BlockTalks x WaterFall DeFi AMA Transcript!

We recently hosted an AMA with WaterFall DeFi, on October 18th at 1.30 PM UTC. Many of you might have participated or many of not. But we make sure no one missed out from the knowledge shared by Tom, Project Lead at WaterFall DeFi So here we are up with the AMA transcript, for those who missed the live session, this blog post will be a saver & feeder of knowledge for them.

Introduction Questions Asked By Team BlockTalks!

Q1. Could you please introduce Waterfall DeFi to our community in layman’s term?

Ans — Let me start with a picture first, then give a bit of the background

This is a visual representation of we tranche the portfolio into different segments, and how yield would flow from the more senior tranche to the more junior tranche

In essence — Waterfall DeFi is a yield aggregator protocol that aims to bring true risk tranching to the DeFi landscape.

We are built on BSC initially, and would develop portfolios that include different farms. Instead of just offering a yield aggregation product, we actually would slice the portfolio into different “tranches” — essentially each tranche represents a risk/reward combo that would allow the users to select

The senior tranche would receive a reduced yield return, in exchange for first lost protection. Junior tranche would receive a much higher, leveraged yield return, but their capital is used to cover any losses suffered from the portfolio.

Just like how the picture shown above, users would choose their preferred tranche to stay in and based on the sequences setup, receive yield

Let me give you a simple example — a portfolio with 10% expected yield, after we slice it into 2 tranches, the senior tranche will receive 5% return, while the rest will flow to the junior tranche. So in a perfect world, the junior tranche will get 15%

The senior tranche is essentially using their future return to buy protection against any capital lost

So in this example — if the farm underperform and the return is only 3% — senior will still get their 5% (as they are being paid out first), while junior might see a 2% lost in their capital

That’s the basic background, I hope it clarifies some concepts.

Q2. What are the advantages of Waterfall DeFi to the other alternatives in the Blockchain field?

Ans — So comparing to the more prominent yield farming strategies out there (lending pool, leveraged products, LP/Staking) — Waterfall would allow users to be able to more effectively fine tune their risk / reward calculation.

Unlike typical aggregator, where you are essentially taking on the risk of the underlying assets, our tranching system allows users to redistribute the risk among themselves in the portfolio, so lower risk tolerant users can trade off their future earnings, in exchange for some protection from the higher risk tolerant ones — while uses with high risk tolerant users can leverage up their return by offering that protection

As for these type of separating tranching products — we actually can see a few players now in the field, and to stand out among them, we have 4 special features

1.Diversification

Our portfolio strategies package multiple DeFi assets and yield farms to ensure risk and return diversification

In the future, we aim to include more diversified assets to ensure an abundance of options for the community.

2. Clear tranche differentiation

A TVL limit is set initially for each tranches in the initial launch to ensure clear tranche differentiation

Going forward will lift the limit but will introduce dynamic reward to incentive optimal user behavior

3. Three tranche approach

We will launch with a three-tranche product, expanding the optionalities for the community.

4. Fixed income product

Will introduce a fixed income product by locking up the user deposit for a fixed period of time (seven days) during the deployment period

Q3. What are the major milestones Waterfall DeFi achieved so far & what are in the future pipeline?

Ans — Tom | Waterfall DeFi | Will Never DM for Fund, [18-Oct-2021 at 7:22:22 PM]:

The first milestone for us is to decide which blockchain to focus on, and we decided to go with BSC, due to its negligible gas fee and presence of high TVL farms with sustainable return.

Then the second milestone would be launching our first product — which would include 3 BUSD farms. Going forward, once we are more matured and the community is more educated to the product, we will be pushing out not just safe, sustainable return package with major farms and high TVL, but also risky leveraged products and new farms with high APY

Goal is to create different type of investment options and risk factor that users can select based on their preference!

We are now hard at work to get everything ready for testing, which is a few weeks away. We are working with our auditor to review our smart contract, finalizing our dApp’s interface and likely will launch the test version soon — stay tuned!

For mainnet launch, it will depend on how our testing goes. Once we get the feedback from the community and adjust based on the suggestions, we will be ready!

And finally, the closest upcoming milestone is that we are open for public sale is right around the corner! (Auction on the 20th, Listing on the 21st) The IEO platform is AscendEx, which is a super exciting time for the team. To find out more about our public sale updates, please follow our socials for the most updated information!

Questions Asked on Twitter For WaterFall DeFi Team!

Q1. Waterfall DeFi charges any commission for withdrawing and depositing funds on its platform, if so, where do the funds collected from said commissions collected go, that is, what use do they give to said funds raised, are they destined in their entirety for the continuous?

Ans — So — yes we will charge a small amount of redemption fee for every transaction related to our product — and part of those fee collected will be used to pay for the daily operation of the project.

The rest we actually earmarked to be used as reward to those who staked our $WTF token. So once our product is live, staking $WTF token on our platform will earn you additional $WTF and veWTF token. veWTF token is our governance token, and is used to vote on future DAO issues. In order to ensure we reward the community for their support and participation, those who hold veWTF token will also be eligible to enjoy a share of the platform fee as reward

Q2. I read that you have launched your first IEO Public sale on AscendEX. Congratulations! What were the reasons why you chose the AscendEX team to carry out this important event? Can you explain how we will be able to access this sale and get benefits from Waterfall?

Ans — As you can see AscendEX actually is also one of our seed investors (their investment arm) — we actually have very good relationship with the team, and throughout the DD process, I think our long-term focused tokenomics, the team’s passion and capability, as well as the concept of risk tranching really impressed them.

As a result, when we are exploring the listing prospect, we talked to a few platforms but ended up going with AscendEX as they know our product the best and would be able to better help us to tackle not just the listing part, but also support on the post-listing actions — such as pre-staking the $WTF token on AscendEX before our main net product is live.

We are also very confident with the track record of AscendEX, especially in initial listing — you guys can take a look at JET protocol’s recent IEO with AscendEX, which saw them went 15x and did very well. So we are confident such a collaboration would really help the short and long term success of the protocol

Q3. I read that what distinguishes Waterfall from other similar projects is that you will offer three tranches for users to invest in; Senior, Mezzanine & Junior. Can you tell us about this three tranches?What are the characteristics that make you stand out among similar projects?

Ans —I talked about the few competitive edges we have earlier so I won’t bore you with the details

I would like to dive a bit deeper into the tranching concept and how this would help we further mature the whole DeFi landsacpe

In the Tradfi world, any structured products that have been:

(1) backed by a pool of income-generating assets;

(2) repackaged into different risk classes based on their repayment seniority known as “tranches”;

(3) then sold to investors,

would have leveraged the practice of “Risk Tranching”.

To simplify — risk tranched products are further categorized as “senior” tranches and “junior” tranches (you can think of mezzanine is a bit middle of the road). Interest and principal payment is first paid back to the most senior tranches as they carry the least risk. Junior tranches on the other hand generate a higher yield to compensate for undertaking a higher default risk, and will receive the remaining principal and interest.

To visualize this, imagine every risk tranched product as a series of waterfalls. The senior tranches are the beginnings of the stream, starting at the mountain tops and taking their fixed percentage yield while the junior tranches will receive the remaining runoff. When the market is doing well, yield increases; like a rainstorm overflowing the river banks the junior tranches receive a higher cut as senior tranches are only entitled to their fixed percentage yield. Vice versa, when the market is in decline, yield decreases, like a drought where senior tranches remain entitled to their fixed cut as junior tranches are left with only droplets.

Q4. What made us choose you over other projects?

Ans — Haha, I see a lot of the audiences are super keen to figure out what makes us stand out — I have also prepare a simple comparison matrix so can clearly illustrate the point.

Q5. I see that Waterfall has facing 2 kinds of risks which are the protocol risk and 3rd party risk. So,can you define each risk with in Waterfall Defi? How would your team will face and manage to deal with those risk in effective way? Which do you think is more risky with the two?

Ans —Yes, security is a key issue and we take it seriously, and @mylhe you are correct that there are two risks that we face:

1. The risk thats with our protocol’s code

2. The risk thats associated with the underlying pools that in our product portfolio (3rd party)

For the first one, we take measures and work with a renowned auditor (Slowmist) to review our code base right now, they gave us some feedback (thank god its relatively minor) and we are now working hard to revise the code based on their suggestions. We will soon have the auditor report done and can’t wait to share with the community to boost their confidence in us. Meanwhile, going forward we soon launch our bug bounty program and continue to work with different auditors and other developer friends we have to peer review the code, making sure that we are always vilgant about checking and reviewing the security

For the second one, We usually would evaluate the risk involved in different crypto assets based on a couple of factors, including: the reputation of the team/protocol, amount of TVL committed by the community, the sustainability of the yield return, etc.

That’s why we introduce 3 BUSD stablecoin farms that all have high TVL and sustainable yield, which is the most secure / safe approach to engage with our first ever product launch. We will also limit the TVL for our first product to ensure we can plan for a smooth launch

And if I have to pick which one is more risky — I would say definitely the 3rd party risk — as those are things that are outside our control — which is why we will take reviewing the new product’s underlying farms’ feasibility and risk assessment super careful

Questions Asked by our BlockTalks Community Members during live Session to WaterFall DeFi Team!!

Q1. Waterfall is about Risk_Tranching but we know that user are not quite familier with this field, Isn’t it? What plans do you have to educate users about this field through various Articles & Videos?

Ans — I agree — risk tranching is not a super straight forward concept, but it is not something like rocket science. Traditional finance likes to hide this behind fancy jargons and complicated numbers, but in fact it is some basic math related to how users could hedge against each other.

The team is passionate about this, and would like to introduce the concept to our community, working with them to bring new ideas to this space, and innovate with the help of our community. With a gradual approach in launching our protocol, I invite all our community to embark on this journey with us!

As for video — we actually just launched an in-a-nutshell video that crispy summarize our project in 5 mins — let me link the Youtube link and medium here below

Youtube: https://youtu.be/lAEPG6tcWjk

Medium: https://medium.com/waterfall-defi/waterfall-defi-in-a-nutshell-6070143c608

Going forward — we will also produce more product 101 and user guide video — to make sure the community would have a clear sense of the concept and setup of the product !

Q2. I read that Waterfall DeFi tranches are structural investment products that package a pool of yield-generating DeFi assets and slices them into different buckets known as “tranches”. This idea is novel I must say, what problem of DeFi Space do you intend to solve by coming up with this great idea? Can you tell us some of the Key Advantages of Waterfall DeFi Tranches and are there any shortcomings with this idea that you would like to share with us?

Ans — Sure — I think the fundamental part we want to see is how to introduce structured products into the DeFi space, and the first step is fixed income product, which risk tranching is one of those

In the traditional market, a significant portion of the financial products is fixed rather than variable. On the other hand, DeFi lending protocols are currently 100% under the variable rate regime, which lacks the environment for DeFi to cross over with the traditional market. And bring the money into this open, permissionless financial world on the blockchain.

Under the variable rate regime, the introduction of risk-related products to the DeFi space will bring further development in the already growing sector, and structured products are the next big thing to emerge on the DeFi horizon.

Structured products (options, futures, etc.) allow users to better control their investment portfolio, finesse their risk tolerance, and min./max. their trading strategy to further leverage their positions. Among structured products, the concept of risk tranching is particularly well positioned in the current DeFi market — relatively simple to grasp, it introduces a fixed income product that provides attractive yield options to investors with different risk appetites. In the DeFi space where everyone is seeking a good yield — especially if they’re in a bear market — attractive rates offered by risk tranching products is a strong option for anyone looking to delve deeper into the DeFi community.

Q3. My research about Waterfall Defi made me realize that the cash flows generated from the underlying DeFi assets are paid out in a sequential manner where Senior Tranche users are paid out before the Junior Tranche users. Can you tell us who the Senior Tranche users are and what distinguished them from the Junior Tranche users? What do I need to do as a user to become a Senior Tranche user and what are the responsibilities and benefits that comes with it?

Ans — Yes — Senior tranche users are getting paid earlier — and in exchange will forgo a certain degree of future earning to take the early spot of the line.

From a user perspective, you are free to pick any tranches you want — since all tranches are opened for deposit at the same time and there is no restrictions for which tranche you can deposit (unless the tranche TVL limit is reached, which means more people had already deposited — which in this case just wait for our second tranched product to open), it all depends on the user, which is you, and how much risk you want to take on

Q4. I would like to ask whether your product can still be operated regardless of whether demand for tranch is skewed to one side I.e when majority of user want a certain tranches while the minority, say 30% demand for another types of tranches.

Ans — You are correct — this is actually something we are trying to tackle too — since this issue has affected some of the similar products in the market.

The whole risk tranching product would work, IF and ONLY IF, the deposit in each tranche (what we call “thickness”) would strike a certain ratio.

For example, too much deposit in the senior tranche, meaning that there isn’t enough deposit in the junior side to cover their lost when the portfolio underperformed. Too much deposit in the junior tranche, meaning that there isn’t enough of yield that is being transferred from the Senior tranche over — thus really minimize the yield differentiation between the tranches (you can refer to Barnbridge and their vault, where ~95% of the deposit is in Junior, thus creating that issue)

To tackle this — we set up our initial product with a fixed TVL model — in this case — each tranches will have a max cap for TVL, and only when the cap is hit by all three tranches, will the product be deployed for farming. During the deposit window, users can freely submit or withdraw their deposit, product won’t get locked until all 3 tranches TVL cap is met. You can tell, in this case, we can guarantee the fixed ratio between each tranche is clear, and ensuring that each tranche’s users are getting what they are signing up for

Let me again hit you with a graphical example

You can see the ratio between the deposit is fixed at a certain ratio — and the pool will deploy ONLY IF all three tranches hit the filling limit

so in this case we ensure a proper risk tranching product is being deployed and users in all tranches got what they asked for.

Q5. I’ve read that each portfolio collects a yield farming strategy for curation in DeFi. How is this different from AMMs and what advantages does portfolio collection bring to yield farming?

Ans — So I would first say that by participating in an AMM — you are essentially going to suffer from IL. We actually launch our first product with 3 BUSD-based farms, which in this case no IL would take place and thus provides a degree of steadiness to the community when they learn the product

In addition, in traditional yield farming, users are susceptible to any fluctuation of the invested strategy, if the product went up 10%, they return went up 10%, if the product went down 10% their investment went down 10% — This is something that Waterfall can take a stab to categorize, into different tranches of risk/reward, so users can now can have a lot more options on how they want their return to be set up, do they want fixed, but reduced yield? Or high, but leveraged one? Or middle of the road? — these are new optionality that Waterfall DeFi can offer to the community to better formulate their crypto investment strategy.

Here are some important links of WaterFall DeFi 👇🏻

⦿ Website ⦿ Twitter ⦿ Telegram ⦿ Blog

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