The decentralized finance (DeFi) space is full of potential, with innovative new platforms, solutions and tools emerging each day. Many have faith that the sector can continue to slowly encroach upon – and perhaps one day even eclipse – the established sphere of centralized finance (CeFi).
It’s also full of risk. Hacks and scams are relatively commonplace, interest rates are highly variable, and the longevity of many DeFi projects remains uncertain. As a result, there is a baseline risk associated with using most DeFi platforms, which is something that many investors already factor into their decisions.
Given this situation, some projects have emerged that aim to tackle these challenges head on. One of these, BarnBridge, aims to bring some more assurance to investors through a novel tokenized risk protocol and application lineup.
What Is BarnBridge?
BarnBridge (BOND) is a tokenized risk protocol that allows users to take positions on factors like interest rate fluctuations and asset price volatility. The platform thus allows users to easily hedge their positions against the various risks associated with interacting with DeFi and to offset some of their potential consequences.
The platform first launched in October 2020, following an initial seed raise by its co-founders: Tyler Ward, Troy Murray, Milad Mostavi, Dragos Rizescu and Bogdan Gheorghe.
BarnBridge’s pool-to-pool design results in the creation of a junior-senior model for its various applications, meaning that one group of users is essentially subsidizing an outcome for the other group. This makes use cases like fixed income and downside price protection possible with BarnBridge applications.
The platform incorporates a native utility token known as BOND, which is an ERC-20 token. BOND is used for voting on governance proposals via a decentralized, incentivized governance system, as well as for staking on the BarnBridge staking portal.
How Does BarnBridge Work?
The BarnBridge whitepaper details two primary applications – the first two to have launched in the project’s ecosystem: SMART Yield and SMART Alpha.
SMART Yield launched in March 2021 and offers users either fixed or leveraged variable yields on stablecoin deposits made into supported lending markets, including Compound Finance, Aave and C.R.E.A.M Finance.
BarnBridge’s second product, SMART Alpha, will allow users to create a dampened and leveraged pool for any ERC-20 token. It’s slated for release during the back half of Q3 2021.
Besides the two applications outlined in the original whitepaper, the team behind BarnBridge is also building two further applications: SMART Exposure and one that is provisionally called “SMART Secret.” The purpose of both is to augment the functionality of the core Yield and Alpha products but the full scope of their capabilities is yet to be revealed.
SMART Exposure will be live at the start of Q3, whereas SMART Secret is being built in parallel to SMART Alpha. As of July 2021, BarnBridge remains in a reasonably early stage of development but plans to launch early versions of its products by the year’s end.
Future protocol development will focus on a more dynamic on-chain governance experience, more niche use cases for DeFi risk mitigation, and cross-chain expansion. On the last point, BarnBridge is expanding first to Polygon and will prioritize the deployment of other scaling solutions that attract its existing integration partners.
As per the official project roadmap, BarnBridge will be looking to launch its own BOND desk shortly after the Smart Yield and Alpha products are live. These will provide an easy-access secondary market for tokenized risks.
What Makes BarnBridge Unique?
BarnBridge embraced the “decentralized” part of DeFi by launching as a decentralized autonomous organization (DAO). There is no incorporated entity in any jurisdiction that controls BarnBridge’s development; instead, its Ethereum-based DAO is the only avenue for decision making related to the protocol’s treasury and resources. The BOND governance token is the mechanism by which decisions are made therein.
The BarnBridge DAO is the recipient of all fee revenues earned by protocol applications. For example, SMART Yield charges 0.5% on deposits into its junior tranche or 5% of yields earned by senior tranche bonds. These fees are charged for the respective asset being deposited and the BarnBridge community is able to allocate these resources through on-chain governance mechanisms. As BarnBridge expands beyond Ethereum in the future, fees will continue to be returned to the Ethereum-based DAO.
Beyond this, by allowing traders to control how much volatility they are exposed to via tokenized risk products, BarnBridge presents a unique, new investment strategy and trading opportunity. It also gives users a way to easily choose the risk exposure for their investments based on the tranche they choose to buy — whether that be high risk with potentially high rewards, low risk and low rewards, or something in-between.
How BarnBridge Stratifies and Isolates Risk
BarnBridge senior tranches, whether from the SMART Yield application or eventually SMART Alpha, introduce a new class of pristine collateral to DeFi. Because they are shielded from volatility in the underlying interest rate or price fluctuations, respectively, by junior tranches, they offer safer foundations for other DeFi applications to build atop of. Wide adoption of senior tranche collateral could result in DeFi becoming more resilient in the face of future drawdowns.
On the flip side, the junior tranches are rewarded with cheap leverage on assets that market depositors view in a positive light. In both of the aforementioned applications, senior tranche users give up a certain degree of upside on their deposits, which then gets distributed to the junior tranches. This creates a symbiotic relationship between different user profiles that are interested in the same underlying; one can imagine a DAO taking the senior side of its native asset for treasury management, while community advocates take the junior side to express their bullish outlook.
By providing a platform where users can easily access fixed-income investment instruments, BarnBridge makes the DeFi space more accessible and intuitive for casual investors. It also helps to improve the efficiency of the system by enabling users to choose their own risk threshold — something that would otherwise be challenging to accomplish using existing tools.