Before we get started, this is not a recommendation or endorsement to buy any token mentioned. DeFi Dad disclosed his team at 4RC invested in the BarnBridge seed round and still holds a BOND position. The following tutorial does not require holding the BOND token.
During flat ranging markets, we as DeFi investors have to seek out the most sustainable yields we can find. During this crypto bear market, there’s been a flight to quality protocols–less risk, more battle-tested, and more predictable yields. In this endeavor, we’ve covered the rise of DeFi fixed interest protocols across multiple protocol designs.
- Fixed Rate Lending: The easiest to understand, where the lender and borrower agree to a fixed interest rate and maturity date, which has major limitations around matching lenders and borrowers willing to agree on fixed terms, often subsidizing lenders with inflationary tokens they can sell for yield, ie Notional Finance.
- Yield-Splitting: This has been the most popular design choice over the last few years, splitting yield-bearing assets into both principal and yield components with a known maturity date, where Yield Token Price + Principal Token Price = Underlying Asset Price. These protocols have been limited in their growth by a lack of liquidity. A few protocols we’ve covered that use yield-splitting are APWine, 88mph, Element, and Sense
- Tranching: This is where protocols split liquidity by risk into different pools. For example, BarnBridge V1 SMART Alpha used tranching to separate senior pool participants who were guaranteed a fixed rate vs junior pool participants earning a variable rate. The downside in this setup was liquidity on the seniors side during bullish times and liquidity on the juniors side during bearish times, given juniors were at risk of incurring a loss if their principal was needed to subsidize the senior pool participants.
Based on the successes and failures of these protocol designs, BarnBridge V2 recently rebuilt its protocol to introduce a simpler, novel mechanism for users to more seamlessly earn fixed yields. BarnBridge V2 aims to offer fixed rates that are sustainable, with fixed income positions that can be borrowed against on Aave and FiatDAO to get secondary liquidity and leverage your position. In V2, the Barnbridge DAO acts as the counterparty to the yield being generated by depositing DAI (or other tokens) into the yield source (Aave) to further subsidize fixed interest earned by lenders.
In other words, the yield in BarnBridge comes from yield earned in Aave during the last epoch. It pushes forward the earned cumulative yield on the last epoch’s deposits into the epoch going forward and then allows depositors to bid to earn that yield.
Under the hood, here’s how BarnBridge V2 fixed interest works:
- Deposit: During the Deposit period, anyone can deposit DAI and essentially bid on the pool of yield (sourced from last epoch) that will be earned over the next 30 days.
- Consider that every deposit of DAI further dilutes the fixed interest rate for the upcoming Epoch.
- Assume we have 560 DAI of yield for the upcoming Epoch. If we have 100k DAI in deposits during the…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
