Project Insight: Friktion – Proving Portfolio Management Strategies on Solana

By Abhinav TewariDeFi

Friktion enables users to automate portfolio management to maximize returns on the market using strategies coined as Volts.

What is Friktion?

Friktion is a DeFi portfolio management protocol on the Solana network, built to perform across market cycles. It is an asset management tool that enables users to maximize returns while mitigating risks by automatically employing strategies called ‘Volts’. The all-in-one platform offers both active and passive portfolio management strategies. It is essentially an Automated Portfolio Manager (APM) that was designed to identify sustainable sources of yield and introduce risk management into the ecosystem through options and non-linear products.

Friktion’s Target Audience

Friktion aims to fill a notable void in the DeFi ecosystem, which lacks a sophisticated portfolio management protocol. It targets the following DeFi participants: 

Passive investors and liquidity providers: The automated portfolio management system allows investors and liquidity providers to input portfolio spot, perpetuals, LP positions and deploy models to determine growth and risk across various market cycles. It enables passive investors to earn yield by providing liquidity to farms while hedging against impermanent loss. 

Active traders: It enables active traders to deploy options to earn and trade through products such as covered calls, secured puts, iron corridors, and straddles on chosen DeFi assets. 

DAOs, developers, and protocols: Friktion offers the community customized solutions in addition to the standard volts available on the app, which are based on identifying risks of the protocol and treasury. It also incentivizes long-term contributors through Custom Liquidity Mining. 

Source: Friktion Participants

Volts 

Volts are Solana’s first and largest structured products and are the building blocks of the Friktion protocol. They are quantitative yield strategies that generate yields in various risk/return scenarios. Volts enable users to invest and trade products built around principle protection, yield generation, and volatility. They provide volatility protection and returns in turbulent markets. 

Volts function in cycles known as Epochs. Epochs begin and end on Fridays when the new strategy is deployed.

Friktion aims to offer four types of Volts:

Volt #01: Income generation through automated call options selling strategy, algorithmic strike and expiry selection, and auto compounding. 

Volt #02: Sustainable tables with automated put options strategy, algorithmic strike, and expiry selection with auto compounding. It is a relatively low-risk vault as a collateralization ratio of 100% is maintained. 

Volt #03: Once launched, it will enable users to harvest volatility yield through monetizing volatile markets, hedge against sharp price rise moves, and earn uncorrelated returns.  

Volt #04: Once launched, it will enable users to hedge impermanent loss and provide liquidity to top AMMs. It will also offer customizations based on users’ LP positions. 

At the time of writing, only the first 2 Volts are operational; we shall dive a bit deeper into the mechanics of these volts.

Volt #01 – Income generating volt

This volt offers a platform for income generation through covered call strategies which many players use for generating sustainable yield. Traditional yield parking protocols rely on token emissions to generate yield; however, Friktion derives yield from option premiums that are more sustainable in the long-term as the yield is not dependent on token price. 

Covered call strategies generate passive yield by selling call options on an asset. In exchange for earning the premium from the option buyer, the seller loses the right to purchase the asset at the agreed strike price. 

Friktion’s covered call strategy offers the following benefits:

Enhanced income with volatility: Premiums generally rise when volatility increases, which offers an opportunity to generate higher yields on-call overwriting strategies.

Active management: The customized solution offers automated strike and expiry selection, position-sizing, and the ability to target and optimize risk-reward ratio, enabling users to set and forget across Epochs.  

Yield generation: Independent of token emission programs or borrowing demand.

Efficient execution: Through on-chain order books and competitive maker auctions.  

At present, Volt #01 supports the 11 crypto assets such as SOL, mSOL, scnSOL, BTC, ETH, SRM, FTT, MNGO, SBR, and RAY   

Source: Friktion Website

Volt #02 – Sustainable stables

This volt uses a put options strategy with a similar payout profile to the covered call strategy; however, it is a low-risk strategy. A cash-secured put enables users to pitch a quoted asset against an underlying asset. Users generally use it when they have a bullish view of the underlying asset and expect the market price to be higher than the predetermined strike price at expiry. 

Friction’s sustainable stables offer the following benefits:

Lower risk compared to covered calls.

Automated strike and expiry selection.

At present, Volt #02 supports the following asset pairs: LUNA//UST, SOL/USDC, BTC/USDC, and MNGO/USDC.

Source: Friktion WebsiteCircuits

Circuits

‘Circuits’ provides on-demand portfolio management for DAO treasuries, creating custom risk frameworks and volts. It is built to provide long-term income generation for decentralized organizations. Circuits offer greater control to risk-aware DAOs, who can now, in addition to scaling and controlling assets, also manage them. Circuits comprise currents, volts, and inductors. 

Currents represent the flow of capital through Circuits.

Inductors serve as risk strategists, portfolio designers, and architects of volts.

Volts are capital allocation strategies.  

Source: Friktion Analytics Platform

Friktion recently deployed the first Circuit called Genesis. After a DAO is accepted into a Circuit, inductors set risk, return, and liquidity parameters. Inductors then construct a set of strategies and stress-test across various market conditions. Strategies are implemented as customized Volts, and allocations are based on market environments. 

Pricing and Payouts 

Friktion is powered by a best-price engine that captures the best options, futures, peripherals, and spot pricing across on-chain exchanges, off-chain market makers, and between volts while maintaining a risk-neutral protocol. 

Friktion utilizes the following infrastructure for pricing and payments:

Channel RFQ: It is a Solana native Request-for-Quote blind Dutch system built to connect off-chain market makers who deploy their pricing algorithms to show quotes on options and spot trade to Friktion.

Inertia: American style physically settled options primitive. 

Traction: American style physically settled options primitive.

PsyOptions: American style physically settled options primitive.

Tribecca: Open source protocol for launching DAOs.

Jupiter Aggregator: The liquidity aggregator for Solana allows users to swap assets across Solana DEXs.

Team Background and Funding

Friktion’s team believes that structured products and risk-adjusted yield strategies are key to exploring the depths of decentralized finance. It has a background working for proprietary trading and quantitative research firms, full-stack blockchain engineering, monetary policy, and UX design. It is led by co-founders Alex and Uddhav, who have experience in TradeFi.

Friktion received funding of $5.5 million in January this year from some of the biggest names in the crypto venture capital space, such as Jump Crypto, DeFiance Capital, Pillar VC, Libertus Capital, Delphi Ventures, Sino Global Capital, Tribe Capital, Castle Island Ventures, Dialectic, Petrock Capital, Solana Ventures.

Friktion has also partnered with a group of industry-leading derivatives traders and market makers such as Genesis Trading, Alameda Research, LedgerPrime, QCP Capital, CMS Holdings, Orthogonal Trading, and GSR.

Source

Concluding Thoughts

The DeFi ecosystem has witnessed unprecedented growth over the last few months, with new protocols being launched fairly regularly. However, it is still difficult for users to navigate and pick various options management tools across platforms as the infrastructure is still in its infancy stage. That is where Friktion comes in; it presents itself as an all-in-one portfolio management solution that simplifies asset management. It is only expected to grow further with the launch of Volt #03 and Volt #04, which could invite a bigger audience and participation.

Source: Friktion Analytics Dashboard

The total value locked (TVL) on Friktion currently stands at $130.34 million as per the analytics dashboard of the protocol. However, a closer look at the split between the TVL by Volt #01 and Volt #02 reveals that the majority of the TVL, i.e., 71.6% or $93.40 million, is locked in Volt #01 and 24.5% or $31.97 million in Volt #02. Notably, 3.9% ($4.8 million) of the total TVL of $130.34 million reported by the analytics platform is unaccounted for in this split between the two Volts.

Source: Friktion Analytics Dashboard

Find more about Friktion here: 

Source web3wire.news

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