Tranche Strategy Implementation

[Falcone]

Tranches are fairly popular in the financial space, but it’s not yet implemented in crypto. Saffron Finance is one of the first to successfully solve this problem, so I will be covering how IDLE & Saffron Finance can work well with each other.

OR IDLE can create their own tranche mechanism, with IDLE token being the core of it, which would add an extra utility to IDLE token. For example, in order to participate in the high yield pool, users need have 1 SFI per 1000 DAI they invest. Maybe IDLE can create a similar mechanism where users who want to partake in extremely high yield pools, need to stake 1 IDLE for every x amount of DAI.

Now I will be covering saffron in more detail, so team and users can get a better understanding of the project and why its useful. And to maybe help team with future ideas, if IDLE team decides to work on something like this on their own.

For those not aware, tranches are basically different categories of risk and return. There are usually an A, AA tranche, and S tranche, for both types of users (Risk & No risk).

Think of it like decentralized insurance. S and AA tranche users mitigate their downside risk by buying coverage from A tranche users, who get paid in S/AA tranche users’ yield.

For example, S and A tranche, S gets 95% of its rewards in SFI and A gets 10X yield from DAI/Compound. The A tranche interest is paid-out by the S tranche LPs. If an underlying platform like Compound or DAI fails then A tranche LPs will lose the SFI they’ve staked in the pool to pay out AA/S tranche LPs.

Currently, the S tranche is getting between .80-10% APY and A tranche 117% APY.

So to put Saffron’s innovation into perspective:
Existing decentralized earning platforms expose liquidity providers to an array of catastrophic scenarios where the volatility of crypto and platform bugs could lead to a significant impermanent loss or the liquidation of their crypto holdings.

Saffron is fairly new, but already have 30mil TVL, and are doing a sort of bootstrapping phase with epochs every 2 weeks. The team is Anon and they’re not audited yet, but they are starting to get a lot of attention. They’ve partnered with alphafinance (yield farming protocol) as well as Rari Capital (which is similar to what IDLE does, but doesnt come close to innovation ).

They’re also almost done closing a 1 million seed round

I talked to the Dev and he said to feel free to DM him on telegram if you have any question. He also said they will be adding USDC soon. His handle is @psykeeper_SFI

In conclusion, I really think saffron will be a big player in the DeFi space due to their innovative tranche system. With IDLE’s unique rebalancing system, ease of use, and being the face of DeFi, both platforms can work well together. With partnership/integration, IDLE will be able to offer the highest yield in the market and will attract a lot more attention.

Also, depending on IDLEs future staking & collateral mechanisms, we can create several ways to amplify the IDLE buyback/token burn and revenue share to stakers.

Also, their code is open source in case anyone is interested:

saffron.finance

[william]

@Falcone thanks for bringing this up.
I think a tranches system it’s an interesting concept that should be further explored as a way to repackage yield (and risk) and offer a diversified exposure to lending protocols.

We are aware of Saffron Finance but we should look more into their details before understanding if they could be a viable solution. I think that an in-house tranches system with IDLE being required to buy certain tranches it’s a good idea and a good way to further increase the utility of the token.

We could potentially start with a tranches system where the yield comes from the Idle protocol only and then further expand it to also include more risky protocols and so to have a broaden tranches offer

[Falcone]

I had briefly mentioned that users who want to partake in high yield tranches, will need a certain amount of IDLE per USDcoin invested. So like 1:100 ratio. 1 IDLE per 100 USD or w.e ratio team think is best.

Eventually IDLE price will be too high for all users to afford/partake in high yield tranches, so the only option left would be to lease/rent tokens from other users and pay a premium fee for borrowing IDLE token.

After users are done/exit the high yield tranche investment, the person that leased
the token gets their IDLE back, plus a cut from the super high APY the borrower was able to get from high yield tranche.

(Just sharing the above for more clarity on the initial message I posted, to ensure new and old viewers can see and understand a little better on the extra utility IDLE can bring with tranches)

[william]

The general idea makes a lot of sense to me, details can be further discussed, but having a new use case for IDLE inside tranches seems perfect

[Davide]

Hey @Falcone, I’d like to take back the conversation and see how the protocol can implement a tranche system.

Maybe we should start with an MVP that features the basic operations of a tranche system. The lock of $IDLE tokens, the lending part, or the split of the fees to stakers/lenders might be explored as a further implementation.

I think that there a couple of approaches:

• Open and dynamic APY changes: we can let the market price the security provided by AA tranches. If we split the revenues (90% to BB and 10% to AA), we can expect that the market size of those tranches will be the same and we come back to the current APY of IdleTokens. In that case the market will further self-adjust the percentages, moving funds to safer products like AA and slightly increasing the BB’s APY.
• Fixed APY ratio: this is the approach used by Saffron, using a S tranche that dynamically adjusts the ratio between AA and BB. In this case AA tranches earn approximately 0.1-1% and BB between 50-100%. But if investors do not buy AA tranches and everyone is looking at BB, the TVL can not scale. The sustainability of the system might be further analyzed.

[RTP2016]

I agree with this feature. It’s fairly novel in the crypto space and provides another use case for the $IDLE token, in turn providing another way to utilise the token. Using Saffron as an example, there’s clearly a demand for this, and as more institutions come in to gain exposure to more “exotic” strategies, tools like this could be appealing.

Is this still under discussion?

[Teo]

hey @RTP2016, welcome here on the forum!

I agree with you, tranche lending is an interesting new exotic strategy that exemplifies how composable all DeFi pieces are, and can be a great fit for Idle’s type of liquidity.

As of now, we are hosting a track for Gitcoin Grants 9 that is focused on tranches strategies – and I think we will have more conversations on tranches once other initiatives get closed out, as they’re also part of our community roadmap.