Understanding Saffron Finance

I did not understand tranches. I’ve heard about them, I know people are excited about them, but I did not understand them (I’m still not 100% sure I do), but having spent some time researching and reviewing Saffron Finance, I wanted to do a write up, to both articulate my understanding, and if by some miracle I am right, then hopefully help others understand it as well.

To try to articulate it in my own vernacular I am not going to refer to “tranches”.

So consider category A. Category A takes DAI and invests it into Compound. But, category A actually earns less interest, than if you just depositing into Compound itself. To understand this, we need to first look at Category B.

Category B simply holds DAI. But category B is “insuring” category A. If something bad were to happen to Category A (like a loss of funds), Category B is essentially taking on that risk. In return for this, Category A is giving category B some of its interest.

So now back to Category A, that is why you are earning less interest, that interest is being paid to Category B “insurers”, but this does mean, your deposits are insured, should something occur.

Now the above is probably a LOT more naïve than the full picture, and I still have a lot more research to do, but I thought this is a really elegant solution to insured products. Reason being, there is no upfront cost for cover, you are simply paying with interest.

Now it does raise questions about “if Category B takes on all the risk of Category A, why not just deposit into Compound and earn full interest”, I don’t have a clean answer on this yet, but I assume that’s where a Category is normally comprised out of more than one “instrument” and as such has different risk diversification, or where Category B can be used to insure multiple other unrelated risk categories, as the same DAI could be used to insure Category A Compound and Category C Aave.

The above is just the start, but its a model I’m very excited by, since it alleviates the upfront costs of insurance, and shifts it to ongoing. Something that I have proposed with Cover Protocol as well. Great to see difference solutions to the same problem.




Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

Low tech to fin-tech, how my frustrations with traditional banking led me to the app store and to…

How Much Loan Can I Get on Gold in 2021?

Where can I get a totally free credit score report?

LyondellBasell-The Buffettology Workbook

My parents had little financial literacy

What is really happening to the stock market?

An Intro to Financial Freedom

Are You Ready To Buy a Home

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Andre Cronje

Andre Cronje

More from Medium

Solidly: preparation for launch

Babylon Fuse Pool on Rari

The Olympus Treasury Dashboard

Bulletin Board: February 6th