What Is Tranchess?Sponsored
Tranchess: More Than Just Liquid Staking
By: Rahul Nambiampurath •DeFi Explainers
Chess-themed Tranchess is a brand new DeFi protocol that expands the allure of liquid staking on Ethereum and BNB Chain. But what does Tranchess offer that cannot be found in Lido or Rocket Pool? The clue is in the word itself, tranche, understood in TradFi as a portion of the main fund.
And there is nothing more appealing to both DeFi and TradiFi investors than having a different risk tranche of the original fund based on their preferred risk level. But before we delve into Tranchess and tranching, let’s first understand the value of liquid staking.
Why DeFi Enthusiasts Love Liquid Staking
Liquid staking was born as a function of Ethereum’s lock-up mechanism. When Ethereum transitioned from Proof of Work to a Proof of Stake consensus algorithm, users’ capital became the resource the Ethereum network utilizes to verify each transaction. This is in stark contrast to Bitcoin miners, who continue to use energy-hungry ASIC machines to do the same.
Nonetheless, once users stake their ETH to secure the Ethereum network, these funds remain locked. That is, at least until the end of March. Then, the much-awaited Shanghai upgrade is expected to enable ETH stakers to withdraw both their staked ETH and the accrued staking yield.
Liquid staking came in as a clever mechanic to access locked liquidity without actually unstaking from the Ethereum network, which is presently impossible. Such protocols serve as middlemen:
- On behalf of stakers, liquid staking protocols deposit their Ether in the Beacon Chain to secure the network and earn staking yields.
- In turn, they mint liquid staking tokens equal in value to deposited funds. E.g., The largest staked ETH token from Lido has an “st” prefix, whereas Tranchess’ is represented by qETH.
- As “fund liberators,” such protocols are typically linked to DeFi’s lending dApps and other utilities.
- As the cherry on top, liquid staking protocols help decentralize the network by allocating ETH to different node operators, per the minimum required 32 ETH.
Consequently, users who take advantage of liquid staking protocols can have their cake and eat it too. They contribute to securing Ethereum and earn rewards for doing so, whilst utilizing staked ETH for other DeFi investments. Usually, this involves providing liquidity to decentralized exchanges or using the liquid staking tokens as collaterals for loans.
The practice of liquid staking has become so popular that a single such service, Lido, makes up one-quarter of the total 526,000 Ethereum validators. Source: beaconcha.in
So, one could say that liquid staking tokens are derivatives, boosting the entire DeFi ecosystem with additional liquidity that would otherwise be locked behind Ethereum’s staking bars.
Now that we’ve cleared that up, what does Tranchess bring to the table?
Main Features of Tranchess Liquid Staking
Even after Ethereum’s Shanghai upgrade, there will be a need for liquid staking. After all, the upgrade would simply enable withdrawals, but users may not want to do so. Many DeFi users will still want to participate in the Ethereum ecosystem while having their staked ETH freed in the form of liquid tokens.
The Tranchess protocol has been available since June 2021, but began offering liquid staking more recently, starting on BNB Chain in January 2022 and then expanding to Ethereum in November 2022.
Just like Lido, Tranchess offers a baseline liquidity staking service by minting liquid tokens equivalent to the amount of staked ETH on Ethereum and BNB on the BNB Chain. In exchange, they receive rewards as proxy validators. For example, at the initial launch of the protocol:
- Tranchess mints 100 ETH as 100 qETH.
- As ETH’s Proof of Stake value grows, qETH’s fair value grows as well.
- Over time, one qETH becomes worth more than one ETH.
The “q” is short for queen as a reference to the protocol’s chess theme. These liquid tokens can then be employed in dApps across Ethereum and Binance ecosystems.
As a decentralized protocol, Tranchess offers a liquidity pool in which people trade qETH for ETH. Consequently, because ETH equivalents are often used as collateral for loans, they are typically high in demand. In turn, qETH holders can earn trading fees, by supplying liquidity on decentralized exchanges like Balancer, BiSwap, or PancakeSwap.
Beyond qETH tokens, ROOK and BISHOP are the novel tranche twists within Tranchess, unavailable on other liquid staking platforms.
The Tranche Mechanism
Representing ownership of ETH and BNB, each qETH and qBNB token can be further utilized. Continuing with the protocol’s chess theme, these q liquid tokens can be split into BISHOP and ROOK.
ROOK is aimed at DeFi investors seeking high-risk, high-return strategies, as it involves leveraged long positions on ETH, BNB, and BTC. In this investment strategy, users employ borrowed funds to buy ETH/BNB/BTC, expecting their prices to rise. Assuming that happens, they pocket the difference in price between the original position and its now-higher value.
Using BNB Rook on BNB Chain as an example, represented as nRook, a BNB leveraged long position, is in no risk of forced liquidation, which usually happens when the value of collateral goes under the liquidation threshold. That’s due to Tranchess deploying an innovative combination of its Rebalance model as well as TWAP pricing — Time-Weighted Average Price.
Tranchess uses the TWAP methodology to lower the risk of manipulation or volatility by calculating the asset’s price over a specified time interval. This can range from a few minutes to several hours. So, instead of relying on discrete spot market prices, Tranchess relies on an average price aggregated as the reference point to calculate the NAV of the leveraged position.
In addition to TWAP, Tranches employs its unique auto-rebalancing model to prevent forced liquidations. The rebalance model keeps users within Tranchess ecosystem safe from volatile moves and maintains a good balance between Bishop and Rook. The number of tokens held by each user changes after each rebalance but with the total asset value remaining constant.
Additionally, Tranchess uses well-established Chainlink oracles to receive accurate price feeds.
Of course, to maintain ROOK’s leveraged long position, there has to be an effective funding cost. This metric measures the cost of borrowed funds to maintain a leveraged position for a specified time interval.
ROOK’s effective funding cost is anchored by stablecoin lending rates on popular dApps like Compound and Venus. This means that the cost of borrowing funds to maintain the ROOK position is based on the interest charged for borrowing stablecoins on these protocols.
Lastly, ROOK shares the queen token’s staking rewards.
In contrast to ROOK, BISHOP tranches (portions) utilize a more conservative investing strategy for investors with lower risk appetites. As such, nBISHOP is fully collateralized and anchored to USD, enabling Tranchess users to earn interest by providing liquidity to ROOK’s leveraged exposure.
This makes BISHOP a stablecoin-like product, backed by ETH, BNB, or BTCB; the token received as a rebate for utilizing CHESS. Similar to ROOK, BISHOP shares queen’s staking rewards.
BothROOK and BISHOP can be purchased with USDC stablecoins.
On top of liquidity staking, qETH liquidity providers are rewarded with CHESS tokens, Tranchess’ native governance token. CHESS holders can receive a weekly rebate in the form of all underlying assets available on the chain, totaling 50% of collected fees within Tranchess, excluding gas fees. For example, on the BNB Chain, such rebates come in BTCB, ETH, BNB, and BUSD. As of March 2023, there are 115.3M CHESS tokens in circulation out of a total supply of 300M.
The CHESS emission schedule is determined weekly by voting.
CHESS holders can also vote weekly on the Alpha split between BISHOP and ROOK strategies. In Tranchess’ original design, only QUEEN and ROOK token holders would receive the Alpha rewards. Nonetheless, the community argued that since BISHOP and ROOK tokens are essentially a proportion of QUEEN tokens, BISHOP token holders, just like ROOK holders, have provided liquidity to the staked BNB/ETH and should share the Alpha earning. After a governance proposal, the dev team added a weekly governance voting, which allows veCHESS holders to vote and decide the specific split of Alpha earnings between BISHOP and ROOK..
Nevertheless, with the additional layers of ROOK and BISHOP gambits, CHESS holders vote on the Alpha split — what percentage of staking rewards should be dished out to either.
Tranchess Gives DeFi Users Extra Flexibility
In conclusion, alongside baseline liquid staking via q (or QUEEN) tokens for either Ethereum or BNB Chain, Tranchess offers extra flexibility via ROOK’s leveraged exposure and BISHOP’s high-yield farming.
The CHESS governance token provides added incentives to participate in the protocol. Overall, this DeFi protocol can be summed up as follows:
- Earn staking rewards by depositing ETH/BNB and get qETH and qBNB in return.
- Use qETH and qBNB on a wide range of dApps, as users’ liquidity is freed.
- Stake BISHOP or ROOK to earn CHESS governance tokens.
- Engage in high-risk, high-reward leveraged exposure using ROOK with no forced liquidations and low funding fees.
- Use the conservative BISHOP strategy to earn yield lending to ROOK.
Supported by the two top chains by market share, Ethereum and BNB Chain (BSC runs on top of BNB), Tranchess is ready to cover 71% of the DeFi ecosystem. As a novel protocol, this gives Tranchess a solid head start while giving users more ways to put their crypto funds to work.
Note: This explainer was sponsored by Tranchess
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.