SMART Alpha Bonds
Market Price Exposure Risk Mitigation using tranched volatility derivatives.
SMART Alpha product
The SMART Alpha bonds will not be structured via traditional yield tranches but instead with various levels of market price exposure, which we will call risk ramps. The idea is that every bucket or tranche of price exposure does not need to be flat across the entire risk curve, meaning the first $100 of price exposure does not need to deserve the same upside and downside volatility.
This is similar to having fractional ownership but with different risk/reward for the fractions.
How it works
For example, if the current price of 1 ETH is expected to be $1000, and moves to $900, the first tranche (the riskiest tranches) takes a higher percentage of the loss. Conversely, if the current price of 1 ETH is expected to be $1000, and moves to $1100, the first tranche (the riskiest tranches) takes a higher percentage of the gain.
How these gains and losses are measured & allocated across tranches can be done algorithmically with smart contracts. Each tranche can be traded as a unique digital asset. For example jETH (a junior tranche of ETH price exposure), mETH (a mezzanine tranche of ETH price exposure, and sETH (a senior tranche of ETH price exposure). The tranches will exist as risk ramps in which users of various risk appetites can gain price exposure to digital assets.