Adjusted risk-tranching product provides different levels of risks tolerance combining several assets in portfolio

Published at: Jan. 6, 2022

Decentralized finance (DeFi) could become the most radical development to come of blockchain technology and cryptocurrencies by potentially ushering in a new foundation for global finance. 

One of the projects that set some early precedents for DeFi was MakerDAO, which pioneered the use of having a distinct token for governance, with MKR, and a stablecoin backed by cryptocurrency as collateral — DAI. Next came Compound (COMP), which let customers borrow and lend select cryptocurrencies using a marginalized system that controlled collateral risk.

These early developments have led to the DeFi market we see today, with many yielding products seeming to have consolidated into one of three variations. There is the standard deposit/lending program, most commonly used by the average DeFi user, in which they simply deposit or lend out their tokens in return for a yield.

Those among the more advanced may use decentralized exchanges (DEXs), in which users stake their tokens into a liquidity pool, or might also prefer yield aggregators. Each caters to users with a different risk appetite, with the risk-averse choosing lower stablecoin yields versus the more risk-tolerant, likely willing to risk more for the higher yield of liquidity pools.

Now come products that allow even the more risk-averse to invest in riskier products without the danger of principal losses, giving it a much higher appeal than standard low-yield products. Waterfall DeFi offers structural investment products, in which pools of yield-generating DeFi assets are packaged into three different “tranches.” Each is given seniority based on expected yield, risk and maturity.

Tranches

The tranche seniority is determined by the method of capital distribution, in which cash flows generated from the portfolio are paid out in a cascading or waterfall-like fashion. Payments are first made to the senior tranche, then passed onto a mezzanine tranche. In having the last right to the cash flows, the junior tranche has the highest risk, which entitles it to a greater portion of potential rewards.

In the case of a loss, senior tranche users are still paid their principal, in addition to a fixed return, while junior tranche users would incur a principal loss but be paid the remaining capital. While in the case of a profit, senior users are only paid their fixed APY, and the remainder of returns go to junior tranche users.

The team

With an experienced background in traditional finance, the founders of Waterfall knew the significance of fixed-rate offerings since they represented a sizable portion of the total market. Consequently, this became a niche they noticed in a market where lending protocols are almost all under variable rates. 

More insights on waterfall defi here

Founder 0xWaterfall spent ten years with a Tier 1 investment bank specializing in cross-asset structured products, spending the past five years deploying those trading strategies in crypto. Meanwhile, project lead Tom Cheng graduated from Harvard and was previously a consultant with McKinsey & Co. 

WTF token

The native governance token issued by the Waterfall DeFi platform is WTF, which will also serve an additional utility role. For one, it will play a primary role in facilitating platform governance through its decentralized autonomous organization (DAO). WTF holders will play a crucial role in deciding key features of the protocol. 

The WTF token also aligns certain incentives in several ways. It will reward platform stakers of WTF by deciding how the platform fees will be distributed through its governance. To ensure that the deposit amount in each of the tranches is closest to the ideal ratio, or “thickness,” users depositing with the most skewed thickness are also rewarded with higher amounts of WTF. 

Achievements and plans

The protocol was launched on the Binance Smart Chain (BSC), which was chosen for its low gas fees, stable APY farms and vibrant community. Among these stable farms, Waterfall DeFi introduced its first product BUSD Falls, a portfolio that aggregates two BUSD lending vaults, Alpaca and Venus, where the platforms exhibit high total value locked, stablecoin liquidity and sustainable APY. 

In the near future, Waterfall intends to introduce more types of products into its portfolio, such as LP tokens, leveraged products, etc., to offer diversified options to the community. Additionally, cross-chain compatibility, which would include products on Ethereum (ETH), Solana (SOL), Avalanche (AVAX), Polygon (MATIC), is also on the roadmap.

Learn more about Waterfall DeFi

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you with all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.

Tags
Related Posts
DeFi resurgence lifts Maker, Aave and Compound price to new highs
Analyzing the activity on lending platforms can sometimes be used as a barometer for measuring the sentiment of the cryptocurrency market as a higher number of collateral-backed loans may signal that traders are eager to trade a rising market. The month of April saw the total value locked on Maker (MKR), Aave (AAVE) and Compound (COMP) climb to new highs alongside rising token values and trading volumes. All three of the projects are based on the Ethereum (ETH) network and have benefited from the rising price of ETH as well as a recent decline in the average gas fee that …
Blockchain / May 3, 2021
Here are 3 ways hodlers can profit during bull and bear markets
For years, cryptocurrency advocates have touted the world-changing capability of digital currency and blockchain technology. Yet with the passing of each market cycle, new projects come and go, and the promised utility of these “real-world use case” projects fails to satisfy. While a majority of tokens promise to solve real-world problems, only a few achieve this, and the others are mere speculative investments. Here’s a look at the three things cryptocurrency investors can actually “do” with their coins. Lending Perhaps the simplest use case offered to cryptocurrency holders is also one of the oldest monetary applications in finance: lending. Ever …
Bitcoin / April 29, 2022
Range-bound Bitcoin price opens the door for altcoins to move higher
Ether (ETH) took charge as a new month begins and the second-largest cryptocurrency by market capitalization rallied to a new all-time high at $3,338. This has many analysts shouting out that a new 'altcoin season' has commenced. Meanwhile, Bitcoin (BTC) price is continuing to meet resistance around the $56,000 to $58,000 level. Data from Cointelegraph Markets and TradingView shows that since dropping to a low of $2,160 on April 25, the price of Ether has rallied 54% to a new record high at $3,324 on May 3 as Monday’s 12% spike lifted the top altcoin above the $3,300 level for …
Bitcoin / May 3, 2021
Crisis in crypto lending shines light on industry vulnerabilities
The crypto market has entered a bearish phase as prices of major cryptocurrencies have fallen to a four-year low. The current downturn in the crypto market has driven several crypto firms to go out of business, while many have made severe job cuts to remain afloat. The crypto market crisis began with the Terra debacle that saw $40 billion in investors’ money vanish from the market. At the time, the crypto market showed good resistance against such a massive collapse. However, the after-effects of the collapse had a greater impact on the crypto market, especially crypto lending firms, which many …
Ethereum / June 23, 2022
MakerDAO goes ahead with $500M investment in treasuries and bonds
MakerDAO, the governing body of the Maker Protocol, has taken the first step of its plan to reallocate $500 million of its stablecoin Dai (DAI) collateral reserves into short-term United States Treasuries and corporate bonds. The decentralized autonomous organization (DAO) voted on Oct. 6 to approve a pilot transaction of $1 million following an executive vote from Maker (MKR) token holders, with the rest of the funds soon to be reallocated following confirmation from the community. A majority, 80% of the $500 million, will be invested in short-term U.S. Treasuries, with $160 million allocated to the 0-1y US Treasury iShares …
Etf / Oct. 7, 2022