and double-check it so there are no vulnerabilities missed. For any further information please stay tuned to our Discord and Twitter.
In the meantime, we have been working on SMART Alpha and look forward to sharing that with you in the near future.