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BarnBridge has brought traditional risk management tools and fixed income to DeFi, but its scale of development has not yet been able to attract a large number of institutions.
Written by: Anton Tarasov, working at Crypto Briefing
Translation: Lu Jiangfei
BarnBridge is committed to dividing encryption risks into multiple “buckets” (risk levels) so that market participants can invest in various products or assets according to different risk conditions.
- BarnBridge brings traditional risk management tools and fixed income to the DeFi industry.
- For institutional participants who want to enter the cryptocurrency market, the BarnBridge protocol product may be attractive.
- The BarnBridge platform is still in the initial stage of launch, and some related products are expected to be released in the first quarter of 2021.
In the past few years, the potential impact of cryptocurrency on traditional finance (TradFi) and institutions is undoubtedly one of the most concerned topics. In fact, people like Blythe Masters (Blythe Masters), an investment banker, became interested in cryptocurrencies before the price of Bitcoin exceeded $19,000.
Chain Wen’s Note: Brice Masters is a female Morgan investment banker, known as the “Queen of Wall Street”. She worked for JPMorgan Chase for 27 years and was promoted to managing director at the age of 28. She also served as chief of digital asset holding/DAH company Executive officer, the credit default swap she invented is considered to be the fuse of the 2008 global subprime financial crisis.
One of the biggest disruptive innovations brought about by blockchain technology is the introduction of automation into the financial industry. In the past, every traditional financial service involved many intermediaries, and the costs incurred by these intermediaries would eventually be passed on to users. Decentralized finance (DeFi) does not require intermediaries to participate, which can effectively reduce these costs.
The huge potential of DeFi makes it stand out from the traditional financial industry worth trillions of dollars, but it is undeniable that the current DeFi ecosystem is not that mature, and at least the needs of many institutions cannot be met. Therefore, before large companies flood into the cryptocurrency industry, many traditional financial industry primitives must be “transplanted” into the blockchain field.
BarnBridge is a project that expands DeFi functions and improves DeFi’s flexibility and efficiency. The team hopes to provide support and assistance for institutional client activities in key areas of cryptocurrency, such as risk management and fixed income tools.
The current dilemma of the traditional financial industry
No matter what type of financial management model you use, one of the most basic and important factors that need to be paid attention to is risk-because no matter whether it is an individual or a large enterprise, any market participant must evaluate his risk tolerance. However, the operation of traditional financial institutions is usually more complicated. Therefore, for institutions, risk management is particularly critical and challenging. Many large companies are adjusting their exposure to various financial instruments to prevent them from being “delayed” when market conditions deteriorate. Into the water”.
More importantly, because business operations cannot avoid the “debt problem”, they need more stable cash flow. As long as the income flow becomes predictable, the business can better formulate financial plans, which in turn will help promote and deploy Long-term development strategy.
On the other hand, fixed income is also crucial to corporate wealth management. The larger the scale of a corporate investment portfolio, the more it is necessary to consider retaining capital rather than increasing capital. Therefore, for wealth management institutions, low-risk investment tools can obtain a small amount of but Regular returns are more meaningful. With the help of fixed-income instruments such as government or corporate bonds, companies and wealth management institutions can eliminate some risks and ensure that their investments are safer and more predictable. In fact, solving the fixed income problem has now become one of the monetary policy strategies drawn up by many governments. For example, the Federal Reserve has chosen to lower interest rates several times in 2020, eventually reducing interest rates to 0-0.25%.
The chart above shows the trend of the US federal funds rate in recent years. Source: Trading Economics
Low interest rates will have a negative impact on bond yields. Taking the US two-year Treasury bond interest rate as an example, it has fallen from nearly 3% in 2018 to 0.14%.
The above chart shows the interest rate trend of fixed maturity of US two-year Treasury bonds, source: Federal Reserve
Another impact of low interest rates is that large companies have begun to explore other channels to obtain income, but they have to pay various fees to intermediaries when investing. Even today with such advanced information technology, financial intermediary fees are still high Ridiculous.
Advantages of decentralized finance
While the traditional financial industry is struggling to find high-yield solutions, DeFi earnings are rising sharply.
Since Compound introduced the concept of liquidity mining, the yield and total lock-up volume (TVL) of DeFi, a niche market, have begun to soar. The figure below shows the trend of total lock-up volume in the DeFi market (source: DeFi Pulse). You can clearly see this trend change:
When the DeFi market is hottest, some platforms can even get dozens of times of investment income. Although whether this high-growth state can be sustained for a long time is questionable, it at least highlights the benefits of DeFi to a certain extent. Great potential.
The above figure shows the annual return rate of the DeFi project Kimchi Finance, the source of information is Kimchi Fiance’s official Twitter
Relatively speaking, the income of platforms such as Compound and Aave is more sustainable. Some DeFi assets on these platforms can provide investors with an annual rate of return of more than 5%, while DeFi projects such as yEarn/protocol investment income The rate can even reach more than 10%.
The figure above shows the monthly return trend of yEarn vault, source: yEarn
However, the “disadvantage” of the DeFi platform is that it cannot provide fixed income. In addition, adding cryptocurrency to the investment portfolio means that investors have to bear significant risks, because the price of cryptocurrency assets is usually volatile-and this is BarnBridge The key problem they want to solve is to help traditional financial investors access lucrative DeFi products and services more easily and securely.
The figure above shows the comparison between the one-year Bitcoin price fluctuation (blue) and the one-year US stock price fluctuation. Source: WooBull Charts
BarnBridge is committed to dividing encryption risks into multiple “buckets” (risk levels) so that market participants can invest in various products or assets according to different risk conditions. Simply put, BarnBridge classifies the original DeFi liquidity mining floating returns according to the level of risk, providing high returns to those who can bear high risks, and stable returns to those who can bear low risks. This is considered a kind of traditional financial The realization of mature products in DeFi.
Let’s take a look at an example: Suppose there is a wealth management company that wants to obtain fixed income from crypto assets DAI. Without the support of BarnBridge, this expectation seems difficult to achieve, because DeFi platforms such as Aave and Compound almost It is impossible to provide products with a fixed rate of return.
If this wealth management company wants to lend DAI, and wants to ensure that the rate of return can be maintained at the desired level (or above), there will obviously be certain risks:
- On the one hand, if the rate of return drops suddenly, then the wealth management company may not be able to bear the corresponding responsibilities, and its business will be damaged;
- On the other hand, if the rate of return suddenly rises sharply, this wealth management company is likely to be unable to ensure that stakeholders receive additional benefits, because traditional financial companies usually put “security” first, and they are not daring to try to take risks and follow suit. Invest in some high-yield assets.
Using BarnBridge, this wealth management company can “give up” some potential gains in order to better predict cash flow. To this end, they can invest funds in the SMART income bond pool on BarnBridge. When wealth management managers invest in Pool Funds, they will designate a “risk bucket”. According to the income bond pool, the “risk bucket” will be divided into three categories:
- Low risk (priority category) “risk bucket”;
- Medium risk “risk bucket”;
- High risk (inferior category) “risk bucket”.
After wealth management managers provide liquidity to the fund pool, they will receive ownership tokens representing different levels of “risk buckets”. Low-risk “risk buckets” are assigned priority tokens, and high-risk “risk buckets” are assigned Inferior tokens. In addition to serving as a proof of liquidity for the fund pool, these tokens themselves are also tradable. Wealth management managers can exit the position by selling the corresponding ownership tokens before the fund pool expires:
- The interest rate of priority tokens is fixed, so the volatility of the return of priority tokens will be relatively stable, which can basically provide investors with fixed income;
- The interest rate of inferior tokens fluctuates. When the income is high, the income of inferior tokens will be higher, but when the income is low, the income of inferior tokens will be lower.
More importantly, in addition to priority tokens and inferior tokens, the protocol also has a native token BOND that can be used for pledge and governance.
The picture above shows the BarnBridge pool structure, source: BarnBridge
For example, wealth management managers can first select priority tokens with higher risk levels and lock their return rate at 5%.
With priority tokens, the wealth management manager will be the last person to take the risk. If the return rate of the fund pool is less than 5%, then BarnBridge will use inferior tokens to “replenish” priority token holders rate of return. However, if the return rate of the fund pool is very good, then the holders of inferior tokens will earn more than the holders of priority tokens, which will then be formed between the priority tokens and the inferior tokens A kind of balance.
Currently, BarnBridge is connected to Aave and aggregates the platform’s revenue through its smart contract. When the fund pool expires, BarnBridge will distribute the revenue based on the investor’s purchase share. As shown in the figure below, the difference between the fund pool allocation options mainly depends on the investment performance of the fund pool (Source: BarnBridge):
A similar structure can be applied to provide price exposure to crypto assets through BarnBridge. Nowadays, some traditional financial institutions have begun to add cryptocurrencies to their balance sheets. However, the stability of such assets is still difficult to satisfy traditional financial institutions. But with the introduction of BarnBridge, institutions can better control related risks.
Let us give another example: there is a corporate finance expert who is studying how to get his company to gain exposure to cryptocurrency investment. He has three options:
- Option 1: Buy cryptocurrencies directly on cryptocurrency exchanges such as Coinbase;
- Option 2: Buy cryptocurrency investment products on Grayscale;
- Option 3: Use BarnBridge.
In fact, if the company’s financial expert chooses to hold cryptocurrency directly (option one) or through stocks (option two), then the cryptocurrency exposure he gains will not be able to help the company avoid risks well, because once the encryption As asset prices plummet, companies will bear the brunt of losses. In contrast, BarnBridge can control potential losses through “risk buckets”-that is, priority tokens/inferior tokens.
Assuming that the company’s financial expert deposits company funds with other users’ ETH in the BarnBridge SMART alpha bond pool to purchase priority tokens, it means that the company only needs to face 30% of the ETH token risk exposure. The company’s funds will be kept in a fund pool until expiry. After the expiration, the smart contract will automatically sell ETH to the designated encrypted assets, and distribute the income according to the risk level.
Specifically, if the company spent $100 to buy ETH when the fund pool was formed, and put ETH into the fund pool:
- If the ETH asset price rises to $110 when the fund pool expires, the company will get $3 (30%) from a profit of $10;
- If the price of the ETH asset drops to $90 when the fund pool expires, the company’s loss will only be $3 instead of $10.
Most importantly, if the company wants to liquidate its encrypted assets before the expiration of the fund pool to pay for its daily operating expenses, it is also feasible, because these priority tokens/inferior tokens are all tradable. In addition, all interactions between users and BarnBridge are automated, which not only eliminates the need for intermediaries, but also makes BarnBridge’s service costs lower than traditional financial alternatives. At present, the only “headache” may be the scalability problem of Ethereum itself, which may cause high transaction costs.
Advantages and disadvantages of BarnBridge
In the past period of time, although the DeFi ecosystem has developed rapidly, it has not been able to provide investors with low-risk fixed income services. BarnBridge has effectively filled this missing part. However, for traditional financial users, decentralized finance is still unable to Make it completely convinced.
Even if fixed income tools can help investors avoid high risks to a certain extent, these tools are not completely risk-free. For example, once the cash flow of a company or government suffers from an inflation crisis, it may lead to failure.
Although BarnBridge introduced low-risk fixed-income tools into the decentralized financial industry, some institutions still believe that the DeFi industry is too risky. In addition, the platform’s smart contracts may also have bugs like other protocols. For example, the recent DeFi protocol Harvest was attacked by lightning loans due to application logic problems, resulting in multiple contract transactions being successfully cashed out by hackers about 24 million US dollars.
Not only that, BarnBridge may also be affected by external factors, such as:
- Insufficient liquidity in the BarnBridge fund pool;
- The connected trading platform has low revenue or insufficient liquidity. For example, when there is not enough liquidity on Uniswap and the BarnBridge SMART alpha bond pool needs to liquidate a certain encrypted asset on Uniswap, then investors in the bond pool may experience losses.
The above picture is a comparison of the risk spectrum of low-risk assets such as DeFi, corporate bonds, government bonds, and cash. It can be seen that DeFi risks are still high
Of course, BarnBridge also has many advantages-as the DeFi industry is booming, BarnBridge will grow with it, and BarnBridge is currently the only fixed-income solution in the entire DeFi industry.
However, it is expected that some DeFi lending platforms will soon find relevant methods and provide similar services. But Tyler Ward, the co-founder of the BarnBridge project, said that his team had already foreseen more fixed income tools in the DeFi industry, but BarnBridge’s advantage lies in its ability to aggregate fixed income and smooth it. Processing, and ultimately improve the efficiency of the entire system.
Although BarnBridge is unique in the DeFi industry, there are already some other platforms on the market that can avoid risks, such as options trading platforms like Hegic and Opyn. For some people, especially traders, using these platforms is sufficient controlling the risk. Another thing to pay attention to is that BarnBridge products have not yet provided specific functions, and it is expected that the SMART income bond pool and agreement DAO will not be launched until the first quarter of 2021.
Despite some shortcomings, BarnBridge is still an important milestone in the development of the DeFi industry because it allows institutions to enter the DeFi industry more predictably and more customizable, thereby opening the door to a wider audience. The core significance of the project is to build a “security pillar” for the DeFi industry, and other teams can further promote the development of the ecosystem on the basis of this “pillar”.
The BarnBridge team has good contacts in the cryptocurrency industry. As Taylor Ward shared in an interview, even during the bear market, they have maintained in-depth communication and exchanges with many DeFi industry influencers. The team even With the help of Synthetix co-founder Kain Warwick, the latter introduced the BarnBridge project to the DeFi community on Twitter.
Not only that, but the crypto community’s attention to BarnBridge is also growing naturally. At the time of this writing, the project has gained more than 6,000 followers on Twitter, and its official Discord channel has more than 500 users. The figure below shows the trend of the BarnBridge account follow (weekly) on Twitter (Source: SocialBlade ):
It should be noted that the BarnBridge protocol currently only guides the community through liquidity mining. Once the incentive measures are over, some users may choose to leave the project. In addition, due to the recent poor price performance of BARN tokens, many community members have expressed negative sentiment. This situation is partly due to the increase in the circulating supply of BARN tokens due to income farming. Support the pledge of BARN tokens, as a result, people have little motivation to hold BARN tokens. The following chart shows the recent BARN token price trend (Source: CoinGecko ):
The future of BarnBridge
It is worth mentioning that the concept of BarnBridge can be further expanded, rather than limited to creating derivatives on top of returns and volatility. There are many forms of risk, especially in DeFi, so the encryption community can construct various products based on this concept in the future.
From a traditional financial perspective, the use of BarnBridge can improve the efficiency of stock trading. For example, stock trading can be reflected on synthetic asset platforms such as Synthetix, and BarnBridge can make stock risk exposures customizable.
Generally speaking, BarnBridge is still in the early stage of development and is small in scale, so it is temporarily unable to attract a large number of institutions into the DeFi field. But the real significance of BarnBridge lies in the creation of an “entry track” for the ever-increasing needs of institutions. In the future, institutions will only need to follow this “track” to smoothly enter the DeFi industry.