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BarnBridge Review: Tokenized Risk Protocol
With the introduction of blockchain technology, Bitcoin kicked off a revolution potentially even greater than Satoshi Nakamoto ever imagined. Since then, financial technology, or FinTech, has grown at an exponential rate.
Contrary to traditional finance (TradFi), recent advancements in FinTech have proven to be in favor of the masses, much to the dismay of central bankers and Wall Street fat cats.
This revolution has remained a mostly quiet, background operation for over a decade. News coverage has been scarce, aside from the astronomical growth in market capitalization only achieved in the bull runs triggered by the “4-year” Bitcoin cycle.
Early adopters of this movement haven’t always been seen as the visionaries they truly are. Although no less accurate, they are typically described as risk-takers. The monumental swings of an extremely volatile, and frequently unpredictable market are beyond the limit of what most people are willing to self-inflict.
However, over time, crypto has proven itself to be not only worthy of investment… but it is, undeniably, the future we have been waiting for. The advent of Ethereum introduced smart contracts, smart contracts opened the door to DeFi platforms, and those same protocols have subsequently created a world in which nearly everyone with access to the internet has access to the same equalizing financial tools.
People now have the ability to lend to (and borrow from) each other in a trustless, peer-to-peer environment. The advantage to this is the elimination of an intermediary. We no longer need a bank to purchase land, build a structure, pay utilities, and exploit employees so that profits generated from our money are funneled to a few select, “elites”.
The modernization of these concepts has turned to diligently planned and carefully crafted computer coding to take the place of the traditional banking oligarchy. This code is awarded no salary for its effort, and doesn’t even require as much time off as a single coffee break.
Finance was a logical step for the utilization of smart contracts. Finance revolves around mathematics, which is the most reliable language we have. As a bonus, computers happen to be really good at solving math equations quickly and efficiently, AKA, computing. Computer code can be written in a simple format where if the input information from each party meets certain criteria, then an action is executed to provide a designated output. If requirements are not met, a secondary action may be implemented, or the entire transaction may be nullified.
In this brilliant simplicity that is the smart contract, we no longer have a need for trusted third parties to facilitate transactions. The obvious benefit here is a gigantic move in the direction of efficiency. Without a middleman to skim off the top, all money within the system remains in the hands of the people, rather than flowing to the institutions.
However seemingly perfect this solution may be, the lion’s share of investors, and their money, are being withheld for various reasons. Some have what could be considered “tech-latency”, in which they struggle to understand and adopt new technologies. Others are simply more risk-averse, which could probably describe the largest demographic in traditional finance as it is.
Luckily TradFi has been around long enough to develop solutions for the people who like the idea of putting their money to work, but aren’t quite so interested in throwing caution to the wind. A variety of tools already exist to mitigate exposure to risk. The people behind BarnBridge simply wanted to bring these concepts into the next generation of finance.
BarnBridge Overview
“Follow the money” is a common phrase for a reason. In the often unpredictable nature of humanity, this phrase represents one pattern of ours that’s as reliable as any of Newton’s laws. The aforementioned increase in efficiency and yield percentages are garnering attention from new potential investors at an exponential rate. Without doubt, people will continue to follow the money, transitioning from the antiquated TradFi legacy systems to the more empowering DeFi with offerings of much stronger APYs.
Of course, some people have no interest in conducting their own crypto yield-farming. The idea of fluctuating values of digital assets and variable rates of return are just a couple of concerns holding people back from making this move to the future of finance. For them, the risk/reward ratio is outside of their comfort zone. As described by the BarnBridge team, they are offering “risk ramps” which allow investors to allocate their money to funds with calculated, structured rates of risk at which each individual may find suitable for their particular financial goals. In this way, BarnBridge opens the door to a much broader range of potential investors to the DeFi space.
In the era of COVID-19, people are now well aware of the concept of “flattening the curve”. This is one principle BarnBridge uses to mitigate risk and yield percentage fluctuation. By pooling funds of different assets, as well as assets from across multiple platforms, this diversification effectively flattens the curve, or reduces potential risk that may be incurred by any type of outlier event befallen onto a singular asset or lending platform. In much the same way, it also tightens the line for yield percentages to follow by reducing standard deviation.
An example of how this concept of risk mitigation works would be similar to how insurance companies rely on the law of large numbers to reduce their own risk. In simple terms, the more people they insure, the less likely there could be an event affecting the majority of insured people simultaneously. Therefore, the premiums of the unaffected can help pay for the claims of the affected. Whereas if the majority of the insured clients are affected at once, this overload of claims could potentially end up forcing the company into liquidation.
In addition to platform and asset diversification to maximize market efficiency, BarnBridge also plans to utilize tranches, or slices, that can be separated out into varying degrees of risk exposure. For now, they are offering two initial products:
SMART Yield Bonds
SMART is an acronym for Structured Market Adjusted Risk Tranches. SMART yield bonds use debt-based derivatives to reduce the risk of interest rate volatility. This offering is simply broken down into 2 tranches, Junior and Senior. Composed of 70% of the total, the Senior tranche offers a fixed rate of return. The trade-off for this stability is that yield exceeding this fixed rate will spill over into the remaining 30%, the Junior tranche, which has a variable rate of return. This potential windfall for the Junior tranche of course comes with higher risk. Losses are absorbed by the Junior tranche, which acts as a buffer to maintain the fixed rate of the Senior tranche.
(Images sourced from the official BarnBridge Whitepaper, available here.)
Scenario 1:
(Images sourced from the official BarnBridge Whitepaper, available here.)
Scenario 2:
(Images sourced from the official BarnBridge Whitepaper, available here.)
SMART Alpha Bonds
In contrast to the SMART Yield Bonds which focus on yield volatility, SMART Alpha Bonds are structured to mitigate price exposure risk by using tranched volatility derivatives.
In trading terms, you can think of these tranches as being leveraged to varying degrees. The SMART Alpha Bonds come with an added mid-level risk exposure tranche, the mezzanine tranche. Acting with the highest amount of leverage is again the Junior tranche, which offers the greatest risk exposure along with the highest potential gains. The Senior tranche continues to have the lowest risk/reward stance. The Mezzanine tranche is a nice middle ground for the folks who like to adhere to the “all things in moderation” mantra.
Here’s an example of how this works, as an excerpt from the BarnBridge whitepaper:
“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.”
In this example using ETH, the tokenized versions of the assets would breakdown like this:
jETH - a Junior tranche of ETH
mETH - a Mezzanine tranche of ETH
sETH - a Senior tranche of ETH
However, not all SMART Alpha Bonds are holdings of a single asset. They also offer the same tranched price risk exposure for pools of different assets, further reducing volatility.
Here’s a glimpse of the U/I, or user interface. Available in both light and dark modes:
(Images sourced from the official BarnBridge Whitepaper, available here.)
(Images sourced from the official BarnBridge Whitepaper, available here.)
The BOND token
$BOND utilizes the Ethereum network as an ERC-20 token. Thus, it is easy to access through decentralized exchanges such as Uniswap, and store in any ERC-20 compatible wallet, like Metamask. According to CoinGecko, at the time of this writing, the top trusted exchanges to get the BOND token are Uniswap V2, MXC, and Hotbit. The current trading price is $65.52, which is 360% above the all-time low of $14.22 about a month and a half ago, and still 64.7% below the previous all-time high of $185.69 dating back to October 27, 2020. The current number of tokens available is just at 1,358,146 out of a relatively small total cap of 10 million. With the current market capitalization at just under 89 million USD, it ranks #265 on CoinGecko.
The DAO First approach was spawned out of a desire of decentralization out of the gates. The incubator phase, Launch DAO, has already been completed, leading the next state in preparation of releasing BarnBridge DAO which will leave BOND token holders in charge of all governance responsibilities.
A fair vesting schedule has been implemented in which the 22% (2.2 million) allocated to the founders, seed investors, and advisors are locked into smart contracts that release the tokens every week over a period of 2 years.
Here’s how that breaks down:
Total amount of $BOND tokens: 10,000,000
Percent of $BOND tokens allocated to Founders, Seed Investors, & 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%
This is how the token distribution plays out:
(Images sourced from the official BarnBridge Whitepaper, available here.)
Development Timeline
As Barnbridge isn’t quite yet up and running at full capacity, here is the current projected outlook to achieve noteworthy milestones (adjusted for time elapsed since the most recent whitepaper update at the time of writing):
BarnBridge DAO - Live as of January 4th, 2021
SMART Yield Bonds - Estimated time to build, test, and launch on the testnet (including the oracle system): 8 weeks
An additional external audit will push the launch on the mainnet by approximately 6 weeks.
SMART Alpha Bonds - Estimated time to build, test and launch on the testnet: 16 weeks
An additional external audit will push the launch on the mainnet by approximately 6 weeks.
Graphic of the timeline:
(Images sourced from the official BarnBridge Whitepaper, available here.)
Who is behind BarnBridge?
The core foundation boils down to just two guys. Here are the descriptions they have provided of themselves:
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 and 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 crowdfunding 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.
The primary tech partners on this project come from a company called Digital MOB. Their collective experience covers a vast array of computer science specialties, including: complex blockchain projects, web3 development, web and mobile development, system architecture, security experts, and analysts.
The Digital MOB team includes:
Milad Mostavi
Bogdan Gheorghe
Dragos Rizescu
Other tech partners:
Atpar
Centrality
Rude Labs
Proof Systems
Advisors and investors include:
Kain Warwick - Founder of Synthetix
Aaron McDonald - CEO of Centrality
Fourth Revolution Capital
ParaFi Capital
BarnBridge Future
Considering BarnBridge doesn’t have its own native lending platform, all assets pooled are derived from existing (and future) DeFi lending platforms. The team has a strong, and noble, desire to remain asset and platform-agnostic. This fits nicely into the theme of decentralization and diversification, allowing them to avoid the risk of being anchored to a bad partner or faulty asset. Although it has not been expressed by BarnBridge, it would be reasonable to believe they will be open to the idea of operating across multiple blockchain networks in the future. It's part of their vision to have a sort of plug-n-play level of adaptability. The same smart contracts and algorithms can be applied to different assets over time and they can continue to offer a greater variety of asset pools to choose from.
Additionally, they have plans for these offerings in the future:
SMART Swaps - one loan broken into 4 instruments
SMART Prediction Hedge - Derivatives hedging fluctuations in prediction market odds
Market Driven Ratings Oracle - Trestle Point Index
Honestly, this Trestle Point Index is a clever idea. Here is how they describe it:
“Leveraging the wisdom of the crowd we can create an index that works as a ratings system providing an oracle mechanism that can be used by any platform in DeFi. A Moody’s for the decentralized future if you will.
The risk assessment framework used to rate the tranches could be used to determine market sentiment. Driven by the markets that form behind the tokenized tranches, the ratings that determine the tranche formation would become a ‘fear gauge’. In short, if the riskier tranches are more popular then it could offer an early sign that the underlying components are less risky. Similarly, if the usage of the lower yield, safer tranches see an increase in volume, this could be an early warning sign that a vulnerability was found and an attack is potentially imminent.”
I suppose you could think of this as a modern replication of the most convenient tool a farmer has to predict an incoming storm: the behavior of his livestock. Except in this case, we’re the animals, and the AI is the farmer.
Jumping out of the Matrix, and into security… BarnBridge has policies for rigorous audits and simulations to be performed on all future products as well as the ones currently in development.
Conclusion
Troy and Tyler saw the bright future of DeFi and identified a massive hole in the market that needed to be filled. The demand for the risk mitigation offerings of BarnBridge cannot be ignored, and should not be underestimated. Being the first DAO to tackle this will undoubtedly give them a huge advantage in dominating this portion of the market.
The crypto space is all about identifying needs and implementing solutions, and this team has certainly shown they understand this concept well. The combination of solid initial offerings as well as innovative future products is exciting, to say the least. Their goals of agnosticism and adaptability will likely go a long way in helping them achieve widespread adoption of their services.
If you think this sounds like a tokenized version of the 2015 Hollywood hit The Big Short, you’d be right. Fear not, as these concepts are functionally sound. However, any fund is only as strong as its underlying assets. Nobody here is offering a house of cards built on a pile of garbage subprime mortgages hidden behind a cloak of opacity. The funds offered by Barnbridge are fully transparent so you know exactly what you’re investing, or decidedly not investing, your money in.
If you’d like to stay up to date on everything BarnBridge you can check out their Twitter and Medium.
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