BarnBurner | March 26th 2021
Explaining SMART Yield and the Implications of the First DAO Proposal
On Pavlo’s Loop
Nowadays, you would be hard pressed to find any difficult-to-understand topic that does not have a corresponding children’s book seeking to explain it. Quantum physics, Bitcoin, our solar system; you name it, there are allegories breaking it down. With BarnBridge’s first app, SMART Yield, having just launched last week, why not try and explain it for the next generation of DeFi degens?
So, picture this: you’ve just come across the world’s largest see-saw, sitting on a verdant coastline. On one side, the beam strikes deep into the ocean; on the other, it sits below a towering tree lined with a crown of bananas. Not only that, but there’s even a spring positioned below the latter side to prevent it from ever totally hitting the ground.
Like thunder, you hear a crowd of apes emerge from the jungle to clamber up the shore side of the beam! The seesaw creaks under their weight as more and more pile on for a chance at the bananas overhead, slowly sinking their side. As the ocean side of the beam emerges from the depths and the bananas grow increasingly out of reach, some of the apes grow disillusioned and return to the jungle in search of easier prospects. Those that remain are rewarded, however, as you witness a killer whale burst forth from the ocean, twirling in the sun before plummeting onto the beam. Its impact catapults the ape faithful up to their bananas, attracting the doubtful to return and setting the cycle in motion once more. The killer whale is left to rest easy as it submerges on the beam, knowing that the apes will eventually weigh down their end yet again and bring him up to breathe.
Our intern’s done a great job of capturing the moment:
What’s that? You left your imagination behind on your 7th birthday and need some more clarity on this contrived metaphor? Okay, okay - we’ve brought on McKinsey* to provide some strategic clarity:
As illustrated, SMART Yield is all about aligning two very different groups of DeFi market participants to create a TVL-accruing flywheel. Junior tranche holders effectively purchase risk off of senior tranche holders, bearing the brunt of volatility in order to offer the latter a guaranteed fixed rate of return. As more participants enter into junior tranches, the fixed income rate offered by the next marginal senior tranche rises until one market participant purchases that tranche, thereby providing more capital to the protocol and driving up the variable rate being earned by all junior tranches. This cycle is best captured by “Pavlo’s Loop” as described in the community Discord chat and expounded upon below:
More Juniors are Minted, Driving Up Senior APR: SMART Yield aggregates a singular principal amount across juniors and seniors and divides yields across both cohorts equally. As more and more of the principal derives from the junior participants, this creates a leveraged yield profile for the next marginal senior tranche.
Senior Tranche is Minted, Locking Up TVL in BarnBridge: Senior tranches are discrete NFTs, with their principal held until maturity. Higher TVL not only improves the yield profile available to juniors, but it also results in higher fee revenues for the BarnBridge treasury.
Junior APR is Driven Up, Attracting More Juniors: The cycle continues with more TVL locked in the protocol, with this back and forth continuing until a steady equilibrium between seniors and juniors is reached (i.e., slightly below and slightly above originator APR, respectively).
And around we go!
Governance Update
This past week, the core team proposed the formation of a three person organization that would represent the BarnBridge community in implementing successful governance proposals going forward. Specifically, proposals related to integrations and DeFi partnerships that fall outside of the scope of the core team’s current roadmap, and therefore, its available resources.
We received great feedback from the community that we intend to reflect in a SnapShot proposal that will be going live in the coming days. Namely, a number of community members called attention to the fact that naming this organization a Council implied a number of things that were not intended. While our ultimate goal is to have the core team dissolve into a larger protocol governance infrastructure, this specific team represents a first step in getting there.
The SnapShot proposal will make this clearer with a new name for the group and more information on how we see BarnBridge governance evolving over the next year. Please feel free to keep the conversation going on the forum thread.
Network Metrics
We’ll regularly be reporting on relevant protocol metrics here going forward. Future editions will dig deeper into BarnBridge TVL and $BOND data. For now, enjoy these snippets from Ser 0xBoxer’s Dune Analytics dashboard.
Disclaimer: BarnBurner is not an official BarnBridge publication and is not meant to reflect the shared views of its core team or BOND token holders. BarnBurner is an educational weekly newsletter meant to share updates on technical and governance-related happenings that occur within the BarnBridge ecosystem. The content herein is not financial advice and readers should not base any investment decisions off of it.
Thanks to Zach Owens for his branding work 🤝