All eyes may be on Bitcoin right now but in the decentralized finance (DeFi) space, investors have been caught off guard by a rally in a coin called Saffron Finance (SFI), also known as Spice.
From a glance, it may be unclear why the coin is rallying: Saffron Finance is run by an anonymous team, and further, the contracts of the protocol are currently unaudited.
But it’s up 400 percent in the past two days alone, and even more if you look at its launching price on Uniswap five days ago.
What is Saffron Finance?
Saffron Finance’s story is a unique one.
Basically, it’s a clone or competitor to BarnBridge, an extremely similar protocol run by “doxxed” developers and funded by leading investors in the space such as Kain Warwick of Synthetix.
BarnBridge and Saffron Finance are both attempting to introduce tranches into the cryptocurrency space.
Tranches are concepts from traditional finance that say financial products can be split up to separate risk and returns to accommodate different investor needs. In the simplest terms, junior tranches carry more risk but yield more while senior tranches carry little risk but yield little.
A few weeks after BarnBridge unveiled its website, Saffron suddenly popped up on the map, launching a Discord and Telegram group with a few dozen members.
It was quiet at first for a few days, then it became clear that Saffron actually had a product while BarnBridge did not, at least not yet.
Saffron’s first product is tranched liquidity provision to Compound in DAI. Junior tranche providers get a small interest payment (~0.5 percent APY) while senior tranche providers can make around 50 percent APY. Depositors get SFI.
The project, while run by anonymous developers, has generated a lot of traction on Twitter.
Investors from prominent DeFi funds such as Spartan Capital, Mechanism Capital, and others have mentioned the Saffron Finance project in a positive light.
SFI’s tokenomics are initiating a pump
According to CoinGecko, SFI is up 400 percent in the past two days, rallying from $150-200 to $800 now. It is up even further if you consider it launched at approximately $30~40 five days ago. Spice now has a fully diluted valuation of $80 million.
First and foremost, the rally is partially due to an increase in interest. A number of investors in the space, as aforementioned, have all tweeted about the coin in the past day, increasing the awareness of many to the project.
Secondly, SFI is rallying heavily due to unique tokenomic decisions.
To deposit into the junior tranches, Saffron Finance makes you deposit SFI and DAI at a 1:1000 ratio. This helps to backstop the protocol in case of a hack and to incentivize usage of SFI.
What makes this interesting is that users earn a lot more SFI by depositing into the junior tranches, though they need SFI to get in.
So, buying pressure began a few days ago to get in on the junior tranche. The unique tokenomic decision to require SFI to enter the junior tranche is perpetuating the price action in the upward price action:
- Junior tranche is attractive due to higher SFI yield
- User buys SFI; price goes up
- Yield of junior tranche increases, attracting more users
- More users buy SFI; price goes up even further
Analysts are currently divided over whether or not the coin is overvalued: while many see value in tranched financial products for DeFi, the tokenomics may have led to a short-term bubble.