How?

How do we tokenize risk...

SMART Tokens are the core primitive that enable risk-tokenisation. We launch initially with a specific type of SMART Token called RiskON & RiskOFF. When you deposit an asset as collateral with The Risk Protocol, that asset is split into two complementary tokens—for example, depositing 1 ETH yields 1 RiskON ETH and 1 RiskOFF ETH. These two tokens together always represent the underlying asset’s value, but each one is programmed with a different risk/return profile. They are two halves of the same whole, but with dramatically different behaviour. RiskOFF offers stability and downside protection, while RiskON provides leveraged exposure. This is programmable money taken a step further. Our SMART tokens package sophisticated exposures into single tokens so that you can focus on outcomes, not mechanics.

Splitting an Asset Into RiskON & RiskOFF

Example

Let’s use an example to make this more tangible. Let’s say an investor owns 1 BTC but is uncomfortable with the daily volatility. The investor comes up to TRP, deposits the 1 BTC as collateral and mints 2 new SMART Tokens--RiskON BTC and RiskOFF BTC. RiskON and RiskOFF are designed to have aggregate value equivalent to value of the underlying cryptocurrency at all times. The design segregates the risk of owning the underlying cryptocurrency into a low-risk token (RiskOFF) and a levered token (RiskON). RiskOFF’s returns will generally have less risk in terms of both beta and standard deviation of returns than the underlying cryptocurrency, while RiskON will generally have a beta and standard deviation of returns that exceed the same statistics of the underlying cryptocurrency.

How do RiskON and RiskOFF get this profile? By holding synthetic options. RiskOFF is long a down-and-out barrier put that provides a floor and it is short a call that caps its upside. As a result, it floats within a band and has dramatically lower volatility than the underlying cryptocurrency. Where did it get these options exposure from? By contracting with the 2nd SMART token--RiskON. RiskON is the counterparty to all the options that RiskOFF owns. The simple contract between RiskON and RiskOFF is that in return for providing the downside protection to RiskOFF, RiskON gets RiskOFF’s share of the upside beyond the cap. Both initially start out with equal ownership of the underlying collateral and have equal values at the outset. Over time however, based on the movement of the underlying BTC, their values diverge. If BTC runs up, RiskON will outperform BTC because of the leverage it is getting from RiskOFF and similarly, in a declining market, RiskOFF will outperform BTC because of the downside protection it is getting from RiskON.

What we have effectively done is that from one asset we have synthetically extracted 2 different “risk flavors” of that asset, designed to appeal to investors/traders with different risk appetites. Investors that want some leverage without margin calls or liquidations will swap out of the RiskOFF token in the secondary market and keep the RiskON. Conversely if the investor wants risk-reduced exposure to the underlying they will hold RiskOFF.

Further details on our SMART Tokens can be found in subsequent sections of the documentation.