What Is SMART Yield
SMART Yield allows users to mitigate the variable yield volatility of other projects, such as Aave or Compound, by introducing senior and junior tranche derivatives.
Users are able to mint junior or senior tokens which represent accordingly-tranched deposits into the underlying protocol. Junior token holders provide the liquidity necessary for senior bond investors to be able to receive fixed yield. The risk present is that, should the underlying variable rate annuities fall below the level necessary to meet senior debt obligations, junior yields and potentially even principals would be algorithmically reallocated to cover.
At the same time, juniors will benefit from the extra yield generated by senior deposits in cases where the variable rate of the underlying debt pool (including any associated token subsidy rewards) are higher than the weighted average guaranteed yields of current seniors. It is expected that the junior positions will have more capital in a given pool than the senior ones.