Existing decentralized earning platforms expose liquidity providers to complex code driven outcomes. Network participants must evaluate an array of catastrophic scenarios where the resulting state could wipe out their holdings or lead to significant impermanent loss. It is hard to anticipate the net effect of extreme market volatility or focused economic attacks. Saffron narrows the set of possible outcomes by giving liquidity providers dynamic exposure.
The saffron.finance system consists of pools of liquidity. Pools in saffron.finance collect deposited base assets from liquidity providers and deploy them on platforms to earn interest. For example, the first Saffron pool is the DAI pool, which launched with a DAI/Compound adapter.
Adapters connect pooled capital to platforms. The first adapter is a DAI/Compound adapter. The DAI/Compound adapter, as its name suggests, connects the DAI pool to the Compound platform giving DAI pool LPs the opportunity to pool together and earn interest on Compound.
The strategy connects all pools and adapters together and selects the best adapter to deploy capital to every hour for each pool. It also generates and distributes SFI tokens to LPs at the end of every epoch.
Epochs are two week periods where liquidity is locked up and deployed to platforms by the system. At the end of an epoch it is wound down and the interest earned is calculated and can be distributed to LPs according to their proportional tranche ownership. During the wind down SFI tokens are generated and can be redeemed using the same proportional calculation used to redeem interest. In the first version of the Saffron, capital is only deployed on yield farming platforms, but in later versions Saffron will be able to create dynamic risk selection for LPs by adapting to different types of DeFi protocols. The first epoch (epoch 0) starts on 2020-10-31 at 14:10:00 UTC.
The SFI token is capped at 100,000 and is generated every 2 weeks during the wind down of an epoch. Tokens are earned by LPs proportional to how many dollars per second (dsec) they provided to the system for the duration of an epoch. SFI token subsidy is halved every epoch until epoch 8. From that point on, the system steadily releases 200 SFI tokens per epoch, until reaching the 100,000 cap. There are no fees on Saffron in version 1. Later versions will introduce Saffron platform fees, and at that time, staking SFI tokens will earn SFI holders a proportion of fees incurred by users. When SFI token generation ends fees will continue to provide incentives to liquidity providers. SFI tokens must be staked for LPs to join the enhanced return A tranche.
Pools are divided up into tranches each with their own unique properties. There are three user-facing tranches for LPs to add liquidity into and two backend tranches that exist only at the smart contract level to provide LPs with additional optionality when adding liquidity. The risky, high interest earning tranche (tranche A) earns interest according to its principal contribution multiplied by the tranche interest multiplier. The tranche interest multiplier defaults to 10. As a result, A tranche LPs earn 10x more interest than they would without saffron.finance, likewise AA tranche LPs earn 1/10th of the interest they normally would.
- AA Tranche: LPs adding liquidity to the AA tranche earn less interest but are covered in the case of loss from platform risk. That covered capital comes from the principal and interest earnings of A tranche LPs. AA tranche LPs are are awarded with 95% of the SFI token generation. (Currently merged with S tranche).
- A Tranche: LPs adding liquidity to the A tranche earn more interest but lose their principal and interest earnings in case of loss from platform risk. A tranche LPs earn 5% of the SFI tokens generated per epoch. SFI earnings are not included in covering first loss for AA tranche LPs.
- S Tranche: The S tranche (currently merged with AA) earns 95% of SFI generated per epoch. The system uses the S tranche to balance the A and AA tranches such that they are always in a perfect equilibrium with each other such that the tranche interest multiplier is maintained at its exact value. For example, with a tranche interest multiplier of 10, the AA:A ratio in a pool is always 10:1.