Tranchess Research Report by SnapFingers Research| Structured Funds in the DeFi World

Author: SnapFingers Research

Original Source (Chinese): Tranchess Research Report

Translated by: ChatGPT

Table of Content

• Preface
• Basic information about the Tranchess project
• Tranchess product architecture and current operation status
• CHESS token model and valuation analysis
• Competitve analysis of risk-rated protocols
• Development prospects for Tranchess

Preface

DeFi is a new type of deconstruction of the traditional financial world, which uses blockchain technology to make financial activities more efficient, open, and transparent. Previously, various financial products such as banks, exchanges, insurance, derivatives, and more had been mapped onto the DeFi field. With the advent of Tranchess, structured funds have also been able to land in the world of cryptocurrency. Structured funds were originally a relatively complex financial derivative designed to meet the investment needs of different categories of investors with different risk preferences. Tranchess has leveraged the characteristics of DeFi to reconstruct this product, lowering the barriers to entry and enabling more users to utilize this tool for asset management. Structured funds generally consist of a parent fund and two sub-funds, with the sub-fund portion divided into high-risk and low-risk segments based on returns and risks. The high-risk portion uses leverage to achieve higher returns, but also bears more risk; the low-risk portion is more controllable and stable. These three parts can be split or combined according to investors’ preferences. With Tranchess entering the LSD track at the end of 2022, its unique structured fund model has brought more possibilities to this track, increasing the level of risk-free returns while also reducing risks under market volatility.

1. Basic information about the Tranchess project

1.1 Introducing Tranchess

Tranchess is an asset price tracking and management protocol running on the Binance Smart Chain (BNB) and Ethereum. Its goal is to provide different returns for users with different risk preferences, allowing users with BNB, BTC, ETH, or stablecoins like BUSD or USDC to find the most suitable product for their risk and return needs. The concept of Tranchess was first conceived in early 2020 and has rapidly developed to its current state. Inspired by the ability of a structured fund to meet users’ different risk preferences, Tranchess provides different risk/return matrices through a main fund that tracks a specific underlying asset, such as BNB. For BNB and ETH funds, Tranchess runs PoS nodes to enable the funds to earn staking rewards.

1.2 Development History

Tranchess’ concept was first proposed in early 2020, and the V1 version was officially launched on the BSC mainnet in Q2 2021. The release of the V1 version quickly attracted a lot of attention and was intuitively reflected in the TVL metric. Within just two months after its release, TVL successfully surpassed $1 billion and reached its highest point of nearly $2 billion in Q4, and its governance token CHESS was listed on Binance in October 2021.

As of April 2, 2023, CHESS has a current price of $0.25 USD (as of April 3, 2023), a circulating market cap of $30 million USD, a fully diluted market cap of $77 million USD, and a TVL of $57.56 million USD.

In January 2022, Tranchess launched the BNB Fund and became a validator on the Binance Smart Chain, which improved its security and returns. Currently, Tranchess has been stably maintained in the Cabinet Node.

In June 2022, Tranchess launched its V2 version with significant improvements in liquidity and user management. One of the major updates in V2 was the addition of three Bishop-BUSD pools and one nQueen-BNB pool. Using AMM pools and an automated optimized trading path, Tranchess improved the price calculation mechanism of the QBR token to simplify the conversion process when buying or selling tokens. This enabled QBR tokens to be freely exchanged at any time. Additionally, QUEEN tokens were made available for real-time creation and redemption.

In December 2022, Tranchess launched a qETH liquid staking product.

1.3 Funding

In July 2021, Tranchess raised a seed round of $1.5 million led by Three Arrows Capital and Spartan Group, with participation from Binance Labs, Longhash Ventures, IMO Ventures, and several other prominent figures in the crypto industry. The round focused on strategic investment, and the team carefully selected institutions and individuals who could support the project’s early stages and initial growth. The average price of the CHESS token during the seed round was $0.1.

1.4 Team Information

The Tranchess team is composed of blockchain and financial experts with diverse backgrounds and experiences worldwide. According to the official website, the core team members come from the TradeFi field, including investment banks, asset management companies, and hedge funds. Their past experiences include, but are not limited to, traders, investment managers, and strategy researchers. The technical team comes from tech giants like Google, Meta (Facebook), and Microsoft, with extensive experience in network security for centralized exchanges and DeFi protocols.

The current known public information about the founder is @Danny Chong. Danny graduated from Nanyang Technological University in 2005 and has over 16 years of experience in the banking industry. He worked at Credit Agricole CIB, where he was responsible for FX and Rates sales in the SEA region, leading the growth of sales, staff, and digital business. During his tenure, he successfully led the development of new products, including regular and structured products. In addition to finance, Danny also created some wellness brands in Singapore and Hong Kong.

1.5 Audit and Security

Tranchess seems to place a strong emphasis on security and user asset safety in both external communication and internal community communication. The team’s strict security requirements have led to higher demands for cross-platform project collaboration and have been perceived by the community as overly cautious. However, the recent occurrence of a series of black swan events and the loss of user funds due to the involvement of high-profile projects have gradually made the community recognize the significance and value of Tranchess’ risk management requirements.

Tranchess’s major code updates undergo three stages of testing and review before being officially released:

1. Internal cross-testing within the technical team;
2. Tranchess team’s use of the internal version;
3. External audit company’s audit report.

Tranchess’s homepage has links to all past audit reports for users to review. Since its inception, Tranchess has also joined ImmuneFi’s bug bounty program, offering rewards of up to $200,000 (or 10% of the potential maximum loss caused by the vulnerability, whichever is less) depending on the risk level. Recently, Tranchess has also detailed the process of fixing a vulnerability in an ImmuneFi report on its Medium page.

2. Tranchess product architecture and current operation status

Tranchess borrows the symbolic product features from the three pieces in chess, the Queen being the strongest piece, while the Bishop and Rook represent stability and attack, respectively. In Tranchess, the Queen is the mother fund, and the Bishop and Rook are sub-funds separated from the mother fund equally, representing fixed-income funds and leveraged funds, respectively.

2.1 Product Logic

Tranchess has been deployed on the Binance Smart Chain (BNB) and Ethereum networks, allowing users to deposit tokens and mint the corresponding QUEEN tokens. On the Binance Smart Chain, the QUEEN tokens are named bQUEEN, eQUEEN, and nQUEEN for the respective funds. On Ethereum, the QUEEN token for the ETH fund is named qETH, to better deliver its LSD feature to users.

The QUEEN token can be split into 0.5 BISHOP tokens and 0.5 ROOK tokens using the Split function. Similarly, 0.5 BISHOP tokens and 0.5 ROOK tokens can be merged using the Merge function to form 1 QUEEN token.

The nature of the BISHOP token is fixed income, while the nature of the ROOK token is 2x leveraged token. The ROOK token borrows half of the underlying assets from the BISHOP token by paying interest, thereby gaining leverage and amplifying risk and return.

With the launch of Tranchess on the Binance Smart Chain (BNB) network, node staking has gradually become the third most important component of Tranchess’ product design. By participating in node staking, the Tranchess team not only becomes more deeply involved in the development of the BNB Chain ecosystem, but also brings stable long-term returns to the funds.

In the current V2 version, Tranchess has also launched an ETH liquidity staking fund on the Ethereum network. Unlike the BNB fund, the underlying nodes of Tranchess’ ETH liquidity staking product are not operated by the Tranchess team itself, but are maintained in a more decentralized manner by various professional technical teams in the market. However, based on the rich experience accumulated in operating BNB nodes in the past, the team is able to evaluate the nodes from a more professional and secure perspective when selecting them, so as to minimize risks and ensure the safety of the fund’s assets while obtaining high-level staking rewards.

Currently, Tranchess has two qETH-WETH AMM pools on Ethereum, one on Balancer and the other on Aura. Through subsidy bribery for staking node voting every two weeks, the LP yields of both pools are currently maintained at a high double-digit level.

2.2 Profit Model from Users’ Perspective

1. Main Fund Returns: Holding Queen tokens obtained through primary market minting or AMM pools can yield BTCB/ETH/BNB exposure. Additionally, holding Queen tokens on the respective mainnets of ETH/BNB can earn PoS staking rewards from Qtokens (e.g., qETH on Ethereum and nQUEEN on Binance Smart Chain).
2. Fixed Income Returns: There are two ways to obtain Bishop tokens. One is by creating Queen tokens and splitting them, and the other by buying directly through InsantSwap on Tranchess. Holding Bishop tokens can generate fixed income and corresponding PoS staking rewards.
3. Leveraged Returns: There are two ways to obtain ROOK tokens. One is by creating Queen tokens and then splitting them, and the other is by buying directly through InsantSwap on Tranchess. Holding ROOK tokens provides a leveraged risk exposure/earning ratio to the Main Fund and earns PoS staking rewards.
4. LP Incentives Returns: Currently, there are 4 AMM (Automated Market Maker) pools on Ethereum: eBISHOP-USDC and eROOK-USDC on the Tranchess platform, and qETH-WETH on Balancer and Aura. On the Binance Smart Chain, there are 4 AMM pools: nBISHOP-BUSD, bBISHOP-BUSD, eBISHOP-BUSD, and nQUEEN-BNB. Providing liquidity to these AMM pools can earn transaction fees and CHESS token rewards.
5. CHESS Governance Token Staking Rewards: Staking Queen, Bishop, and Rook tokens can earn CHESS governance token staking rewards.

Note: It should be noted that LPs who stake in the qETH-WETH pool on Balancer do not directly receive CHESS incentives. Tranchess pledges these CHESS incentives to a Hiddenhand bribing program in Balancer’s ecosystem to earn higher BAL rewards. Through this approach, the project receives a boosted return on its liquidity pools to attract more external investors to stake in the qETH-WETH LP to obtain sufficient liquidity, maintain the trading depth of LPs, and prevent the disanchoring of qETH and ETH.

2.3 Analysis of Strategy Risks and Returns

ROOK achieves leveraged exposure by borrowing assets from BISHOP. The return of ROOK is equal to the return of the underlying fund multiplied by the leverage factor minus the interest paid to BISHOP. When the underlying asset rises, ROOK amplifies the gain by the leverage factor. However, unlike traditional leveraged products, ROOK does not have the risk of forced liquidation during a market downturn. BISHOP earns fixed income by lending assets and adding staking rewards, and its expected APR can reach nearly 7%, which is a considerable return in the risk-free category.

When the underlying fund is established, the net asset value (NAV) of ROOK and BISHOP is both 1. ROOK borrows twice the assets from BISHOP, resulting in a leverage ratio of 2. When the underlying asset price rises, the NAV of ROOK increases twice as fast as the underlying asset, causing the leverage ratio of the newly minted ROOK tokens to decline. As the price continues to rise, the leverage ratio of ROOK continues to decrease, even approaching 1, resulting in the loss of leverage. Conversely, when the price of the underlying asset falls, the NAV of ROOK decreases twice as fast, causing the leverage ratio of the newly minted ROOK tokens to rise rapidly. Meanwhile, the NAV of ROOK falls even faster.

To avoid the loss of leverage during a sustained rally or a rapid decline in NAV, Tranchess uses a Rebalance mechanism to restore the leverage ratio. The specific approach is to restore the NAV of ROOK and BISHOP to 1 by adjusting the distribution of Queen tokens and changing the number of ROOK and BISHOP tokens held while keeping the value of the assets unchanged. The trigger condition for Rebalance is when the ratio of the net asset values of ROOK and BISHOP tokens exceeds 2 or falls below 0.5, which means the underlying asset has risen or fallen by more than 100% or 25%, respectively. With the addition of the PoS staking model, the underlying fund’s yield has a safety cushion, providing more room for ROOK holders during a downturn.

Historical data shows that during the nearly two years of operation from V1 to V2, there have been several large market fluctuations and a total of 13 Rebalances have been conducted, demonstrating the stable operation of the protocol.

Note: After upgrading and optimizing the QBR price calculation mechanism in V2, the number of Qtokens is no longer affected by Rebalance.

2.4 Actual earnings of the strategies

In terms of the scale of the main fund, the BTCB fund running on the BNB Chain has a scale of 1340 BTCB, the ETH fund has a scale of 1,854 ETH, and the BNB fund has a scale of 54,710 BNB. The ETH fund running on Ethereum has a scale of 213 ETH.

Regarding PoS staking earnings, the BNB fund running on the BNB Chain has a PoS APR of 2.3% and a utilization rate of 95.4%. The ETH fund running on Ethereum has a PoS APR of 2.6% and a utilization rate of 90%.

Regarding liquidity staking earnings, the qETH-WETH pool on Balancer has a TVL of about $425K and an APR of 7.82% to 14.65%. The qETH-WETH pool on Aura has a TVL of about $410K and a real-time APR of 33.69% (historical APR is 15.75%).

Regarding the earnings of the structured sub-fund, Bishop’s earnings come from three aspects: the fixed interest paid by Rook of 7.3%, the Chess rewards obtained by staking, with a historical high of 63.8%, and the PoS node earnings, which are currently 3.3% on the BNB Chain. Rook’s earnings are reflected in the change in net asset value (NAV), and in addition, one can also receive PoS staking earnings sharing and CHESS emission rewards.

2.5 Development Status of the Platform

Product Operations and Relevant Data

Tranchess provides services on both the BNB chain and the Ethereum network, including:

• 3 main funds on the BNB chain: BNB (54707 BNB), BTCB (1340 BTCB), and ETH (1854 ETH).
• 1 main fund on Ethereum: ETH (213 ETH).
• 4 AMM pools on Ethereum: eBISHOP-USDC, eROOK-USDC (on Tranchess), qETH-WETH (on Balancer), and qETH-WETH (on Aura).
• 4 AMM pools on BNB Chain: nBISHOP-BUSD, bBISHOP-BUSD, eBISHOP-BUSD, and nQUEEN-BNB.

According to data from the DefiLlama platform (as of April 3rd), Tranchess has a total value locked (TVL) of $57.75 million, with 99% of the TVL on the BNB chain. Tranchess ranks 12th in the BNB chain ecosystem. The BNB staking pool on Tranchess accounts for 3.92% of the total BNB staked.

Community Operations

Tranchess’s official Twitter account currently has 42,000 followers, with 60 users using the platform in the past 30 days. It is worth noting that in the update of version 2, the UI and user interaction were upgraded. The UI upgrade not only significantly improved functionality but also simplified previously complicated processes into more understandable interactive operations. Most of the suggestions come from the community, and the team attaches great importance to the community’s voice, adopting many important and friendly suggestions from the community. The team’s understanding of DeFi is also reflected in the product’s usability. With the overall development of DeFi and the digital currency industry, more and more “newcomers” from non-traditional blockchain fields are beginning to observe and even enter the DeFi field. Therefore, any improvement that makes it simpler, more convenient, and more intuitive for users to use the product is worth it. Users are willing to become familiar with and understand it. In the six months since the launch of Tranchess V2, the user experience and feedback seem to be fairly positive.

3. CHESS Token Model and Valuation Analysis

3.1 CHESS Token Economic Model

CHESS is the governance and utility token of Tranchess. According to CoinGecko data, the total supply of CHESS is 300 million, with a current circulating supply of 115 million, and a market cap of approximately $34.5M. Of the total supply of 300 million CHESS, 50% will be used for community allocation and incentives, of which 120 million will be released on the official Tranchess platform (with the specific weekly emission plan announced on the official website). The CHESS token will be released on a decreasing schedule over a period of 4 years. The total supply of CHESS tokens is 300 million, with the following distribution:

Apart from purchasing CHESS tokens on the secondary market, users can obtain CHESS emission rewards through four methods:

• Staking QUEEN, BISHOP, or ROOK tokens on the official platform to receive CHESS emission rewards.
• Staking CHESS on the official platform to create veCHESS and receive weekly rebates.
• Staking CHESS on Binance or Pancake Swap to receive CHESS rewards.
• Providing liquidity to AMM pools to receive CHESS rewards.

3.2 CHESS Token Features

The main functions of CHESS are implemented through veCHESS. Locking CHESS can earn veCHESS. The lock-up mechanism of CHESS is designed similarly to mainstream designs on the market: the lock-up period ranges from 1 week to 4 years, and the longer the lock-up period/the larger the lock-up amount, the more veCHESS can be obtained (for example, locking 1 CHESS for 1 year can earn 0.25 veCHESS, while locking for 4 years can earn 1 veCHESS).

Currently, the Tranchess platform only offers locking options for 1 week, 1 month, 3 months, 6 months, and 1 year. Longer lock-up options will be available in the future. veCHESS has three functions:

• Governance: Holding veCHESS can participate in platform governance, such as deciding the emission ratio of each fund or AMM pool, the allocation ratio of PoS staking rewards between Bishop and Rook, and adjusting the interest rate premium of Bishop through proposals.
• Dividends: Weekly dividends, which come from 50% of all transaction fees on the Tranchess platform. Dividends on the Binance chain are paid in BTCB, ETH, BNB, and BUSD, while dividends on Ethereum are paid in qETH and USDC.
• Boosting Staking Income: Staking Queen, Bishop, and Rook fund tokens can earn CHESS token rewards, and holding veCHESS can increase this reward.

3.3 CHESS Token Valuation Analysis

The protocol generates revenue through fees and revenue sharing, including:

• Management fees of the main fund: 1% per year for BTCB and ETH funds, 2% per year for BNB funds
• Queen minting fee (Creation): 0
• Redemption fee (Redeem): 0.2%
• Splitting fee (Split): 0
• Synthetic fee (Merge): 0.1%
• AMM pool: 0.1%
• Revenue sharing: 20% of BNB node staking income and 7% of ETH node staking income

Unlike traditional finance, DeFi is a rapidly growing and very young industry with explosive data growth and exceptionally fast iteration within the industry. As a result, there is currently no perfect valuation system for analysis. However, for DeFi projects, market capitalization and TVL are important indicators for evaluating market value. Therefore, the following analysis focuses mainly on these two indicators and compares them with other DeFi project data to evaluate Chess.

Data shows that the total supply of CHESS tokens is 300,000,000, and as of the end of March, the circulating supply is about 117,099,737, accounting for 39%. The current price of CHESS is $0.258, and the market value of the token is $30,203,840, which is diluted to $77,373,468 after complete dilution. The 24-hour trading volume is $2,943,074. The TVL of the CHESS protocol is $57,561,773.

The price-to-earnings ratio is one of the most basic financial metrics, usually used to identify undervalued stocks or evaluate stock earnings potential. Similarly, the ratio of market value to 24-hour trading volume in DeFi projects — NVT (Network Value to Transaction) — can also reflect their investment value. Compared with the price-to-earnings ratio, NVT does not have compatibility issues across industries, so even different projects’ cryptocurrencies can be compared with each other. The following figure is an overview of NVT data for various tokens based on March 1st data. The figure shows that the current NVT value of CHESS tokens is 6.56, which is relatively low. The NVT ratio for top DeFi projects such as AAVE is above 20. The lower the value, the lower the market valuation. Considering the launch time of the Tranchess project and the V2 version update time, the market entered a bear market last year, which also partly indicates that the project has not fully developed, or the market has not fully recognized the potential value of the token.

In terms of Total Value Locked (TVL), TVL typically reflects market size and user participation. The TVL of the CHESS protocol was once ranked third on the BNB chain, but currently stands at a medium to upper level. Moreover, the TVL is significantly higher than the market capitalization, indicating that most tokens are locked, which also indirectly reflects high user participation. The current ratio of market capitalization to TVL, or Mcap/TVL, is approximately 0.57. Typically, a ratio of less than 1 indicates an undervalued state, which suggests that Tranchess is a cryptocurrency protocol with potential.

In summary, the valuation analysis of CHESS tokens shows that the market valuation of the tokens is relatively low, but their circulating value and TVL are high, representing the actual trading value of the tokens and the large market size of the protocol.

4. Competitive analysis of risk-rated protocols

Tranchess operates both staking nodes and a layered fund built on top of staking nodes, achieving composability in DeFi through cross-chain integration. Currently, most other on-chain layered fund protocols were created based on lending protocols before the Ethereum PoS merger, and they do not have the advantage of risk-free yield provided by PoS staking compared to Tranchess in terms of interest rates and risk control. These protocols include Saffron Finance, BarnBridge, and 88mph, all of which have had a glorious past. Barnbridge reached a liquidity mining deposit of $186 million just weeks after launch, and Saffron reached a TVL of $58 million just two weeks after launch, gaining significant momentum. However, now, one year after launch, Saffron’s TVL is only $300,000 according to its website, with APR data no longer available, and the project is building a new fixed income product based on Uniswap. BarnBridge currently has only $1.23 million TVL left, with one product (DAI on ETH) and 17 active users.

We analyze the reasons and countermeasures through a simple review of the design of various protocols, and explore the possible outcomes of market competition.

4.1 Introduction and current status of competitors

Saffron

Saffron Finance is a peer-to-peer risk trading protocol that allows liquidity providers to collateralize their crypto assets on its platform and offer customized risk exposure based on their desired risk and return expectations. The Saffron protocol automatically connects liquidity to third-party DeFi lending platforms.

In other words, Saffron enables users to share deposit earnings at different risk levels. Low-risk users can earn fixed-rate returns, while high-risk users can earn higher returns when overall earnings are higher. If overall income falls short of expectations, low-risk users may need to be subsidized for their fixed returns and record losses. Additionally, Saffron compensates liquidity providers with SFI tokens issued based on the amount of LP (Liquidity Provider) supplied.

BarnBridge

BarnBridge provides interest rate swaps that allow for the conversion of any variable interest rate into a fixed interest rate. It enables users to execute simple interest rate swaps, where one party assumes more variable risk while the other party assumes a fixed rate of return (sBond pool, low risk but fixed returns; jTokens pool, high risk but unpredictable returns).

Subsequently, with the SMART Alpha upgrade, risk can be further subdivided, allowing low-risk preference users to sell some of the downside risk to high-risk preference users in exchange for sacrificing potential earnings, in order to hedge against the downside risk in fiat-denominated terms.

Later, BarnBridge introduced SMART Exposure. Users with portfolio assets can automatically calibrate the balance between different assets based on price fluctuations by setting specific ratios through SMART Exposure.

In a subsequent update, BarnBridge became a closed pool, where deposits cannot be withdrawn during the deposit period and withdrawal period. However, during the deposit period, new asset tokens can be minted by depositing the amount into relevant lending protocols for collateralized loans.

88mph

88mph is a fixed-term fixed-interest rate yield product that acts as an intermediary between users and third-party variable interest rate lending protocols, providing your capital with the best fixed interest rate yield. The maximum deposit period is 1 year, and in certain types of deposits, the protocol uses tokens for interest subsidies.

88mph offers two types of products:

• Fixed Interest Rate Bonds (FIRB): Currently, 88mph supports multiple token deposit services (including Dai/sUSD/USDC/UNI/yCRV, etc.), and deposits are placed in Compound/Aave/Harvest/YFI to earn yield and pay it to deposit users in the form of fixed interest rate.
• Floating Interest Rate Bonds (FRB): If users expect the overall market interest rates to remain at a higher level, they only need to take on a small amount of debt with fixed interest rate and earn excess floating interest; on the other hand, if the market interest rates are lower, holders of floating interest rate bonds may incur losses as a result.

There are no bonds available for purchase in the high-risk pool：

4.2 Summary of Competition Projects

The current three protocols in the same category are all facing operational challenges. These protocols are based on simple lending agreements, where they exchange the variable interest rates of the lending market with fixed interest rates for their users through interest rate swaps. They split the deposit interest of the lending agreement into two parts — low-risk, low-fixed income and high-risk, high-income. However, they face the following issues:

1. The deposit interest of the lending agreement is not high, even in the current context where the lending agreement benefits from LSD (Liquidity Sensitive Deposit) yield farming. Before LSD, the borrowing demand was more short-term and based on speculative mining and high-risk investments, which had less stable borrowers and lower borrowing interest rates. This low-interest rate environment limits the room for designing differentiated products, whether by splitting them into two products or having the protocol itself bear the subordinated tranche with lower interest rates, as acknowledged by the founder of BarnBridge.
2. Most of the tranched funds require long-term locking of assets, while the crypto world is volatile and events can happen rapidly. Most existing fixed-income protocols have lock-up periods ranging from 90 to 180 days, and some even up to one year, making it inconvenient for users to exit. In some protocols, users may also need to wait for specific vault opening times to enter, adding further inconvenience.
3. Lack of liquidity — Most fixed-income positions lack secondary market liquidity, meaning that users cannot use them as collateral or easily convert them into other assets.

Tranchess’ Solution:

Tranchess offers a new solution based on the existing problems, optimizing user returns and reducing risks.

• Tranchess’ tranched funds are based on LSD, leveraging the advantage of higher yield from LSD collateralization compared to deposit interest in lending protocols, making them more attractive to users than traditional on-chain tranched funds. Moreover, Tranchess does not simply use interest rate swaps to design structured products, but also leverages the higher yield from LSD to increase leverage for the high-risk tranche through internal borrowing, while earning fixed income from providing loans to the high-risk tranche, and both tranches share a portion of the LSD interest income. This is a more stable and higher-yielding structured product based on LSD.
• Tranchess has built liquidity pools within its structured products, allowing users to enter and exit at any time, reducing user risks and improving the liquidity of collateral assets.
• Tranchess’s structured products are denominated in U, allowing users to purchase with USDC, making it easier for users to understand the profit and loss of their assets.

Final Analysis of Market Competition:

Structured funds essentially classify investment products for sale based on risk, term, and other characteristics to meet the investment needs of different users. In the sales of traditional financial products in the wealth management field, fixed income products are an important component of asset allocation, especially during economic downturns. As of the end of 2021, in JPMorgan’s asset management structure, the proportions of liquidity, fixed income, equity, diversified, and alternative assets were 28.2%, 20.7%, 23.2%, 23.2%, and 9.9% respectively. In the field of cryptocurrencies, some investors often consider the risk of underlying asset volatility, and fixed income assets allow risk-averse investors to participate in liquidity mining and cryptocurrency investments with minimal risk, while the higher risk portion in structured funds can meet the needs of investors seeking high returns.

Based on the above analysis, the following trends can be inferred for the market:

• The emergence of liquidity collateralized derivatives will bring more capital inflows: Since Ethereum shifted to PoS, liquidity collateralized derivatives have provided higher low-risk interest rates for the entire DeFi industry, laying the foundation for more capital inflows.
• Structured funds will become a major target for capital allocation: Capital will be allocated in a balanced manner, taking into account both returns and risk control, and fixed income products will become a major target for allocation, with the stability of fund operations being a key consideration.
• The model of structured funds will become more diversified: DeFi is highly composable, and in the future, more structured funds based on LSD (Liquidity Sensitivity Distribution) will be created to meet the investment needs of different users, such as LSD+leverage, LSD+options, etc.

As a pioneer in this field, Tranchess has not encountered significant risks in its economic model and protocol security during its two years of operation. With the recent rise of LSD and increased attention from capital, there is a great opportunity for Tranchess to become a leader in the on-chain structured funds race.

5. Development prospects for Tranchess

5.1 Tranchess Development Prospects

Tranchess has advantages in both pattern innovation and risk control, and with the improvement of macro liquidity and the development of the LSD track, Tranchess has significant growth potential.

1. Simple Risk Grading Model

DeFi has developed a risk grading model to meet different users' risk preferences. As mentioned earlier, competitors often use stablecoins as underlying assets with income mainly coming from lending. Tranchess, on the other hand, tracks major asset classes such as BTC, ETH, and BNB, which have growth potential and stability compared to general blue-chip assets. For users who pursue low risk, Tranchess’ Bishop token can provide higher risk-free returns. For users who pursue high risk, Tranchess’ Rook token provides a simple way to configure leverage positions without adding an additional margin to maintain the position during market downturns.

2. Bull Market Benefits Tranchess’ Growth

Tranchess’ main fund tracks asset prices, and leveraged tokens in the sub-fund amplify gains or losses when asset prices rise or fall. According to the development trend of leveraged funds in traditional finance, leveraged funds are the most sought-after investment product during bull markets, and the size of leveraged funds tends to grow rapidly. This is because leveraged tokens like Rook become more attractive during periods of rising asset prices. The instant redemption and purchase of Rook through the minting of Queen tokens and splitting them into Rook tokens allows the main fund to expand during bull markets quickly. In 2023, with the expected easing of macro liquidity, the cryptocurrency market may experience a recovery, which is undoubtedly a positive factor for Tranchess.

3. Providing Base Income through PoS Staking

With the implementation of Ethereum’s Shanghai upgrade, ETH staking is expected to experience greater growth, and staking income will bring a large amount of funds into DeFi, further promoting pattern innovation in DeFi. Tranchess’ entry into the LSD track has greatly expanded the imagination space for such products and enriched the possibilities for LSD users’ income portfolios. At the same time, the integration of Tranchess’ structure with LSD has also expanded Tranchess’ own imagination space, and if it can fully leverage its advantages, it may bring more possibilities in future collaborations with various projects.

4. Risk Control

As a structured financial product, leveraged funds have a certain level of complexity in their structure, and protocol builders need to have strong financial expertise. Based on the team background, transparency of information, and past two years of operation, Tranchess has the relevant capabilities.

5.2 Risk Points of Tranchess

1. Anchor risk of the underlying assets and Queen Token LP (e.g., ETH/qETH): Tranchess Protocol relies on the prices of the underlying assets and Queen Token LP for its operation. Any deviation or instability in their prices may negatively impact the normal operation of Tranchess Protocol and the interests of investors.
2. Rapid depreciation risk of Rook token: The value of Rook token may depreciate quickly, which could result in losses for investors who hold Rook tokens.
3. Small scale and uncertain market development expectations of qETH: Currently, qETH has a relatively small market scale and uncertain market development expectations. Additionally, there is a risk of penalties due to defaulting staking nodes, which could affect the performance of qETH and, in turn, impact the Tranchess Protocol.
4. Policy risk:

Since the emergence of Bitcoin, the world of cryptocurrencies has rapidly developed, but regulatory issues have always been a challenging aspect of its growth. In recent years, the U.S. Securities and Exchange Commission (SEC) has begun to understand and explore how to regulate the world of cryptocurrencies. Although regulation is still in its early stages, regulatory trends for cryptocurrencies and DeFi (Decentralized Finance) have begun to emerge.

The Howey test is a legal test used to determine whether a transaction is considered a security, and it is also an important indicator for assessing the compliance of DeFi projects. If a DeFi project or asset meets the four elements of the Howey test, it may be considered a security and subject to securities regulations.

From the previous regulation of Bitcoin (BTC) to Ethereum (ETH), and more recently, NFTs and stablecoins, the SEC is increasing regulatory efforts to ensure compliance. While Tranchess Protocol appears to potentially meet the four elements of the Howey test, there are currently no specific cases of regulatory scrutiny for DeFi. On the other hand, DeFi projects themselves still need to further strengthen security and compliance measures. Therefore, from the perspective of sustainable and robust development of the DeFi industry and protection of investor interests, DeFi projects need to establish more comprehensive and effective compliance measures. Regulation should not be arbitrary restrictions or political tools, but rather based on reasonableness, legality, and compliance, as a premise for promoting industry development.

This report is provided by SnapFingers Research and is intended for specific clients’ use only. The report is issued only in compliance with relevant legal requirements and the information provided is sourced from public channels. While SnapFingers Research strives to ensure the accuracy and completeness of the information, no guarantee is made regarding its accuracy or completeness.

The complete views of this report should be based on the full report published by SnapFingers Research, and any views and information published on media, social websites, or other platforms are for reference only.

The information, opinions, and speculations presented in this report reflect SnapFingers Research’s judgment as of the date of the report. Analytical opinions and speculations may be subject to changes without notice in subsequent research reports, and investors should pay attention to relevant updates or modifications.

The information or opinions expressed in this report are for reference only and do not constitute investment advice to anyone. Investors should not solely rely on this report as the sole factor for investment decision-making, and should not consider this report as a substitute for their own judgment. SnapFingers Research or its affiliated institutions do not guarantee investors will profit, nor do they share investment returns with investors, and are not responsible for any losses incurred by anyone due to the use of any content in this report.

About SnapFingers Research

SnapFingers Research is a research platform under SnapFingers, specializing in DeFi and TradeFi research on various public chains.

Relevant Links:

Twitter: @SnapFingersLabs

Website: Mirror.xyz/snapfingersresearch.eth