frag·mentsBroadly the Fragments protocol does two things:
Below we introudce Perpetural Tranching and the Balancing Rate. To understand the system in greater detail, see the documentation.
Perpetual tranching is the process of reorganizing the volatility of an input asset (cbBTC) into senior and junior derivatives. BTC-Sr is insulated from underlying volatility; while BTC-Jr benefits from magnified volatility.
Holding both Sr and Jr perpetuals in the right ratio is equivalent to holding the underlying asset because net volatility is conserved.
To balance demand for stability and volatility, the protocol carries a bidirectional interest rate. This means when demand for the Jr is high, holders of the Sr receive a yield—incentivizing new demand for Srs and vice versa.
Users can take the low-volatility side of this ("cash and carry") trade by holding the Sr which is insulated from volatility, and harvesting the yield generated by demand for leverage.
Note — At market equilibrium, we expect the Sr to carry a yield that's competitive with the broader risk-free-rate of stable assets. The cost of leverage for holding the Jr is simply the mirror image of this yield.
To understand how the system is constructed from the bottom up, have a look at the documentation.
