An Avalanche of DeFi: Struct.fi and Pollen
Struct.fi — Fixed rates and structured products
Arrow’s options will be useful for many trading and investing strategies that are already in use on Ethereum and in TradFi. StakeDAO, which is already on Avalanche, and Ribbon are the major players in covered call and put writing strategies.
But there are other structured products that can be created using options. In TradFi that usually involves investing in a zero-coupon bond plus an option on a risky asset (e.g., ETH) to create what is known as a principal protected note.
No matter how poorly the option performs, the investor will always get 100% of their original investment back. If the underlying does well the returns could well exceed the initial investment. The blue line path gives 20% return, while the orange path gives 0% return.
Creating the zero coupon or fixed rate asset is the first challenge in creating such structures, and Struct.fi is focused on that use case before moving on to the structuring. As they stated in their seed round announcement,
Struct Finance will use this fresh injection of capital to build the tools for institutions to easily customize interest rate products and compose them with options to construct structured products better-suited to the profiles of different investors.
Fixed rate protocols on other chains are a dime-a-dozen, and have already crossed over into Avalanche. Generally, they split a yield token into a fixed rate token and a residual.
Struct uses as an example the USDX-AVAX pool on TraderJoe. A saver can receive a 15% fixed yield for three months on a USD-pegged stablecoin deposit, without taking impermanent loss risk (see below).
The floating tokenholder gets a leveraged position in the yield farm, while taking extra risk to the AVAX token. This leveraged yield investment cannot be liquidated. Effectively the fixed rate investor is financing the leverage to term.
At current Trader Joe AVAX-USDC pool yields, Struct’s example yield token offers an annualized 55% return over the three months.
But token splitting is only the first product on the roadmap for Struct.
The protocol will also become an aggregator for cryptoasset options pricing and trading, offering structured products combining fixed rate and yield tokens with crypto options.
Preferred partners, and eventually anyone, will be able to construct and manage any complex instrument or strategy that can be created from the primitives supplied by Struct and partners.
Between Arrow and Struct, Avalanche will have decentralized options, fixed rate investment opportunities and complex structured products. More gaps in Avalanche DeFi filled.
Pollen DeFi — Crypto funds, for everyone
While options and structured products are integral elements of TradFi, fund management is truly the “killer app” for retail investors. Exchange traded funds democratize diversified portfolio allocation at low cost. Active management, though shrinking, still provides enough demand for trillion-dollar firms.
TradFi managers are indeed huge. Blackrock is around 8% the size of the entire global equity market capitalization, though of course they have fixed income and other non-equity mandates as well. Ten companies manage more than $ 2 trillion each.
Cryptoasset fund products, on the other hand, have lagged the general market, perhaps because most crypto natives are quite happy actively managing their own portfolios, and can afford the often outrageous gas fees to transact. With the whole crypto market cap around $2 trillion, the largest on-chain fund management protocol has less than $300 million in TVL, 0.15% of total. Grayscale is the largest off-chain manager at around 40 billion, or 2% of total crypto market cap.
The next generation of crypto investors are not going to be quite as sophisticated, or as wealthy, as the OGs. One would think that retail investors would therefore be very interested in finding experienced and knowledgeable investment managers to help them navigate the risky waters of crypto.
Indeed, this potential for decentralized ETF and active investing has attracted a lot of new projects in the space. We chose to invest in Pollen, an on-chain portfolio management platform on Avalanche, primarily due to its unique formula for identifying top managers in a transparent and gamified manner.
On Pollen, anyone can become a “Pollenator”, and set up a portfolio — permissionlessly and at low cost — by simply staking native PLN tokens. “Delegators” can stake their PLN with any manager. Both will earn PLN tokens if the portfolio does well. Tokens will be burned if not.
So far, this is like fantasy football. Portfolios are virtual, rather than asset-backed, and earnings are in PLN only. Over time, however, winners will watch their Reputation Score increase, and high scores should attract the attention of investors.
Once Pollen’s asset-backed indexes feature is live later this year, investors will be able to buy into portfolios set up and managed by top Pollenators via index tokens. These portfolios will be on-chain, transparent, and, perhaps most importantly, low cost.
Not only are there no running management fees, gas fees can be shared amongst all investors. Additionally, index managers and investors will be splitting profits (or losses) 80/20, so sharing both rewards and risk.
Data collected via virtual portfolios can inform decision-making for the asset-backed indexes, should index managers choose to use those signals.
This “trade to earn” gamification has an important benefit in that it identifies individuals in the crypto community who outperform. Though past performance does not necessarily imply future outperformance, following the best historical managers also forces discipline on investors, who might otherwise tend to overtrade, or fall victim to far worse traps such as rug pulls or hacks.
Rasheed Saleuddin, PhD CFA is an advisor/angel/VC with Aventures, TheBoringDAO and the Cosmic Cartel, as well as independently. He is also co-chair of the University of Cambridge Centre for Alternative Finance (CCAF) DeFi research steering committee.
AVentures is an investment DAO composed of OG Avalanche community members on a mission to support the ecosystem. The team boasts multiple successful blockchain developers and project owners, content creators, advisors and domain experts that have come together to channel our expertise to support the Avalanche ecosystem.