Decentralized Finance (DeFi) is a relatively new and fast-growing concept in the world of finance. And, thanks to protocols like Barnbridge, it offers an alternative financial infrastructure for those willing to step away from traditional financial systems.
In this feature, we will take a look at the concept of decentralized finance, along with Barnbridge tokenized risk protocol. The aim of this article is to give a general overview of the entire concept and the guidelines that are incorporated in its functioning. This includes Bond tokens, the act of tokenized risk, and everything else related to the Barnbridge protocol.
What exactly is Decentralized Finance?
In 2020, decentralized finance exploded in popularity. The market started with a worth of a few hundred dollars but has skyrocketed to a market cap exceeding $45 billion. Moreover, the growth spurt shows no sign of stopping. In fact, it is just beginning.
The concept of decentralized finance is quite simple when you look at it. In essence, it eliminates the use of centralized financial institutions. This includes intermediaries such as insurance funds, banks, and credit unions.
As an alternative, the decentralized finance uses peer-to-peer transactions. These are mainly done through blockchain-powered smart contracts that incorporate digital assets.
The best part about these smart contracts is their automation. The automation eliminates the otherwise costly, slow, and painstaking processes associated with intermediates.
What is possible through decentralized Finance?
By virtue of protocols such as Barnbridge, everything possible through traditional finance is theoretically possible through decentralized finance.
Therefore, transfers, trading, and even more complex financial moves such as yield farming are possible.
And since decentralized finance relies on blockchain technology, this ultimately results in a fairer and more transparent financial system.
How does decentralized finance work?
Through the use of smart contracts, decentralized finance combines decentralized apps and interchangeable protocols to create a peer-to-peer financial network. In many ways, the process is similar to how centralized financial systems use APIs to connect services.
Benefits of decentralized finance?
Since decentralized finance is actually a set of apps and protocols operating on top of a blockchain, it’s the users of the protocols who reap the rewards.
The system is censorship-resistant. This is because blockchain eliminates the need for third parties, meaning anyone living anywhere in the world can participate in the ecosystem.
All financial transactions occur in rapid succession as they don’t require human interactions. More importantly, the costs incurred are a fraction of those you would expect to pay for traditional financial transactions. Again, this is due to eliminating the need for third parties.
Full custody of finances
The user always holds the private keys. Therefore he/she is in total control of the money being moved. In other words, blockchain facilitates safe financial self-custody of assets.
One of the main advantages of decentralized finance is transparency. All transactions on the blockchain are public and visible to everyone. This increases both price and market efficiency.
Where does Barnbridge come in?
Barnbridge is a cross-platform protocol that compliments decentralized finance through tokenized risk.
The concept was first published in 2019 and soon gained momentum upon its release. This was mainly in part due to it being a one-of-kind protocol. In the world of decentralized finance, nothing compares to Barnbridge.
It is the first protocol based on fluctuation derivatives. Before the introduction of smart contracts, there was no way to track and assign a yield to a divided allotment of capital.
The Barnbridge protocol makes this task trustworthy, transparent and allows for hedging of every possible form of fluctuation.
How does Barnbridge work?
Technically it is possible to create derivative products to hedge a wide variety of risks occurring due to fluctuations in the market.
Examples of such fluctuations are endless and infinite. However, common fluctuation occurs in commodity pricing, the sensitivity of interest rates, and mortgage rates.
As you can see, in the world of finance, there always seems to be a never-ending list of fluctuations that could hedge a certain position.
The Barnbridge cross-platform derivatives protocol is innovative in the way it attempts to tackle fluctuations in the market.
Currently, the protocol’s primary approach is limited to fluctuations in market price and yield sensitivity.
That said, there is the potential to apply the protocol to all types of fluctuations in the market. And in the future, they are planning on increasing the effective scope of their hedges against different fluctuations in the market.
Barnbridge fluctuation derivatives
Their theory is quite simple to understand on paper as it involves a straightforward take on a solution for the risks that come with digital assets.
The concept involves reducing the risk that comes with digital assets and their yield asset sensitivity. It does so by breaking digital asset investments into infinite, dollar-dominated chunks known as tranches and building derivatives off these tranches.
This provides traditional investors with layered risk management, effectively smoothen out the risk curve. This risk management system introduces better functioning yield and debt-based derivatives.
Initial Product Offerings
Currently, Barnbridge offers two smart bonds. However, the team hopes to expand on these as the protocol matures.
Smart Yield involves reducing interest rate volatility. It does so through derivatives based on debt. This allows users to obtain a fixed yield, whilst smoothing the yield curve for the rest of the industry.
Here the total collected collateral is deposited into protocols or contracts that generate yield. The yield is then tokenized and bundled up into different tranches.
So from here as a user, you have the freedom to buy into tranches based on your preferred risk tolerance. In other words, the lower yield, the lower the risk.
SMART Alpha bonds
SMART Alpha Bonds involves mitigation of market price exposure. It does so through derivatives based on tranched volatility.
This does not follow the traditional method of yield tranches. Alternatively, it paves the way to create tranches of yield generating multi and single asset pools.
Here ramps with lower risk will get lower returns as the underlying assets rise correspondingly. This will also result in lower losses in the event of them dropping.
What are BOND tokens?
BOND ERC-20 tokens were initially staked by investors. However, with the initial release of the program, BOND tokens are now the governance token for the Barnbridge tokenized risk protocol.
BOND ERC-20 standard can be easily stored and exchanged across any Ethereum wallet such as Metamask. This effectively makes it widely accessible.
Currently, there are 1,333,784 BOND tokens in circulation. The maximum number of tokens that will ever exist at a particular moment will be 10 million.
More importantly, over the next 2 years, the distribution of BOND tokens will ensure that no particular entity will ever have control over the system. As a result, currently, 68% of BOND tokens reside amongst the community.
This wraps up our feature on Barnbridge which in whole is an innovative tokenized risk protocol with massive potential. With decentralized finance markets booming, if you are someone that is interested in it, it is best to start off quickly to reap the greatest benefits. The later you are to the party the slower you will profit off it, that’s the rule of trading and finance.