A Retrospective on the First SMART Alpha Epoch

This post was originally published here

Last week began with the launch of our first SMART Alpha epoch. Three of the four deployed pools saw ~$500k in aggregate deposits split relatively evenly between their respective junior and senior sides. Here’s a look at each pool and how it performed over the course of the past epoch.

WETH (in USD terms)

The conditions for ETHUSD epoch one, as determined by the ratio between junior and senior deposits.

ETH’s USD performance for this epoch wound up being quite volatile going into the close, as seniors found themselves underwater for most of the week until the last 24 hours. It was at that point when a rapid decline in ETH’s price resulted in the senior positions earning a yield of 7.9% on their ETH for the week. Annualized, that’s 409% — not bad.

By the end of the epoch, 1 ETH deposited into the senior side was worth 1.079 ETH.

WBTC (in USD terms)

The conditions for BTCUSD epoch one, as determined by the ratio between junior and senior deposits.

BTC’s USD performance followed suit, though with a little less volatility to the downside. The similarly rapid decline in BTC’s price resulted in the senior positions earning a yield of 5.2% on their WBTC for the week and 269% annualized.

By the end of the epoch, 1 WBTC deposited into the senior side was worth 1.052 WBTC.

WBTC (in ETH terms)

The conditions for BTCETH epoch one, as determined by the ratio between junior and senior deposits.

Here’s where things got interesting. This pool tracks BTC’s performance in terms of ETH — because BTC dropped less than ETH for the epoch, it was actually the juniors who won this time around. As you can see below, BTC and ETH traded in lockstep for the majority of the period, with the divide between junior and senior positions not widening until the market underwent significant volatility. Junior positions earned a yield of 9.3% for the epoch, or 481% annualized.

By the end of the epoch, 1 WBTC deposited into the junior side was worth 1.093 WBTC.

Conditions for Epoch #2

People are bearish ETH and BTC, more so the former than the latter. Why are they bearish? Something about a new drink size at Starbucks in China or something, we don’t know.

Seniors outweigh juniors extensively in both pools, leading to more attractive junior position terms for bulls.

As you’ll note, the more overweight one side of a pool becomes:

  • The less attractive its terms are for its depositors
  • The more attractive the terms are for the opposing side

For both pools, the seniors receive less absolute downside protection, as well as less upside participation, while the juniors get ever more leverage. This dynamic rewards contrarian depositors who are proven correct, while tempering the outcomes for crowded trades.

Depositors into the BTCETH pool are decidedly less certain of where the pair will be trading in a week, reflecting the tendency of digital assets to converge on a correlation of 1 when the going gets tough.

Unlike the USD-denominated pools, the BTCETH pool is split down the middle between juniors and seniors.

While it can be difficult to get a clear picture on an upcoming epoch until the hours leading up to it, the composition of each pool provides us all with market sentiment oracles for the given pair.

What’s Next?

With the successful advancement of epoch one, we can now move forward with deploying more SMART Alpha pools.

  • Polygon Deployment. You’ll be able to use SMART Alpha on Polygon in time for the next epoch.
  • DeFi Token Pools. We’re looking to deploy AAVEUSD, LINKUSD, UNIUSD, and SUSHIUSD pools in time for the next epoch as well. For the AAVE and SUSHI pools, you’ll actually be depositing stkAAVE and xSUSHI so that you can earn yield while using SMART Alpha!

Moreover, if you haven’t voted yet, make sure to give it a go with the ongoing DAO vote. KPI options will allow us to bootstrap secondary liquidity for SMART Alpha assets, meaning that you will soon be able to buy and sell into or out of junior and senior positions intra-epoch.

And if this post didn’t make sense to you, check out our previous posts detailing how SMART Alpha works here.

About BarnBridge

BarnBridge is a suite of risk tokenization protocols for DeFi. Its applications allow users to select from opposing pools and take positions on risk factors like interest rates or asset prices. Its first application, SMART Yield, offers fixed and levered variable yields on stablecoins deposited into underlying lending markets like Aave, Compound, and C.R.E.A.M. Finance. Its application suite has expanded to include SMART Exposure, a position rebalancing solution, as well as SMART Alpha, which allows users to calibrate their exposure to price movements in an underlying digital asset. BarnBridge is currently live on Ethereum and the Polygon Network, with deployments on Avalanche, Arbitrum, and Optimism all on the horizon.

Keep up to date with the BarnBridge community via the following channels:

A Retrospective on the First SMART Alpha Epoch was originally published in BarnBridge on Medium, where people are continuing the conversation by highlighting and responding to this story.

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