How exposure to yield strategies are kept in balance to enable tranching
Risk Balancer is a module that autonomously balances a portfolio of assets to enable tranching of smart contract and stablecoin risks. It is the technological innovation powering Gro protocol and enabling the two products; PWRD stablecoin and Vault.
Risk Balancer provides Gro protocol with a systemic view of protocol and stablecoin exposure throughout layers of nested protocols and stablecoins. This means funds are balanced not only to meet a target allocation across strategies, but also taking indirect exposure (such as collateral or assets used to back another stablecoin) into consideration.
It also integrates with Gro protocol's deposit and withdrawal mechanisms to enable decentralised and user driven portfolio rebalancing. This allows the protocol to autonomously maintain a balanced exposure, spreading risk between tried-and-tested stablecoins and protocols.
Each transaction is characterised by size as a percentage of TVL. The small transactions (sardines) simply go in or out of the three stablecoin vaults in the same stablecoins and amounts requested by the user. This is the cheapest way to transact. Medium-sized transactions (tunas) get swapped if the deposit is into the most overexposed stablecoin or the withdrawal is from the most underexposed stablecoin. This can be more costly than a sardine transaction if a swap needs to happen. The large transactions (whales) get deposited or withdrawn in a balanced way, from each vault, to keep the system in equilibrium. This is the most costly of the three in gas, since whales effectively execute a rebalance each time they deposit or withdraw funds.
Risk Balancer is also a risk-tranching mechanism. Thanks to the balanced portfolio and the compartmentalisation of assets into several protocols with low correlation, risk can be tranched into a high risk ("junior") and a low risk ("senior") tranche. Unlike other tranching platforms, Risk Balancer also tranches long-tail risks like stablecoin and smart contract failures. Risk-tolerant users can then get higher yields, while risk-averse users enjoy protection in exchange for sharing profits with their risk-tolerant counterparts.
DeFi is still a very new space, and while that's exciting, it comes with risk. Gro Protocol's software helps you access this world, but make sure you do your own research and only supply assets you can afford to lose.