DAOrayaki Reserach |BarnBridge: A Fluctuations Derivatives Protocol for Hedging Yield Sensitivity and Market Price.

17 min readJun 18, 2021

DAOrayaki DAO Research Grant：

Fund Address: 0xCd7da526f5C943126fa9E6f63b7774fA89E88d71

Voting Result：DAO Committee /7 Yes

Grant Amount：200 USDC

Category: BarnBridge, SquadDAO, TradFi, DeFi, Structured Market Adjusted Risk Tranches (SMART), Bounty Hunters, yield bonds, SMART Alpha Bonds, yield-based derivatives

Contributor：Jones, Julie, DAOctor @Daorayaki

Launch date: BarnBridge first appearance was in the Q2 of 2019.

Token name: BarnBridge token was initialized under the name “BOND”.

Token type: BOND was issued under the ERC-20 standard protocol.

Chinese Version:

https://daorayaki.org/barnbridge-yong-yu-dui-chong-shou-yi-lu-min-gan-xing-he-shi-chang-jie-ge-de-bo-dong-yan-sheng-pin-xie-yi/

Financing:

BOND initial price: $0,03USD, the initial coin offering started in 15th Dec, 2020 and ended in 22th, Dec, 2020.

BOND current price: $24,84USD.

BarnBridge current volume: $62,46M USD.

Total USD raised: the total amount of USD raised through the ICO was $6,35M USD.

Brief Overview about BarnBridge:

BarnBridge (BOND) is a tokenized risk and fluctuations derivatives protocol allowing investors to hedge yield sensitivity, market price risks and interest rate volatility using debt-based derivatives. Furthermore, BarnBridge offers an alternative to the variable rate annuities offered by many decentralized financial platforms, structuring yield into fixed rates in the form of locked collateral with maturity on repayments (BONDS) as well as offering fixed rate annuities with no maturity period. This unique approach to derivative restructuring will reduce complexity of financial planning for investors who may be new to the decentralized financial sector. BOND token holders can stake the platform’s native ERC-20 governance token to gain community voting rights. BarnBridge’s SMART Yield system splits debt-based derivative pools into tranches based on risk, quantified as ERC-20 token jTokens for higher risk or as ERC-721 sBOND NFTs for lower risk.

I.Background:

The acceleration of debt levels, across the globe, was happening before the financial crisis caused by Covid-19. In Q1 2020, all countries saw a global debt increase to $258 trillion. This number is 331% above global GDP, according to the IIF, which represents global banks and financial institutions. With the Federal Reserve operating under the pretense that they have an infinite supply of cash and euphemism “money printer goes brrrr” joining the mainstream lexicon, it’s quite clear these numbers will likely increase and debt issuance to GDP will continue to accelerate.

The traditional financial system, referred to as TradF, is experiencing a historic uptick in aggregate debt levels while yield and interest rates plummet. Meanwhile, there is a decentralized financial system, referred to as DeFi, burgeoning in the digital economy with digital assets and cryptocurrencies. While debt levels, which is referred to as TVL, or total value locked in decentralized financial protocols, has increased from hundreds of millions last year, to billions of dollars in 2020, yield on these instruments continues to dward the menial rates offered by comparable products in the legacy TradFi system. Conversely, due to assumed higher risk levels coupled with higher efficiencies provided by smart contract technologies, annual percentage yield (APY) is far higher on decentralized protocols than what can be found in the traditional financial system. Working is following the historical trend of following higher yield which is why TVL is moving to DeFi at an accelerating rate. Thus, the need for familiar TradFi instruments to exist throughout the DeFi ecosystem has never been stronger. BarnBridge is an idea whose time has come.

1. DeFi Primer: Risk Ramps and TradFi Bridges:

The yield products in the decentralized markets which are yielding higher APY than yield products in traditional markets are currently crypto backed loans. Instead of selling crypto for fiat, borrowers are staking digital assets and receiving digital assets in return. While these loans have mostly been short term loans to traders, the system has proven to be efficient & ripe for expansion. These efficiencies will inevitably attract higher value, longer duration loans to decentralized ledgers. The efficiencies referenced are enabled by smart contracts’ ability to hold digital collateral until both sides of the transaction fulfill their obligations algorithmically. The reduction of custody, settlement, and escrow — labor-intensive, costly actions within the legacy system — to algorithmic actions is reducing the rent charged by the labor to perform these actions. These efficiencies, coupled with the perception of higher risk, are why the yields are higher on decentralized systems. As risk in DeFi converges on risk levels perceived in TradFi, by the nature of the loans moving from crypto backed loans to traders to collateralized mortgage loans to homeowners, for instance, the efficiency of smart contracts will continue to offer higher yield on decentralized systems than traditional centralized systems.

What’s more, the efficiency of smart contracts and DAO technologies allows for far more complex derivative instruments to be built & provides a level of transparency and security unfathomable to current financial networks. All of these efficiencies are currently stemmed and built off of crypto backed loans.

As previously discussed, these efficiencies should extrapolate to mortgage debt and corporate debt moving to decentralized platforms on a longer timeline. This should also encourage more complex derivatives based on debt and yield to move to decentralized platforms. Thanks to the innovations of blockchain, cryptocurrency, smart contracts, and decentralized autonomous organization technology, it becomes possible to structure far more complex derivatives and track them with far greater efficiency and transparency than before. $244 trillion in debt and yield based derivatives will continue to move to more efficient technologies over time. The migration of yield and yield-based derivatives from less efficient centralized financial systems to more efficient decentralized financial systems will be one of the largest movements of wealth in human history. BarnBridge exists to help facilitate this transition and make the decentralized financial system more efficient, risk-flexible, and attractive to a wider range of participants.

There is a massive market for people wanting to get into crypto who (1) don’t want to bite off the entire risk curve of owning, lending, or receiving an entire digital asset & (2) will never take the time to use a decentralized autonomous organization (DAO) to create a smart contract which algorithmically scripts both sides of the loan or agreement. Over 99.9% of global debt is still structured via traditional markets and is starving for yield. Conversely, more advanced financial companies have no risk tolerances. This allows for different structures at each point of the yield curve with the riskiest (likely hedge funds) wanting to put the least money down with the highest return for their bet/hedge. On the contrary, more conservative investors are often willing to give up a large portion of upside opportunity in order to access safer instruments. “Riskless” products, as tradFi describes them, are not currently offered in the decentralized financial ecosystem. The opportunity to structure these types of instruments will allow for more risk averse investors in the traditional markets to move into the decentralized markets.

In the shorter-term phase (DeFi) & medium-term phase (Proof of Stake) risk ramps will continue to create markets and industries for traditional investment firms who want to “get off zero” or “get above 1%”. As this happens, more and more types of loans will move to decentralized ledgers. In the long run, and partially through this process, lenders and borrowers will understand why decentralized and trustless intermediaries are superior and less costly than the current 3rd party intermediaries. As this happens, ledger portions of the $244 trillion in global debt will move to the chain, creating the opportunity for more yield, more risk ramps, and higher CD-like (collateralized debt) products for fiat and crypto depositors of the new age commercial banks & financial markets.

II.Team, Affiliates & Partners:

1. Core Team:

Troy Murray — Troy runs RUDE_labs, a crypto centric artist company. Troy has been exploring the many benefits that Blockchain can bring to media and artists since 2012 when he got bit by the Bitcoin bug and has been falling down the rabbit hole ever since. Troy has worked in an around the Crypto space, devoting most of his time to Ethereum based projects. Previously was working on SingularDTV/Breaker and snglsDAO trying to decentralize media and entertainment. Before that he was building a Title III equity crowd funding platform using Ethereum tokens in 2016.

Tyler Ward — Tyler runs Proof Systems, one of the largest marketing & UI/UX companies specializing in digital assets. Tyler has worked with ConsenSys, Earn.com (who was acquired by Coinbase), FOAM, Dether, & Grid+, Centrality, Sylo (a decentralized messaging dApp with 300k users in NZ), NEAR Protocol, DARMA Capital, SingularDTV & the snglsDAO. He started working in crypto in late 2016 & has bought and sold numerous ecommerce companies.

Digital MOB — DigitalMob, a software development company experienced in building complex blockchain products, is taking the technical role in the product with an extensive team of web3 developers, web and mobile developers, system architects, security experts and analysts.

Milad Mostavi — Milad co-founded and runs DigitalMOB. He is a seasoned software architect and in the past 5 years has worked with ConsenSys on a dozen of different projects. His contribution was decisive in successfully launching SingularDTV and Gnosis and orchestrated the development of SingularDTV’s entertainment decentralised ecosystem.

Bogdan Gheorghe — Bogdan considers himself a DeFi nerd — with a background in mathematics and data science, he spent the past 2 years at Alethio doing data analysis on blockchain data, using and researching almost all DeFi protocols in order to put a DeFi flavor to the Alethio product suite. Having also worked on development and sales for the Codefi DeFi data API, he was in contact with all of the major protocol teams. Now he is part of Digital MOB taking the product owner responsibility to build DeFi products.

Dragos Rizescu — Dragos is responsible for product development at Digital MOB. His background is full stack developer with a passion for building highly scalable user interfaces. In the past 5 years Dragos has been at the forefront of web3 technologies. He co-founded Treum.io, a blockchain supply chain solution that brings transparency, traceability and tradability to highly valuable physical assets. As a developer, he was part of the core team to launch projects such as Gnosis and SingularDTV and has advised and supported multiple projects in the ecosystem, most notably Alethio. He worked with ConsenSys to support the enterprise arm of the company, being part of the development team to deliver the first non-financial Ethereum use case, a track and trace solution of rock samples for BHP and a solution for decentralized energy markets with BP.

2. Advisors/Technology Partners:

Aaron McDonald — Co-Founder and CEO Aaron is a 20 year tech industry veteran with experience leading teams across all aspects of a technology company managing portfolios over $1b in value. Aaron founded Centrality a leading $100m global venture studio supports a venture portfolio leveraging decentralised technology to create new market innovation and customer experiences. Aaron is a board member or advisor to more than a dozen venture companies around the world. In 2018 Aaron was awarded EY Entrepreneur of the Year for the technology and emerging industries category.

Atpar — the company behind ACTUS protocol — whose goal is to provide the Ethereum community and the TradFi world with the tools necessary for fulfilling the vision of an open, interoperable and frictionless financial ecosystem. At its core, the ACTUS Protocol leverages the Algorithmic Contract Types Unified Standard (ACTUS) which is a formal representation of all kinds of financial contract types in terms of their financial obligations.

III.BarnBridge DAO mechanisms:

1. Tokenized Risk Protocol:

Barnbridge is the first tokenized risk protocol. Before the advent of smart contract technology, it was close to impossible to track & attribute yield to a divided allotment of capital, trustlessly & transparently, to provide hedges against any and all fluctuations. Conceptually, A person can build derivative products from any type of market driver fluctuation to hedge various risks, but are not limited to interest rate sensitivity, fluctuations in underlying market price, fluctuations in predictive market odds, fluctuations in default rates across mortgages, fluctuations in commodity prices, and a seemingly infinite number of market-based fluctuations to hedge a particular position. BarnBridge got inspired by this to create the first cross platform derivatives protocol for any and all fluctuations. To start, the team focused on yield sensitivity & market price. Downstream, they plan to introduce a far wider variety of hedges against fluctuations in the decentralized ecosystem. BarnBridge aims to be platform and assed agnostic.

A person can reduce the risk of digital assets & digital asset yield sensitivity by breaking them into essentially infinite, separate, dollar-denominated chunks, or tranches, and building derivatives off these tranches. BarnBridge aims to smooth out the risk curve and offer layered risk management to both DeFi & TradFi investors by building more efficient debt & yield-based derivatives.

2. Initial Product Offerings:

SMART $BONDS — Structured Market Adjusted Risk Tranches.

2.1. SMART Yield Bonds:

Interest rate volatility risk mitigation using debt-based derivatives. Currently, the decentralized financial system is primarily offering variable rate annuities. However, the ability to structure yield into fixed rates will come in the form of locked collateral with a maturity on repayments, or bonds, as well as fixed rate yields with no maturity, or annuities. From BarnBridge point of view, this latter can’t be a novel idea and these types of products will come to DeFi sooner or later. However, the types of derivatives & complexity reduction in financial planning that can be able to structure and implement with the existence of fixed yield in smart contracts will be mind blowing to traditional financial markets.

Decentralized financial instruments are showcasing the power that a trustless financial industry can wield. Powerhouse projects in the DeFi space like MakerDAO, Synthetix, AAVE, Compound, Curve and others are producing yields for users that have none of the constraints and rent seeking of tradFi instruments by replacing bookkeepers, escrow and various overhead with algorithms, trustless oracles, and decentralized ledgers. Different market driven yields can be found on numerous decentralized platforms, but there is nothing out there that services & pulls together all of the different decentralized protocols & allows for a normalized risk curve and derivatives for risk mitigation. Furthermore, efficiencies across lending protocols are non-existent in the current DeFi markets, and the ability to pull yield from numerous protocols and tranche them into higher and lower yield buckets is something that exists in traditional financial markets but is more efficient in decentralized financial markets, assuming an acceptable level of liquidity.

According the BarnBridge team the first structuring will not only allow DeFi users to get access to fixed yield but also pools yield from numerous protocols across the ecosystem creating a more efficient market, again, smoothing out the yield curve across the entire industry. By algorithmically pooling interest generating digital assets on a number of lending platforms, BarnBridge is able to create greater efficiencies by spreading risk & normalizing the industry risk curve and since BarnBridge does not lend money directly off a native platform, and instead pools lending across the industry, it allows us to be platform agnostic and digital asset agnostic which in turn will allow for more complex structing and bond rating systems downstream.

Risk and Loss Scenarios:

Pooled collateral would be deposited into lending protocols or yield generating contracts, and the yield will be bundled into different tranches and tokenized. So, you could buy exposure to the most senior tranche and get a lower yield but have a much lower risk profile. SMART bonds are a way to buy and sell risk on yield with all of the pricing driven purely by the market.

2.2. SMART Alpha Bonds:

Market Price Exposure Risk Mitigation using tranched volatility derivatives. The SMART Alpha bonds will not be structured via traditional yield tranches but instead with various levels of market price exposure, which we will call risk ramps. The idea is that every bucket or tranche of price exposure does not need to be flat across the entire risk curve, meaning the first $100 of price exposure doesnot need to deserve the same upside and downside volatility. This is similar to having fractional ownership but with different risk/reward for the fractions. For example, if the current price of 1 ETH is expected to be $1000, and moves to $900, the first tranche (the riskiest tranches) takes a higher percentage of the loss. Conversely, if the current price of 1 ETH is expected to be $1000, and moves to $1100, the first tranche (the riskiest tranches) takes a higher percentage of the gain.

How these gains and losses are measured and allocated across tranches can be done algorithmically with smart contracts, where each tranche can be traded as a unique digital asset. For example, jETH (a junior tranche of ETH price exposure), mETH (a mezzanine tranche of ETH price exposure), and sETH (a senior tranche of ETH price exposure). The tranches will exist as risk ramps in which users of various risk appetites can gain price exposure to digital assets. Furthermore, The SMART Alpha product will make way to build tranches of single asset and multi-asset pools that generate yield and where lower risk ramps get lower returns when the underlying assets rise and lower losses when they drop. However, we can build this without needing yield attached at all. The opportunity for downstream opportunities to use various risk ramps for differing collateral obligations is a logical progression these risk ramp will create.

2.3. UI/UX Interface (Light):

2.4. UI/UX Interface (Dark):

3. Token — $BOND:

BOND is an ERC-20 token. It is used to stake in the system, and as a governance token when the governance module is launched. As it conforms to the ERC-20 standard, the $BOND token is tradeable on any exchange and storable on any wallet — allowing anyone in the world to access it.

3.1. Distribution:

The distribution breakdown is designed to facilitate the most decentralized protocol and make sure power doesn’t reside in the hands of a few.

3.1.1. Fair Vesting:

The vesting schedule is designed so that there is not a giant cliff waiting over users heads at a specific point. The tokens allocated to the Founders, Seed Investors, and Advisors are locked in a smart contract that releases the tokens on a weekly basis over a. two-year period. The vesting period starts with the launch of the Yield Farming mechanism. This breaks down as such:

- Total amount of $BOND tokens: 10,000,000.

- Percent of $BOND tokens allocated to Founders, Seed Investors, and Advisors: 22%.

- Total amount of $BOND tokens vested: 2,200,000.

- Length of vesting: 100 weeks.

- Release schedule: 1 week.

- Amount of $BOND tokens released each week: 22,000.

- Percent of $BOND tokens released each week: 0.22%.

3.2. Governance:

The $BOND token is the system’s governance token, empowering $BOND holders to vote on updates to the platform. Combining governance mechanisms and incentivizing holders, it serves as a means to align the different stakeholders in the system. $BOND also serve as a security and policy management medium. Decentralized, automated governance, that incentivizes participants and aims for security, sustainability, and participant welfare is key to a DeFi protocol’s success.

3.2.1. DAO First Approach:

BarnBridge is taking a “DAO First Approach” to spinning up the protocol, choosing to use decentralized tools from the start to achieve the team final goal of complete decentralization and having a flexible smart contract system able to add / upgrade / remove functionality all based on DAO proposals. In addition to that, BarnBridge launched an incubator DAO called Launch DAO with the final protocol DAO known as “BarnBridge DAO”.

- Launch DAO:

Starting with Launch DAO, the Founders, Seeders, and Advisors an Aragon DAO Company Template which uses transferable tokens to represent ownership stake. Decisions are made based on stake-weighted voting and the Launch DAO took $BBVOTE token as a native token, which is divided as follow: The Founders receive 45%, Seeders receive 45%, and Advisors get 10%. From the other side the support is set to 62%, which means more that 62% of the voting shares need to be present at a vote. The minimum is set to 62%, meaning for a proposal to be passed it must be approved by at least 62%.

The funds from the seeders and the initial supply of the $BOND token is kept in the Launch DAO treasury. Launch DAO also has Aragon Agent activated and possible integrations for Uniswap pool allocation and Balancer pool allocation control situated within the DAO.

- BarnBridge DAO:

BarnBridge DAO is the DAO controlled by the $BOND community. The BarnBridge DAO has full control over the protocol and the features that are built into it. This is accomplished through the use of the Diamond Standard (EIP-2535), which allows us to upgrade the protocol without having all the members remove their tokens and switch to a version 2 of the protocol that time arises. The BarnBridge DAO also has a full control over the Diamond which provides amazing flexibility in the WEB3 space.

IV.SquadDAO:

Along the road BarnBridge team came across developing a BOT for Discord platform to be used as a DAOs management utility, below we provide a brief overview of this BOT along its various usages.

As DeFi grows and evolves, more and more DAOs are putting out bounty and grant programs to get some help and involvement from the community members. However, when it comes to practice, there is no clear flow for contributors to organise themselves into teams and manage the granted funds efficiently, and since BarnBridge the team behind SquadDAO has a lot of plans for the grants and bounties, they realised that there is no good for the community members to work through for this reason particulary they decided to create SquadDAO.

SquadDAO uses Discord as a reputation system that allows people to connect with others and lets them easily communicate. From the other hand, Gnosis Safe Multisig helps teams manage their funds since it has a beautiful UI & UX. Despite that SquadDAO was developed by and for BarnBridge, the team haven’t used the BarnBridge branding on it because they wanted to give it out to the whole DeFi community. It is completely open-source and permissionless so any project team is free to take and use it.

V.Contact Information:

Official website:

- BarnBridge: https://barnbridge.com/

- SquadDAO: https://squaddao.com/

Medium:

- BarnBridge: https://medium.com/barnbridge

- SquadDAO: https://medium.com/barnbridge/introducing-barnbridge-3f0015fef3bb

Twitter: https://twitter.com/barn_bridge

Github:

- BarnBridge: https://github.com/BarnBridge/

- SquadDAO: https://github.com/dgornjakovic/daofirst-bot

Discord: https://discord.gg/Jtq9vu29