As we could have seen in the past couple of weeks, the financial world is really complicated. Everything that has been going on only shows how difficult it is to understand the banking system, let alone trust it.

That is one of the key reasons more and more people are still leaving the traditional financial world to join the cryptocurrency revolution. And with more inflow of people, more products and services are still developed in the cryptocurrency space to satisfy the needs of everyone. A recent development shows that DeFi structured products might be the best way to do this.

What are structured products in traditional finance?

Structured products are pre-packaged investments that include assets linked to interest plus one or more derivatives. They offer retail investors easy access to derivatives and are designed to facilitate highly customised risk-return objectives.

Structured products are financial instruments that are created by combining one or more traditional financial instruments, such as stocks, bonds, or derivatives, with an embedded derivative component. They are designed to provide investors with exposure to a particular asset class or investment strategy while offering customised risk and return profiles.

These products may take traditional securities and replace the usual payment features with non-traditional payoffs. They can be principal-guaranteed to issue returns on the maturity date. However, the risks associated with structured products can be fairly complex and they may not be insured by the FDIC and tend to lack liquidity.

Structured Products – What are they? Source: DBS

Structured products are generally tied to an index or basket of securities. They replace the usual payment features of a conventional investment-grade bond with non-traditional payoffs derived from the performance of one or more underlying assets rather than the issuer’s own cash flow.

Structured products can take many forms, but some common examples include:

• Equity-linked notes: These are structured products that combine a bond with a call option on the underlying equity. The notes pay a fixed rate of interest, and the investor receives a payout at maturity based on the performance of the underlying equity.
• Reverse convertible securities: These are bonds that are linked to the performance of an underlying asset, such as a stock or commodity. If the underlying asset falls below a certain level, the investor receives a predetermined number of shares of the asset, rather than the principal amount of the bond.
• Exchange-traded funds (ETFs): These are funds that track a specific index or asset class and are traded on a stock exchange like a stock. Structured ETFs may use derivatives or leverage to achieve their investment objectives.

Structured products can offer investors a range of benefits, such as tailored exposure to specific asset classes, customized risk and return profiles, and the potential for enhanced returns. However, they also carry risks, such as credit risk, liquidity risk, and the risk of loss if the underlying asset performs poorly.

What are DeFi structured products?

The structural products, just like those described above, were poised to make it also to the world of cryptocurrencies. If this sector wants to really establish itself and come up with an alternative to the traditional financial world, it needs to offer products that would be able to compete with what the TradFi offers. And that’s what DeFi structured products are trying to do.

DeFi structured products are packaged investments that are linked to crypto assets. In this case, these are cryptocurrencies such as Bitcoin, Ethereum or Tether. Most of them are options of some sorts, but there are other products as well. The goal of these products is the same as for the traditional structured products. To improve the risk-return metrics for the investors. They also aim to improve the volatility of the investments and accessibility of the investing world to retail investors.

However, it needs to be clearly stated that these types of products are still very complex. Combining a complex nature of structured products in and of itself, with the rather complicated nature of crypto derivatives can lead to many barriers to entry. While countless cryptocurrency projects have embarked on a journey to erase these barriers, the task is rather difficult at the current state of both, the cryptocurrency world and the world of structured products.

That, however, does not mean that there are not any projects or strategies that would not be worth trying. Yet, the investors and traders need to be cautious about what they are doing, as their actions in the crypto world are in vast majority of cases irreversible. Nevertheless, some products and strategies are definitely worth looking at. These include:

• Leveraged staking: products that use leverage to allow their investors to generate higher profits in most cases without the need to undergo higher risks.
• Decentralized Option Vaults (DOVs): allow users to stake tokens into vaults to enter into different option strategies such as Covered Calls or Cash-Secured Puts depending on their current sentiment.
• Principal Protected Vaults: combination of a low-risk strategy with a high-risk strategy to help risk-averse investors with increasing their potential returns without having to be subjected to big risks.
• Overnight: providing a capital in the form of USD Coin in an investment fund, where the asset managers try to outperform the market and then share their profits with the investors.
• Tranched Instruments: investing in a senior tranche product where the investors lock stable yield with lower risk since the senior tranches get paid first in the unlikely event of a default.

These are only short descriptions of some of the strategies and products that can be used. Before delving into them, investors should make sure to properly study and understand them to eliminate any potential mistakes or irreversible decisions. 

Examples of projects in DeFi structured products

The question still remains though, where would one go in case they want to use such products? Here is a short list of DeFi structured product providers that might be in your interest.

1. Ribbon Finance (RBN)

Ribbon Finance is a decentralized finance (DeFi) protocol built on the Ethereum blockchain. It is designed to allow users to easily access and execute complex investment strategies in a user-friendly and efficient manner.

Ribbon Finance’s main feature is the ability to create structured products, which are investment products that are created by combining different financial instruments. These structured products are created using smart contracts, which are self-executing agreements that automate the process of creating and managing these investment products.

Total value locked in DeFi structured products of Ribbon Finance, Source: ribbon.finance

Ribbon Finance allows users to create customised structured products that suit their specific investment goals and risk preferences. The platform offers a range of tools and features, such as yield farming, options trading, and risk management, that allow users to optimise their investment strategies and maximise returns. 

Overall, Ribbon Finance aims to democratise access to complex investment strategies by providing an accessible and user-friendly platform that enables anyone to participate in the DeFi ecosystem.

2. Cega Finance (CEGA)

Cega is a leading DeFi protocol that specialises in creating exotic options structured products on the blockchain. Since its launch in June 2022, Cega has become the number 1 provider of DeFi crypto structured products in Solana, and number 4 across all chains. The platform has been praised for its strong operations and risk management during the FTX crisis in November and has established itself as a market leader in counterparty management.

Cega recently conducted a fundraising round to accelerate the expansion of its product catalog, develop new innovative products, and assemble a trading team for creating exotic derivatives. The platform’s success has kickstarted the market for exotic options with crypto underlying, and it aims to continue leading the way in this area.

Cega Finance has only recently raised $5 million in a funding round led by Dragonfly Capital, with participation from Pantera Capital and Robot Ventures. This brings the total seed funding raised by the startup to $9.3 million. Cega aims to create innovative and high-performing DeFi products that offer users strong risk-adjusted yield and best execution in the market through an in-house liquidity maker. 

Cega has developed a decentralized application that combines basic and advanced options to create packaged structured offerings for DeFi users. Its first exotic options structured product is the fixed coupon note, which is a basket of puts with knock-in barriers. 

This structured product offers superior yield, built-in downside protection, and compounded returns, benefiting both retail investors and market makers who can use it as a discounted hedge for their portfolio and gain through hedging trades.

3. Tranchess (CHESS)

Tranchess is a decentralized finance (DeFi) protocol that allows users to easily access and manage a range of investment strategies through its platform. The main feature of the Tranchess protocol is its creation of tranche-based investment products, which are pre-packaged investment products that divide investor returns into different levels of risk and reward.

Example of data that Tranchess offers to its investors, Source: tranchess.com

Tranches are essentially different layers of investment that are created by dividing a portfolio of assets into different segments. Each tranche has a different level of risk and return, with higher tranches offering higher returns but also higher risks. This allows investors to choose the tranche that best suits their risk tolerance and investment goals.

Tranchess allows users to invest in tranche-based products using the Ethereum blockchain, and offers a range of tools and features to help users optimize their investment strategies. These include automatic portfolio rebalancing, risk management tools, and access to yield farming strategies.

Overall, Tranchess aims to provide users with an easy and efficient way to access a range of investment strategies through its tranche-based investment products, while leveraging the benefits of decentralized finance and the Ethereum blockchain.

Conclusion

The world of DeFi structured products is complicated for sure. That is one of its biggest drawbacks. On the other hand, there are numerous projects such as Ribbon Finance, Cega or Tranchess that are doing their best to improve the current state of DeFi structured products. It might take some time before many of these are not only accessible by the retail investors, but also are very simple to use. Nevertheless, the direction of the progress seems to be correct, which means that these types of products can for sure play a big part in the future of finance.

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