Tranchess (CHESS) Review
An independent analysis on Tranchess
A novel structure redefining fund management in blockchain
As the DeFi Ecosystem grows past its exploration stage, it starts to attract an increasing variety of investors with different risk capacities and appetites. Tranchess addresses these needs in a novel way through its unifying tokenized asset management platform. It offers a full suite of DeFi features with single- asset yield farming, fixed-interest rate lending and leveraged trading on Binance Smart Chain.
Tranchess' main offering currently consists of three products. The QUEEN tranche is a Bitcoin tracker with enhanced yield, BISHOP is a yielding delta- neutral token similar to a stablecoin and ROOK is a 2x leveraged BTC tracker. Holders of the protocol’s governance token CHESS currently earn 50% of protocol fees and determine the internal interest rate spread charged to ROOK holders. The team plans to expand to more chains in the future and add different underlying assets.
Since its launch on June 24 this year, Tranchess has rapidly accumulated TVL of over $1.3B and climbed the ranks to become BSC’s 4th most popular protocol. This remarkable growth validates its product-market fit and shows that investors are attracted to the innovative tokenized risk-return solutions.
Defi on Binance Chain
Binance Smartchain (BSC) gained a lot of traction at the beginning of 2021 when Ethereum’s high gas prices pushed users to find alternative solutions. BSC’s more centralized structure with a low number of active validators allows for lower fees and transaction times but comes with its drawbacks. Its close ties to Binance, who recently came under regulatory scrutiny and controls major on and off-ramps to BSC is a known concern in the market. The recent launch of several liquidity mining programs on other Layer 1s has also seemingly shifted the market’s attention away from BSC.
Regardless of these considerations, BSC’s fundamentals are strong and point to a different reality as seen by its on-chain activity. After Ethereum, BSC is still the largest chain in terms of TVL, with more than $18B locked in its dApps. User activity measured by daily active addresses also hovers close to its all-time high of 1.3M, which is roughly twice the amount of Ethereum’s. Comparing the number of daily transactions paints a similar picture: BSC outpaces Ethereum severalfold.
Tranchess' Value Proposition
Tranchess uses an innovative approach known as tranching, which is used in structured finance to derive different risk-return characteristics from a primary fund. These tranches cater to classes of investors with varying risk appetites.
With its tokenized solution, Tranchess solves the following three pain points in DeFi:
• Long-term holders of major assets like BTC want to maintain market exposure in a highly liquid fashion while earning an additional return on their position. So far, limited single-asset yield farming opportunities exist for Bitcoin holders.
• Risk-averse investors prefer stable investment returns with little or no market risk. The current DeFi market lacks such options, as most yield farming opportunities involve price risks of at least two assets and suffer from impermanent loss.
• Risk-seeking investors require leveraged exposure through derivatives with high capital utilization, low cost, and no risk of forced liquidations (e.g. through oracle or liquidation engine failures). Unlike centralised exchanges with real-time matching engines, challenges exist for on-chain settlements such as congestion. Hence most protocols would implement a large margin requirement that is detrimental for capital efficiency.
Tranchess seeks to address these limitations and offers users an intuitive and safe experience. Tranchess' smart contracts underwent multiple rounds of code audits by CertiK and PeckShield. A bug bounty program has also been launched on ImmuneFi, with rewards of up to $50'000 for critical issues.
With its unique combination of products, Tranchess addresses a majority of crypto investors, who either pursue a passive buy-and-hold, active trading, a passive yield strategy, or a combination thereof.
The current product offering focuses on Bitcoin as the underlying, with more assets to be added in the future. Users can create QUEEN tokens with BTCB (the BEP-2 version of Bitcoin) to track the performance of BTC and farm additional CHESS rewards. The QUEEN token can be split equally into two sub- funds, called BISHOP and ROOK. All of the three tokens can also be traded anytime in the secondary market via USDC through the platform's exchange.
Queen - BTC Tracker with Enhanced Yield
The main fund is a BTC-tracking token with yield farming feature and currently has around $1.3B in TVL. The product is targeted at long-term BTC holders, who seek BTC exposure with enhanced yield, which currently stands at 30% and is paid in CHESS tokens. To acquire QUEEN, users can either buy it in the secondary market with USDC or create it in the primary market with their BTCB. Creation and redemption requests can be submitted anytime and will be processed daily at 14:00 UTC. There is no lock-up period and users can freely redeem the underlying through the daily redemption process. Currently, there are no fees for the creation of QUEEN, but a 0.2% fee applies at redemption.
Bishop - Stable Interest Rate Product
The BISHOP token can be compared to a high-yield savings account and primarily attracts stablecoin denominated investors. BISHOP is delta neutral and therefore is not affected by the price of BTC. BISHOP is a sub-fund of the main fund and provides liquidity to the ROOK tranche in exchange for stable interest rate payments. Tranchess uses money market protocol Venus' USDC borrow rate from the previous week to determine the next week’s interest rate. Through ballot voting, the community can decide to add a spread of up to 4% to the base rate. The total then determines the fixed APR that BISHOP holders will receive for the next 7-day period. Fees for splitting and merging QUEEN into BISHOP and ROOK are 0.05% and TVL currently stands at $22M with an APY of around 60%.
Rook - Leveraged BTC Token
The ROOK token offers a 2x leveraged BTC position with no risk of forced liquidation. It offers a simple way to gain leveraged exposure without the hassle of managing margin, liquidations, collateral, or funding rates. The tranche borrows equity from BISHOP holders to gain leveraged exposure to the main fund. The return to ROOK holders is equal to the main fund's return less the interest paid to the BISHOP tranche. With a spread between the farming rewards rate and borrowing rate currently around 5%, ROOK holders are essentially getting paid to take positions. TVL stands at around $40M.
In addition to the creation/redemption process for QUEEN tokens, the Tranchess exchange allows users to trade in and out of all Tranchess' tokens directly. The exchange uses a premium/discount order book relative to the forward-starting 30-minute TWAP. Each 30-minute trading window is defined as one epoch, allowing users to place an order at a premium or discount of the next epoch's NAV. Compared to other DeFi protocols, which rely on discrete tick prices from oracle price feeds and are thus susceptible to oracle exploits, Tranchess' robust trading mechanism is resilient against such attacks.
By combining multiple products on a simple and user-friendly platform, Tranchess is a unique protocol that lacks direct comparables. However, individual parts of Tranchess’ offering compete with other DeFi products.
The market for BTC-trackers with native yield has been growing steadily and a few protocols are offering similar products to QUEEN.
• BadgerDAO offers two trackers with native yield: DIGG a synthetic, rebasing token, which currently yields around 12% when staked and ibBTC, an interest-bearing BTC token that generates yield sourced from Curve and yearn.
• Bancor offers impermanent-loss-protected liquidity products with yield generated through BNT and rebated swap fees. APY for its BTC pool comes in at around 40-60%. However, to benefit from the full impermanent loss protection, users need to stake their assets for at least 90-days.
• KeeperDAO also provides users with a single-asset yield opportunity, although the source of yields is quite unique, as it redistributes on-chain profit (MEV) back to its users. With yields in the low single-digits, KeeperDAO's rewards paid out in ROOK (KeeperDAO's native token), are substantially lower than Tranchess’.
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