How Saffron Fixed Income Vaults Will Change DeFi
Dingo looks at three black swan events in crypto and how Saffron’s Fixed Income Vaults would have helped to mitigate losses.
It’s no secret that the nascent digital asset industry is filled with volatility and enough black swan events to make Nassim Taleb blush, and one might argue on some level that that is the draw for many. But how does the cryptocurrency industry at large begin to eventually stabilize to attract bigger capital? Time is an active component naturally but with products from Saffron we aim to accelerate the entire industry forward in maturation and provide stability in a volatile market. Let’s take a look at how Saffron Fixed Income Vaults can be used in times of crisis to help preserve the value of your assets by turning to history.
USDC Depegging [est. March 2023]
Scenario:
In Jan 1, 2023 a Saffron Fixed Income Vault with a ETH/USDC pairing launches. Users on the variable side rent the position of the fixed side for one year. Several months later, due to Silicon Valley Bank’s collapse, fears about Circle’s future cause massive sell pressure on their stablecoin USDC. As a result of the chaos, the ETH/USDC pool on Uniswap V3 sees an unprecedented spike in activity.
Who benefits?
As we explained in the previous article, the variable side benefits because they are “renting” a larger position that they would not normally have access to, and thus would reap well over their projected yield for the duration of their contract.
The fixed side benefits because they were paid upfront for their position months ago and are able to allocate their newfound capital into other investment vehicles, such as Bitcoin — which saw a near 20% pump that following Monday.
In this scenario both parties benefit, but clearly the variable side is getting the better end of the deal. Let’s take a look at a different scenario where the fixed side benefits more.
Bull Market Ends [est. Dec 2021]
Scenario:
In December 2021, a Saffron Fixed Income Vault with a ETH/USDC pairing launches. Users on the variable side rent the position of the fixed side for one year. However, all good things must come to an end and the crypto bull run of 2021 begins to draw to a close over the next year. As interest wanes in crypto across the board, people begin to sell their digital assets to prepare for the bear market.
Who benefits?
The variable side benefits because they are still renting this position for the duration of their contract; they are not stuck with these assets after their term expires. Interestingly enough in this scenario any amount of activity on the pairing — even people selling their assets to stablecoins because of the market’s downturn — is still netting them fees with each transaction.
The fixed side benefits because they were paid upfront for their position back when the projected volume on the ETH/USDC pairing was much higher than what the actual activity turned out to be on ETH/USDC LP in 2022. Had they waited 5 months they likely would not have been able to rent their position for as much due to the negative sentiment of the market.
As you can see price volatility isn’t necessarily an indicator of a poor performance when using our vaults — because the variable side makes their money with fees, which come from transactions into and out of the ETH/USDC LP position (i.e. buying ETH with USDC, or selling ETH for USDC).
For the variable side the biggest key indicators of success when using our product is the activity level or volume. What is incredible about our Fixed Income Vaults is that price prediction is a less important factor than trade volume. The main factor is how much perceived volume your vault will have — and when there is notable price action one way or the other, there will be volume. If you are bearish or bullish you can profit with our Fixed Income Vaults — Saffron is able to offer stability in a volatile market.
In the above scenario the fixed side benefits, but what about a scenario that goes beyond short term volatility and turns into a catastrophic event? It’s hard to use the word “benefit” in this kind of doomsday scenario for a protocol or network, but it seems more flowery than saying who “gets screwed less” here. With Saffron’s Fixed Income Vaults, both sides are able to mitigate some of their losses. Let’s take a look.
Terra Network Collapse [est. May 2022]
Scenario:
In Jan 1, 2022 a Saffron Fixed Income Vault with a ETH/LUNC (previously LUNA) pairing launches. Users on the variable side rent the position of the fixed side’s position for one year. Later that year, the Terra Network collapses, plummeting the price of the LUNC token. As a result, billions of dollars in digital assets are lost.
Who “benefits”?
The variable side still benefits because while they did not receive their expected yield for the full term, they were able to get yield off of this position while not actually owning the position. This means they are not stuck with the now near-worthless LUNC token when the term ends.
The fixed side still benefits because they were paid upfront for their position months ago. While they are still stuck with their position after the term ends, they were still able to get paid at the beginning of the term. Contrast this to if they had held their position throughout the year, they would have only gotten yield for four months before the position collapsed.
Naturally the best scenario is if everyone in the above scenario could predict the future and cash out of their LUNC position in 2021, but until precognition becomes a mainstay in the investment world it’s best practices to hedge your positions as much as you can. Saffron Fixed Income Vaults offer an easy and intuitive way to accomplish this.
Our industry has had plenty of volatile storms in the past and will surely weather many more, but I believe that the launch of our Fixed Income Vaults marks a paradigm shift in the industry’s ability to handle volatility. Currently nothing else like this exists in decentralized finance, and I believe having access to a completely decentralized, reverse zero coupon swap will be an important tool going forward that will allow the digital asset industry to be better served and to further protect decentralized finance users from volatility.
In addition, we have just announced the capped vault launch, which can be found here.
Our whitepaper here:
Saffron Fixed Income Vaults Whitepaper
Community resources
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Twitter: https://twitter.com/saffronfinance_
Github: https://github.com/saffron-finance/saffron
