29 Oct 2021 · 2 min read

Tranche Finance Hits 45% USDC APYs

Disclaimer: The text below is a press release that was not written by Cryptonews.com.

Tranche Finance, a decentralized protocol for maximizing returns and minimizing risk, has developed a DeFi strategy paying 45% APY in USDC. The protocol is completely decentralized and smart-contract enforced.

We contacted the Tranche team to better understand how they were developing these strategies and if they were too good to be true. We’re happy to say we’ve deep-dived and it looks like basic math. We’ll walk you through the concepts, as well as the calculations, and you can judge for yourself. 

Understanding Debt Seniority 

Debt seniority simply dictates who gets paid first. Once a loan is chopped up into new instruments and sold to a bunch of different investors, the repayments can be put into a debt-waterfall, so that each instrument ends up with a different risk and return profile. This allows underwriters to package debt in such a way that it is appealing to a wider range of investors. Those seeking risky high-returns can invest in junior debt (Tranche B). While those seeking stable, low risk returns can invest in senior debt (Tranche A). 

Understanding Tranche’s Crypto-CDOs 

Tranche introduces debt seniority to DeFi. The protocol integrates with any interest accrual token, such as Compound’s cTokens and AAVE’s aTokens, to generate two new interest-bearing instruments - a low-risk senior tranche with a fixed rate (Tranche A), and a high-risk junior tranche with a variable rate (Tranche B).

This mechanism allows Tranche to “Serve a $SLICE of DeFi to everyone”. Users seeking higher returns can deposit into junior tranches (Tranche B), while users seeking stable low risk returns can deposit into senior tranches (Tranche A). Currently, users can forgo the compound return of ~8% in preference to a higher return, ~45% on Tranche B.

Mechanics & Calculations 

So how does Tranche achieve these high APYs? Let’s walk through the Compound - USDC integration: 

  1. USDC - Compound - Tranche A Holders currently have USD 1,103,829 earning ~8% variable interest from the Compound Protocol.
  2. Tranche A holders only collect 1.14% fixed interest - they forgo the rest in return for secured deposits (Senior - Tranche A is protected from default by Junior - Tranche B).
  3. This implies that the Tranche protocol is generating 8% - 1.14% = 6.86% in excess interest on the USD 1,103,829 of deposits. This is an excess return of USD 75,723.
  4. USDC - Compound - Tranche B holders currently have USD 189,776 earning ~8% variable interest from the Compound Protocol.
  5. This pool is augmented by the excess returns from Tranche A - USD 75,723. This is given to the Tranche B deposits, which boosts APYs by ~40% (USD 75,723 / USD 189,776 = 39.9%).
  6. Tranche B is now earning the ~8% Compound return as well as the 40% excess - yielding a total APY of 48% paid fully in USDC.

Conclusion 

It seems the Tranche team is onto something with Crypto-CDOs. The mechanism is novel and can be applied to all DeFi protocols and any interest accrual token. The team has integrated Compound and AAVE, on Ethereum L1 and Polygon L2, and their GitHub repository shows that they’ve deployed on Yearn-Fantom and Avalanche testnets. We’ll definitely be watching this space. 

About Tranche Finance 

Learn more about Tranche at https://tranche.finance/ 

Twitter - https://twitter.com/TrancheFinance 

Discord - https://discord.com/invite/Nv44PTdF3K 

Medium - https://tranchefinance.medium.com/