Tranchess: DeFi's Move Towards Tailored Risk and Reward

Key Insights

• Tranchess is a crypto protocol inspired by the concept of tranches, which provides varied risk-return solutions for investors. It aims to create a unique risk/return matrix from a single main fund that tracks specific underlying assets or a basket of crypto assets.
• Tranchess exists on Ethereum and BNB Chain and has two main offerings: liquid staking and Tranche. These offerings are facilitated through four tokens: QUEEN, BISHOP, ROOK, and CHESS.
• CHESS is Tranchess' governance token, and veCHESS is required for all utilities of the CHESS token.
• The Tranchess team comprises blockchain and financial veterans with experience in traditional finance, investment banking, asset management, and hedge funds.

"Tranche is a French word meaning slice or portion"

Tranches are often used in structured finance, where a single asset or a pool of assets is divided into different segments, i.e. tranches, based on their level of risk and return. Each tranche has a different level of risk and return, with the lower tranches being riskier but also potentially offering higher returns, and the higher tranches being less risky but with lower potential returns. Tranches offer several benefits for investors including diversification, flexibility, and tailored risk and return.

Protocol Overview

Tranchess is a crypto protocol inspired by the wide adoption and benefits of tranches. It is a yield-enhancing asset tracker that provides varied risk-return solutions. The protocol aims to create a unique risk/return matrix from a single main fund that tracks a specific underlying asset or a basket of crypto assets, such as BTC, ETH, or BNB. Tranchess seeks to empower DeFi users with asset allocation flexibilities, allowing them to better manage their investments and maximize their returns.

Today, the Tranchess protocol exists on Ethereum and BNB Chain and has two main offerings: liquid staking and Tranche. These offerings are facilitated through four tokens: QUEEN, BISHOP, ROOK, and CHESS. This report will provide an in-depth overview of the Tranchess protocol and explore how its various components work together to provide users with one of the most popular traditional financial services in the crypto market.

Liquid Staking

Tranchess protocol supports liquid staking, which is a process enabling crypto holders to stake their assets while still retaining their liquidity. Tranchess offers liquid staking for Ethereum and BNB Chain and maintains validator nodes on each chain to facilitate this process. On the BNB Chain, Tranchess runs its own nodes, while on Ethereum, it collaborates with multiple node providers.

When a user stakes ETH on Ethereum or BNB on BNB Chain, the user receives qETH or nQUEEN (QUEEN ETH or QUEEN BNB) respectively. The QUEEN tokens are liquid staking derivative tokens which accrue staking rewards, while qETH can function as collateral for external DeFi protocols, and nQUEEN can serve as collateral on Tranchess.

Each liquid staking derivative token is charged a protocol fee. For qETH, there is a 10% protocol fee on staking rewards that is split between the Tranchess protocol and node operators. For nQUEEN, there is a 20% fee where half is distributed to veCHESS holders as the weekly rebate and the other half is allocated to the protocol. The protocol uses the fees for operations, maintenance, technical expenditures, etc. For both nQUEEN and qETH there is no minimum staking amount.

One of the potential use cases for QUEEN assets is providing liquidity. Users can provide liquidity for qETH on the Balancer qETH-WETH pool and the Aura qETH-WETH pool and earn trading fees. For nQUEEN, users deposit assets on the Tranchess nQUEEN-BNB pool and earn trading fees. All QUEEN-pools also earn CHESS tokens as rewards, more on CHESS later in the report. (Note - LPs on Balancer receive CHESS and veBAL; however, the CHESS is not distributed to LPs, but used for the bribing mechanism on Hiddenhand.)

Tranche

Tranchess provides varied risk-return solutions from a main fund, QUEEN. The main fund on BNB Chain has underlying asset-specific pools, currently BTC, ETH, and BNB, where users can stake the respective token and receive a QUEEN derivative token: nQUEEN for BNB, bQUEEN for BTCB, and eQUEEN for ETH. The main fund on Ethereum has one underlying asset-specific pool, currently ETH, where users can stake the respective token and receive qETH. Users are incentivized to staked with the fund(s) because they maintain exposure to the underlying asset while simultaneously accruing staking rewards, farming CHESS, and having the optionality to split the QUEEN derivative token into two products with different risk matrices: BISHOP and ROOK.

BISHOP is the lower risk, lower yield tranche designed for more conservative investors. It returns greater yields on BUSD stablecoins by lending liquidity to ROOK holders for their leveraged positions. The interest rate which BISHOP holders on BNB Chain receive is based on a seven-day moving average lending rate of BUSD from Venus. The interest rate which BISHOP holders on Ethereum receive is based on a seven-day moving average lending rate of USDC from Compound and Aave. BISHOP holders earn staking rewards in the form of CHESS, while nBISHOP on BNB Chain shares a portion of the staking rewards. Additionally, BISHOP holders can LP their tokens to earn additional trading fees and CHESS.

ROOK is the higher risk, higher reward tranche designed for more aggressive investors. It is used by investors to take leveraged positions on their asset of choice. At the time of writing, BNB leverage is 1.74X, BTCB leverage 1.58X, and ETH leverage 1.76X, however the leverage ratio changes as the fair value changes, with a theoretical range from 1.5X to 3X. ROOK holders finance their positions by borrowing liquidity from BISHOP. The funding rate is anchored to the Venus funding rate. For nROOK on BNB Chain, holders earn QUEEN rewards for staking.

Tranchess employs the fair value (NAV) mechanism to distinguish between the current trading price and the true value of BISHOP and ROOK tokens. The fair value starts at one and increases over time, based on a calculation that compares the current market price of the QUEEN token's underlying assets to the price of the QUEEN token. Specifically, for BISHOP tokens, the fair value accumulates the amount of interest earned from ROOK tokens. Meanwhile, for ROOK tokens, the fair value reflects the earnings minus the interest paid to BISHOP tokens.

CHESS

CHESS is Tranchess' governance token. It can be obtained by providing liquidity or staking QUEEN, BISHOP, and/or ROOK. The total supply of CHESS is 300 million, with 116 million (40%) currently in circulation. The token allocation is: community incentives with 150 million (50%), core team with 60 million (20%), future investors with 45 million (15%), ecosystem/treasury with 30 million (10%), and seed investors with 15 million (5%).

The vesting schedules for CHESS token allocations are as follows: 120 million (80%) of the 150 million community incentives will be released on Tranchess. As of May 25, 2023, approximately 52% or 78 million CHESS community incentives will have vested. The team updates the community incentives every 10 to 20 weeks in case new products are released with additional incentives. The future investors' token allocation is kept in the smart contract and has not yet been vested. The ecosystem allocations do not have a vesting schedule. Seed investors had a 3-month locking period followed by a 24-month linear vesting schedule, while the core team had a 6-month locking period followed by a 36-month linear vesting schedule.

It's worth mentioning that at the time of writing, 41.5 million CHESS (35% of circulating supply) are locked, with an average lock duration of 8.3 months. The Tranchess bridge enables the transfer of CHESS and veChess between Ethereum and BNB networks.

veCHESS

veCHESS is required for all utilities of the CHESS token. Firstly, it can be used to vote for the Alpha split between BISHOP and ROOK holders on a weekly basis, and CHESS emissions across the different pools and funds. Secondly, veCHESS holders receive a weekly rebate, which is equivalent to 50% of the fees collected (excluding gas fees) within Tranchess. The remaining 50% is kept in the Tranchess treasury for further collaboration with other protocols and liquidity bootstrapping. Thirdly, veCHESS provides a boost to CHESS staking earnings.

To obtain veCHESS, users must lock their CHESS tokens. The locking time ranges from one week to one year, and the number of veCHESS tokens received depends on the duration of the lockup.

Governance

Tranchess protocol offers a forum for community governance where users can actively participate in decision-making. The voting power of users is based on the amount of veCHESS they hold. The Tranchess forum has four categories that cater to different types of discussions:

• Proposal: A category for proposing new features, products, technical updates, and other relevant topics. This is where community members can share their ideas and suggestions with the rest of the Tranchess community.
• Announcement: This category is where the Tranchess development team releases notifications and updates regarding the project. This includes announcements about new partnerships, platform updates, and other important news.
• General Discussion: An open forum for conversations of all topics related to Tranchess or DeFi in general. Here, community members can discuss anything from tokenomics and trading strategies to broader industry trends and news.
• Technical Support: A category where users can ask questions and locate answers related to any technical issues they face. This is where community members can get help with issues like wallet connectivity, smart contract functionality, and other technical challenges.

Competiton

Tranchess faces competition from other protocols looking to build on-chain risk-tranche DeFi protocols:

• Saffron Finance: A peer-to-peer risk adjustment protocol. Users customize their risk and return profiles by selecting their own degree of exposure to underlying platforms. SFI, the governance token, has a market cap of $4 million.
  BarnBridge: An open source, fixed-income, decentralized protocol that allows users to earn a fixed return on their deposits by swapping variable APYs from money markets for a fixed APY. BarnBridge has $2.4 million TVL and the BOND token has a market cap of $42 million.
• 88mph: A fixed-term fixed-interest rate yield product that acts as an intermediary between users and third-party variable interest rate lending protocols. It offers two products: fixed interest rate bonds and floating interest rate bonds. 88mph has $900,000 in TVL and the MPH token has a $2.7 million market cap.

Risk-tranche protocols face similar challenges, including low deposit interest rates, long-term asset lock-ups, and lack of liquidity. Tranchess offers a solution that optimizes user returns and reduces risks by leveraging the higher yield from LSD collateralization, building liquidity pools within its structured products, and allowing users to purchase in USDC. The emergence of liquidity collateralized derivatives will bring more capital inflows, making structured funds a major target for capital allocation, and the model of structured funds will become more diversified.

Roadmap

Tranchess, which was launched in 2021, has continued to make significant strides in its development. In 2022, Tranchess witnessed notable updates, with the largest being Tranchess V2. Looking forward, Tranchess has set multiple milestones for both product and business development. From a product perspective, Tranchess plans to expand its offering by tracking more underlying assets and providing additional fund structures through additional synthetic derivatives. The team also aims to increase the use cases of the CHESS token. From a business development perspective, Tranchess plans to collaborate with other protocols, expand to other chains, and further build out the team with a focus on technology and marketing.

Team

The Tranchess protocol is supported by a team of blockchain and financial veterans. Core team members possess backgrounds in traditional finance, including roles in investment banking, asset management, and hedge funds. The technical team boasts experience in network security for centralized exchanges and DeFi protocols, with members hailing from tech giants like Google, Meta (formerly Facebook), and Microsoft.

Founder Danny Chong, a Nanyang Technological University graduate, has over 16 years of experience in the banking industry. He has held roles at Credit Agricole CIB, where he led the growth of sales, staff, and digital business in the SEA region, and developed new financial products.

Audits

With the prevalence of hacks in the crypto industry, it is crucial for teams to be proactive about security. Tranchess has taken this approach seriously, as evidenced by the six audits it has undergone. The audits were conducted by PeckShield on June 28, 2021; September 10, 2021; December 24, 2021; May 20, 2022; and October 30, 2022, as well as by Certik on June 3, 2021. These audits focused on various aspects of the Tranchess protocol, including smart contracts and overall security.

Investors

In July 2021, the company announced a $1.5 million seed round led by Three Arrows Capital and Spartan Group, with participation from Binance Labs, Longhash Ventures, IMO Ventures, and others. Additionally, Tranchess has set aside 45 million CHESS tokens, representing 15% of its total supply, for future investors.

Conclusion

Tranchess is a crypto protocol inspired by the concept of tranches, which provides varied risk-return solutions for investors. It aims to create a unique risk/return matrix from a single main fund that tracks specific underlying assets or a basket of crypto assets. The protocol operates on Ethereum and BNB Chain and offers liquid staking and Tranche through four tokens: QUEEN, BISHOP, ROOK, and CHESS. Tranchess aims to empower DeFi users with asset allocation flexibility, enabling better investment management and return maximization.

The Tranchess team comprises blockchain and financial veterans with experience in traditional finance, investment banking, asset management, and hedge funds. The protocol has undergone multiple security audits to ensure the safety of its users' assets. Tranchess faces competition from other risk-tranche DeFi protocols such as Saffron Finance, BarnBridge, and 88mph. Its future plans include expanding its product offerings, increasing CHESS token use cases, collaborating with other protocols, and expanding to other chains.