SMART Alpha allows users to calibrate their exposure to the performance of an underlying asset. It does so by redistributing the performance of an aggregated pool of the underlying asset between two groups of users: a senior side, and a junior side. Whereas the senior side of the pool receives dampened exposure to both upside and downside movements, the junior side takes on levered exposure. Put another way, junior depositors are buying asset price risk off of senior depositors, guaranteeing them price protection up to a certain threshold, in exchange for greater upside potential.
The outcome is a two-sided marketplace for asset price risk, generalizable to any ERC-20 token.
SMART Alpha implements an epoch-based approach in which users can only enter and exit pools once a week at Monday, 9:30 AM EST / EDT. In between epochs, users will be able to signal their intent to enter, exit, or switch sides within the pool for their given ERC-20 token. The composition of these pools, namely, the ratio of deposits in the senior side versus those in the junior side, are what determine how much downside protection the former, and for the latter, leverage, receives.
Depositors on both sides of a given pool receive an ERC-20 token as proof of liquidity. For example, if you were to deposit Ether into its senior SMART Alpha pool, you would receive a bb_senETH token in return. Like any ERC-20, these tokens would then be further usable within other trading, lending, or derivative applications. These ERC-20 tokens are perpetual, meaning that new epochs do not bring new tokens.
The current implementation of SMART Alpha calculates senior rates as a function of junior-side pool dominance. Senior rate is defined as the maximum amount of downside price movement the underlying asset can experience in a week before senior depositors suffer dollar-denominated losses. Junior dominance is defined as the share of a given ERC-20 token’s pool that is comprised of junior depositors.
There are two things to note under the current model:
The senior rate is calculated as 80% of junior pool dominance
The senior rate is capped at 35% downside protection for any given epoch
Consider the following illustrative examples:
Once the smart contracts for SMART Alpha are deployed on a given blockchain network, there are only a handful of parameters that can be altered, the power with which to do so having been handed over to the BarnBridge DAO. These parameters are:
Status of the Guardian Contract
Owner of the Guardian Contract
Underlying Asset Price Oracle
Senior Rate Model
Note that the Guardian Contract only holds the borrow to stop and resume deposits into SMART Alpha; it cannot exercise any control over deposited assets.