Traders Pour $200M+ Into New Risk-Hedging DeFi Protocols in Two Weeks

There’s a new investment category rising in DeFi: yield optimized by risk level.

At least two projects, Saffron Finance and Barnbridge, have started to offer investors the ability to earn differing yields in accordance with their risk tolerance. Barnbridge currently has $186 million in liquidity mining deposits just weeks after its launch on October 20th, while Saffron’s total value locked is at $58 million after its November 1st launch.

SFI Rally

Each project has its own native token, with Saffron’s SFI soaring by almost 100% in the past ten days to $410. Barnbridge’s BOND token has climbed by 45% from its $17 lows. Zooming out, SFI has soared over 1,000% since its Uniswap listing on November 15th.

SFI’s rally is one that has confused some, especially those that don’t allocate much attention or capital to unaudited projects launched by anonymous teams. But against these odds, SFI is gaining traction.

Saffron Finance aims to allow users to access varying levels of risk and return within DeFi via tranches. DeFi-specific tranched products could help mitigate risks such as market volatility, impermanent loss, DAI falling off its peg, and flash loan attacks.

Saffron is currently focusing on tranching default risk and smart contract risk.

Senior tranches carry the least risk and offer lower returns. Junior tranches carry the most risk and offer higher returns. Mezzanine tranches sit somewhere in the middle.

Users can currently deposit DAI into Saffron’s S tranche, which offers 0.3-3.0% APY through money markets like Compound, or the A tranche. Numbers run by the Spartan Group’s former head of origination Gavin Low suggests the A tranche offers around 55% APY. This is the yield on top of the SFI distributed to liquidity providers on a pro-rata basis.

If a smart contract bug takes place or if the underlying money market fails to properly liquidate debtors, A tranche holders take the fall, while S tranches are protected.

SFI is rallying due to a decision by the Saffron team to require A tranche depositors to deposit SFI at a 1:1,000 ratio to the DAI they deposit.

This has two purposes: 1) to backstop S tranche depositors in case of risk events that wipe out the A tranche, and 2) to give SFI utility to those that want access to higher yields.

Another factor to consider is that the SFI rewards are not equally distributed between the S tranche and A tranche. As of the time of his tweet, Low found that A tranche depositors would get 340% more SFI per DAI deposited than S tranche depositors.

Farmers looking to access the A tranche’s dramatically higher yields bid SFI from $300 to $600 after Low’s tweet was published.

Meet Barnbridge

Barnbridge is another project focused on launching tranche-based DeFi products. Funded by investors like Synthetix founder Kain Warwick and Aave founder Stani Kulechov, Barnbridge launched in October—over a week before Saffron.

Barnbridge and the Saffron team have similar goals: to make DeFi more appealing by hedging risks.

Where the two differ is the planned products.

Similar to Saffron, Barnbridge will also offer products to hedge smart contract and default risk. Though, out of the gate, Barnbridge intends to also offer a product that will enable users to hedge the volatility of cryptocurrencies.

Say ether moved 10% lower, senior tranche holders would only lose a few percent while junior tranche holders would take an amplified loss of potentially 20% or more.

Due to audits and a longer development schedule, Barnbridge only released token generation pools during its launch. Users can currently deposit stablecoins, BOND-USDC Uniswap liquidity provider shares, and BOND to earn BOND. The project has yet to launch tranched DeFi products.

Also, it is unclear if BOND will be used as a backstop for junior tranches, as seen with SFI and Saffron.

This means that at the moment, BOND’s only utility is to earn more BOND. Until a product launches and governance develops, investors are unlikely to bid BOND as much as they did SFI.

Still, Barnbridge measures the market opportunity for tranched DeFi products in trillions. DeFi today only has a total locked value of approximately $16 billion.

The Need for Tranched Financial Vehicles

Beyond a surging SFI price, there will likely be a long-term interest in tranched DeFi products.

Anecdotally, investors I talk to most often mention the risk of volatility and default failure when discussing why they don’t want to put funds in DeFi or cryptocurrencies in general.

Saffron and similar projects such as Barnbridge will offer risk-averse investors to participate in yield farming and cryptocurrency investment with minimized risk. Simultaneously, they will also allow investors seeking higher yields to obtain exposure to riskier financial products.