Introducing BarnBridge
By: Tyler Scott Ward
Tags: Derivatives, Ethereum, Cryptocurrency, Yield Farming, Defi

DeFi Primer: Risk Ramps and TradFi Bridges

The yield products in the decentralized markets which are yielding higher APY than yield products in traditional markets are currently crypto backed loans. Instead of selling crypto for fiat, borrowers are staking digital assets and receiving digital assets in return. While these loans have mostly been short term loans to traders, the system has proven to be efficient & ripe for expansion. These efficiencies will inevitably attract higher value, longer duration loans to decentralized ledgers. The efficiencies referenced are enabled by smart contracts’ ability to hold digital collateral until both sides of the transaction fulfill their obligations algorithmically. The reduction of custody, settlement, and escrow — labor-intensive, costly actions within the legacy system — to algorithmic actions is reducing the rent charged by the labor to perform these actions. These efficiencies, coupled with the perception of higher risk, are why the yields are higher on decentralized systems. As risk in DeFi converges on risk levels perceived in TradFi, by the nature of the loans moving from crypto backed loans to traders to collateralized mortgage loans to homeowners, for instance, the efficiency of smart contracts will continue to offer higher yield on decentralized systems than traditional centralized systems.

What’s more, the efficiency of smart contracts and DAO technologies allows for far more complex derivative instruments to be built & provides a level of transparency and security unfathomable to current financial networks.

All of these efficiencies are currently stemmed and built off of crypto backed loans.

As previously discussed, these efficiencies should extrapolate to mortgage debt and corporate debt moving to decentralized platforms on a longer timeline. This should also encourage more complex derivatives based on debt and yield to move to decentralized platforms. We will be able to structure far more complex derivatives and track them with far greater efficiency and transparency than possible before the innovations of blockchain, cryptocurrency, smart contracts, and decentralized autonomous organization technology were realized. $244 trillion in debt and yield based derivatives will continue to move to more efficient technologies over time. The migration of yield and yield-based derivatives from less efficient centralized financial systems to more efficient decentralized financial systems will be one of the largest movements of wealth in human history. BarnBridge exists to help facilitate this transition and make the decentralized financial system much more efficient, risk-flexible, and attractive to a wider range of participants.

There is a massive market for people wanting to get into crypto who (1) don’t want to bite off the entire risk curve of owning, lending, or receiving an entire digital asset & (2) will never take the time to use a decentralized autonomous organizations (DAOs) to create a smart contract which algorithmically scripts both sides of the loan or agreement. Over 99.9% of global debt is still structured via traditional markets and is starving for yield. Conversely, more advanced financial companies have different risk tolerances. This allows for different structures at each point of the yield curve with the riskiest (likely hedge funds) wanting to put the least money down with the highest return for their bet/hedge. On the contrary, more conservative investors are often willing to give up a large portion of upside opportunity in order to access safer instruments. “Riskless” products, as tradFi describes them, are not currently offered in the decentralized financial ecosystem. The opportunity to structure these types of instruments will allow for more risk averse investors in the traditional markets to move into the decentralized markets.

In the shorter term phase (DeFi) & medium term phase (Proof of Stake) risk ramps will continue to create markets and industries for traditional investment firms who want to “get off zero” or “get above 1%.” As this happens, more and more types of loans will move to decentralized ledgers. In the long run, and partially through this process, lenders and borrowers will understand why decentralized and trustless intermediaries are superior and less costly than the current 3rd party intermediaries. As this happens, larger portions of the $244 trillion in global debt will move to the chain, creating the opportunity for more yield, more risk ramps, and higher CD-like (collateralized debt) products for fiat and crypto depositors of the new age commercial banks & financial markets.