TradFi Products Enter the DeFi Landscape
The Intelligent Insurer #57: Sophisticated products are solving financial access issues
The DeFi space has experienced significant growth since 2020. This exponential growth has brought several innovative protocols that are building open and permissionless financial ecosystems on the blockchain. The total value locked (TVL) in DeFi applications has also skyrocketed, hitting highs of over $250 billion this year. As the DeFi sector continues to expand, many of its protocols are becoming more sophisticated.
The latest Intelligent Insurer will highlight two sophisticated products that have entered the space. We will also consider the problems these products are solving and how DeFi traders and investors can keep pace with the rapid growth. Before we dive into it, we’ll bring you some exciting updates from our software development team.
Insured Finance software development update
As always, we are excited to give you a detailed run-down of the progress we have made in the past week towards the highly anticipated launch of our mainnet. Given that we’re in the final stages of beta testing, we have completed a few tasks in preparation for our mainnet.
For starters, we have completed the draft for the business requirement document of our new insurance coverage dubbed the “Smart Contract Failure”. The draft details the business flow, initial system parameters, roles and processes, background and motivation, and other future development ideas. We also dive into the motivation behind our platform’s launch and visually map out processes.
Additionally, we have completed the integration of decentralized autonomous organizations (DAOs) from Aragon and also added support for other DAO platforms. The claims assessment process, research, and development of the BRD wallet for our users have also been finalized.
To ensure a safe and secure environment for our users, we continue to rigorously test our platform for bugs and improve the quality of our offerings. Over the past week, we fixed the average market price displayed on the UI when creating a listing for providing or requesting cover. Here are a few other bug fixes and feature improvements that we are currently working on:
- A few steps were skipped in the token bridge on the Mumbai testnet. We are working to rearrange them appropriately. User experience was not significantly affected by this bug, but we’re nonetheless working to eliminate any possible flaw in our platform.
- We have finalized the draft of the business requirement document for smart contract failure coverage and it is now officially a proposal.
- Creating wireframe design for the business flow of smart contract failure coverage
- Running a code audit before deploying to the mainnet. As part of this effort we will be initiating the following actions:
- Testing for 15 distinct smart contract attacks
- Unit testing smart contract
- Reviewing the subgraph and the coin API
- Auditing the React app.
- Centralizing a few web components, including popups, buttons, cards, tables, etc, into a web component repository.
Over the next week, we anticipate reviewing the results of our technical audits and ironing out any final kinks in our mainnet release plans. We remain steadfast in our commitment to provide users with a next-gen digital asset insurance platform that will offer a secure and positive experience!
Leveraging DeFi derivatives to unlock off-chain asset values
Traditional Finance or TradFi refers to the current mainstream financial system that several financial institutions, including banks, brokerage firms, and more operate. The TradFi space is typically characterized by a high level of centralization, control, and exclusion of retail investors from many financial services.
Derivatives trading is one of the most lucrative business lines in the TradFi industry. Derivatives contracts are complex financial instruments used for various purposes such as hedging and accessing additional assets or markets. Traders participate in this market to achieve greater yields than simply buying the underlying asset. Typically, the reward profiles of these instruments are much greater than that of traditional assets.
According to recent data from the Bank for International Settlements (BIS), the total notional value outstanding for contracts in the traditional derivatives market for the first half of 2021 rose to $610 trillion. These instruments are typically traded by institutional traders and are inaccessible to the average trader. Derivatives have not made a major splash in DeFi yet. However, several innovative protocols are driving the growth of this market in the DeFi space.
Synthetix is currently one of the largest derivatives protocols in the market, with a TVL of over $1 billion. This DeFi protocol has developed an ecosystem that allows users to gain exposure to real-world assets on-chain.
(Source: DeFi Llama)
Synthetix achieves this goal by issuing assets known as Synths that mimic the price actions of their underlying assets. The protocol generates these synthetic assets via a process called collateralization. Users must purchase the protocol’s native token, $SNX, to collateralize or create new assets on the Synthetix platform.
Once the SNX tokens are deposited on the platform, Synthetix creates a new synth token that mimics the value of whatever asset the user chooses. For instance, synths can be designed to mimic the value of fiat currencies like the USD or crypto like Bitcoin and they are called sUSD and sBTC respectively. Synthetix tracks the prices of these assets via oracles. Thus, traders gain exposure to assets that do not exist on-chain, such as gold, oil, and more.
Hedging DeFi risk with tranche lending
Used widely in the traditional financial markets, tranche products are sophisticated financial instruments that allow investors to choose specific risk and reward attributes. Like derivatives contracts (that are not plain vanilla options,) tranche lending and investment is inaccessible to the average investor.
Several DeFi products are bringing this investment vehicle to the decentralized space. Investors deposit their digital assets into a pool and choose their risk exposure based on two tranches levels, junior and senior. Each tranche pays a different interest rate, with the senior tranche paying less but providing greater payment consistency.
Senior tranches are composed of assets with high credit ratings and usually have a first lien, that awards them the right to be repaid first in case of a default in the loan payment. While the senior tranche is relatively more secure as it bears lower risk exposure, it yields an equally low interest.
On the flip side, the junior tranche consists of assets with lower credit ratings and they bear higher risk exposures since they have either second liens or no lien at all. However, due to the high-risk exposure, the interest rates here are much higher.
BarnBridge is a DeFi protocol that is pioneering this move in the decentralized space. It is a tokenized risk protocol that helps mitigate yield fluctuations and the volatility of digital asset prices by breaking them into separate dollar-denominated tranches. BarnBridge intends to bridge the gap between TradFi and DeFi by introducing more efficient risk management and fixed income tools.
Investors can choose an appropriate amount of risk exposure best suited for their strategies by purchasing tokens. Via its tokenized risk exposure levels, the protocol can either increase volatility for speculative traders or decrease it for conservative investors.
Using its SMART Yield product, BarnBridge allows users to gain access to fixed yield on its platform while also pooling yield from numerous platforms on the ecosystem including Aave and Compound. To help users hedge the volatility of their digital assets and gain more control over the performance assets in their portfolios, BarnBridge introduced its SMART Alpha products. The SMART Alpha Bonds allow investors to earn the highest risk-adjusted returns on their portfolio by allocating funds to multiple tranches containing digital assets.
BOND, the protocol’s native currency, is used to power various activities on the platform, including staking and governance. The BarnBridge protocol currently has a TVL of $10.7 million. These solutions are making interest rates more predictable, helping investors, traders, and liquidity providers to manage risks while getting the most from their digital assets.
(Source: DeFi Pulse)
The DeFi sector continues to evolve
The DeFi space is still in the early stages of its development and the products mentioned have the potential to unlock several innovative solutions. However, these products come with risks too. As more protocols emerge, attack vectors increase in number, exposing these protocols to vulnerabilities. Additionally, these financial products are complex, making them tough for the average DeFi trader to understand.
Therefore, investors must take the time to learn more about these products before investing. They can also do well to heed the age-long investment advice of never investing more than they are willing to lose. Ultimately, they must protect their assets at all times with insurance solutions like those offered by Insured Finance. These insurance products protect users from suffering massive losses in the event of unexpected attacks.
About Insured Finance
Insured Finance is a decentralized, peer-to-peer insurance marketplace. Users can request customized insurance on a wide variety of digital assets, thereby ensuring full protection. Those fulfilling requests can earn premiums and earn a competitive return on their capital. Claims are fully collateralized and settled instantly.