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The basic mechanics
Risk Parity Protocol | The Lite Paper V1.0
The Formation Fi platform prioritizes accessibility in an ecosystem which currently lacks clear and intuitive user experiences. Yield farming strategies will be automatically and periodically updated across many blockchains, initially Ethereum, Binance Smart Chain (BSC), Huobi Eco Chain (HECO). Upcoming chains such as Polkadot, Cardano, Cosmos and more will be added as more DeFi assets are created within the internet of chains.
The cross-chain DeFi assets are calibrated and indexed according to their asset class and network. This allows us to apply the basic principles of the Risk Parity investment strategy.
It’s this composability (a.k.a., money lego) that will ultimately allow anyone using the Risk Parity Protocol to construct all types of cross-chain yield farming strategies, grouping them into a portfolio weighted and balanced by risk.
Alpha, beta, and gamma don’t translate exactly from traditional markets to crypto, but DeFi trends are sufficiently clear that we can produce the following broad token classes:
- ALPHA is the index token class representing aggressive yield farming strategies with liquidity mining programs from top performing protocols across major networks. Alpha class assets are high growth projects with high risk. The protocol employs modest leverage to boost yield in a bull cycle.
- BETA is the index token class representing market indices designed to track the top Web3 infrastructure projects in key segments like DeFi (lending/borrowing, DEXes, derivatives, asset management), Layer 1 and 2 projects, open data market, oracles, AI, and storage across major networks.
- GAMMA is the index token class that produces consistent monthly income. These are generally based on stablecoins staked in the top lending protocols across major networks. This produces solid, predictable yield without any exposure to liquidity mining.
The beauty of this tokenized approach is that it can itself be indexed and tokenized, allowing us to produce PARITY, a fourth token class which synthesizes the other three:
- PARITY is the index token class which tracks a risk-adjusted, balanced portfolio of ALPHAs, BETAs, and GAMMAs across the network to generate the most protected APY against environmental changes. It’s the kind of portfolio of the yield farming strategy where you let the robo-advisor manage your portfolio through all economic seasons (bull, bear, boom and bust). It’s long-term growth focused. It will have both a small leverage to boost yield and certain perpetual futures and options to hedge.
The table below shows key characteristics of each index coin class:
Asset | Index | Focus | Thesis | Style |
Raging Bull Alpha | ALPHA | Pure Growth | Cross-chain yield farming strategies with liquidity mining programs offered by leading DeFi projects to maximize APY.
Leverage: Yes Risk: High | Stock |
Web3 Formational Beta
| BETA | Thematic Indices (market) | Cross-chain thematic ETFs, each built specifically around the core infrastructure building blocks of Web3.
Leverage: No Risk: Market Average | ETF |
High-Yield Fixed Income Gamma | GAMMA | Monthly Income | Cross-chain stablecoin based yield generating tokens from top DeFi lending and asset management protocols designed to offer a fixed monthly income.
Leverage: No Risk: Low | Bond |
Smart Yield Farming with Risk Parity | PARITY | Long-Term Risk-Adjusted Growth | Collection of cross-chain yield farming strategies weighed and optimized by risk in response to environmental changes.
Leverage: Yes Risk: Adjusted | Risk Parity |
We say token class, because the Risk Parity Protocol is designed to be chain agnostic. At the time of writing, DeFi is primarily conducted across three chains with over $64B in Total Value Locked (TVL):
Network | TVL* |
Ethereum (ERC) | $44.68B |
Binance Smart Chain (BSC) | $12.89B |
Huobi Eco Chain (HECO) | $6.27 B |
Therefore, each token class will initially comprise four tokens: one for each chain and a composite token indexing the other three tokens in that class. This results in a suite of sixteen index tokens, as follows:
Name of Index | All Network | ERC | BSC | HECO |
ALPHA | ALPHA-composite | ALPHA-erc | ALPHA-bsc | ALPHA-heco |
BETA | BETA-composite | BETA-erc | BETA-bsc | BETA-heco |
GAMMA | GAMMA-composite | GAMMA-erc | GAMMA-bsc | GAMMA-heco |
PARITY | PARITY-composite | PARITY-erc | PARITY-bsc | PARITY-heco |
This approach can obviously be expanded as deemed necessary by the team or community. To begin with, the Risk Parity Protocol will focus on the top three chains with at least $5B in TVL. Support for other chains such as Polkadot, Cosmos, Cardano, etc., will be added when they reach this threshold.
The final outcome of this rigorous allocation of assets by risk is the matrix of cross-chain yield farming strategies algorithmically engineered and maintained in a single PARITY index coin. In theory, a single PARITY-composite coin could represent the best, risk-adjusted portfolio of cross-chain, an algorithmically rebasing DeFi asset that can be staked, exchanged, or traded without any limit.
Putting it all together, Risk Parity Protocol will offer a matrix of index tokens across three major networks, allowing any yield farmer or DeFi asset manager to design their own unique portfolio to match every risk appetite within the entire DeFi universe.