SMART Tokens

Underlying Concept

SMART Tokens are the core primitive for risk-tokenization, built on an ERC-4626–compatible interface with integrated rebalancing. 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 BTC yields 1 RiskON BTC and 1 RiskOFF BTC. These two tokens in aggregate 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 behavior. RiskOFF offers stability and downside protection, while RiskON provides leveraged exposure. Think of these as two different "risk flavors".

RiskOFF is the low-risk half. It has a claim on 50% of the underlying and is designed to track the underlying asset’s price, but within a limited range. It does that by having a built-in floor on losses and a cap on gains. For example, RiskOFF BTC might be defined to never drop more than -10% (the “floor”) in a given period and to forgo any upside beyond +15% (the “cap”). It achieves this by holding options, specifically a "costless collar". In essence, RiskOFF sacrifices extreme upside in exchange for a safety net on the downside. The result is a token that is significantly less volatile than the underlying.

RiskON is the high-risk half. It too has a claim on 50% of the underlying and is the mirror image of RiskOFF—the same options but opposite in sign. Where RiskOFF is long a put, it is short the same put and where RiskOFF is short the call, it is long the same call. RiskON takes on the volatility that RiskOFF sheds. The simple contract between RiskOn & RiskOFF is that by agreeing to bear the downside beyond RiskOFF’s floor, RiskON earns the right to all upside beyond RiskOFF’s cap. This makes RiskON a super-charged leveraged version of the underlying asset. If the asset’s price rallies strongly, RiskON will outperform the asset (since it gets an extra slice of upside). Conversely, if the price plunges, RiskON will underperform and absorb more losses, even approaching zero in extreme cases – that is the trade-off for its leveraged upside.

Within the cap and the floor, both RiskON & RiskOFF behave the same as the underlying asset (because each has a 50% claim on the underlying and all the options are out of the money).

How can two tokens cover each other’s risk like this? The magic lies in synthetic options and smart contract design. TRP doesn’t purchase options from an exchange or work with any market makers –no external liquidity is needed to price the options. Instead, the two tokens are counterparties to each other. It’s an internal risk swap: RiskOFF’s contract with RiskON guarantees RiskOFF a certain payoff (the put option’s protection) and, in exchange, obligates RiskOFF to give up some payoff to RiskON (the call option’s upside share). The synthetic options that RiskOn & RiskOFF hold are equal to each other but opposite in sign. Bring them together and they cancel each other out and the holder is left with 50% claim on collateral + 50% claim on collateral = Underlying collateral asset.

Because these derivatives are synthetic and perfectly offset within the pair, the system remains self-contained and delta-neutral. Depositing 1 BTC as collateral allows a user to mint 1 RiskON + 1 RiskOFF. A user can redeem the 1 BTC at any point by burning 1 RiskOn and 1 RiskOFF. This 1:1 equivalency ensures that TRP itself takes no directional exposure and never risks its solvency.