DeFi Structured Products
Finance is complicated. There is no way around it. According to the Milken Institute, only 52% of the United States is considered financially literate. Financial literacy is broken down into eight sections: borrowing, saving, earning, consuming, information sources, investing, insuring, and comprehending risk. Knowledge regarding borrowing, earning and saving are the sectors where the average American has the most knowledge (Milken). However, financial literacy amongst investing and risk management is the lowest. What if there was a way to simplify the complicated systems of investing and risk management? Let me introduce structured financial products
Structured Financial Products
As defined by Wikipedia, a structured product is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, and derivatives.
Although ETFs are not considered structured products I believe they are the best way to explain them. I won’t dive in deep but at its core an ETF is a basket of stocks. Instead of owning one stock I can own an ETF that owns 15. This diversifies my portfolio, effectively mitigating SOME risk. If I have all of my eggs in one basket, and that basket falls, all of the eggs I have will break and I will be left with nothing. An ETF spreads those eggs in a various amount of baskets.
What’s the relationship between structured products and ETFs? The goal is to make it EASIER for the consumer. ETFs make exposure to a variety of stocks easier while structured products simplify the intended investing strategy.
Structured Products in DeFi
DeFi is in its primitive stages, and so are its structured product protocols. Although there are many types of financial structured products in the traditional finance world, this is a crypto blog. We will focus on crypto structured products. The three protocols pioneering decentralized structured products are Ribbon Finance, Tranchess and Goldfinch
Ribbon Finance ($RBN)
The first structured product we will be looking at is Ribbon Finance. Ribbon Finance is the first DeFi structured product built on the Ethereum blockchain. Ribbon Finance is a decentralized option vault bringing crypto structured products to their users. Ribbon combined futures, options and fixed income strategies to improve a portfolio’s risk return.
Ribbons core product is their “Theta Vault”. According to Ribbon’s docs, “Theta Vaults use the Vault terminology because it stems from the idea of depositing your assets into a vault and earning a yield on them, set-and-forget.” (Theta refers to the rate of decline in the value of an option due to the passage of time (Investopedia)). Users deposit their assets into Ribbon’s smart contract and automatically starts running the specific options strategy.
Ribbon currently has two option strategies: Covered Call and Put Selling. Options are a financial instrument your typical investor does not understand, so it makes sense that investors won’t understand more complicated options strategies. To simply define these strategies: a covered call strategy earns yield from selling POTENTIAL UPSIDE while put selling generates yield from neutral/price appreciation.
Currently, Ribbon is on four chains: Ethereum, Avalanche, Solana, and Aurora. They have eleven current options strategies. They are
- Sol Covered Call
- Avax Covered Call
- USDC Put Selling (Avax)
- ETH Covered Call
- Yearn USDC Put Sell (ETH)
- Staked ETH Covered Call
- WBTC Covered Call
- Avax Covered Call
- Aave Covered Call
- USDC Put Sell (ETH)
- Ape Covered Call
Ribbon Finance Utility
Ribbon’s utility is that it allows investors easy access to DeFi option strategies. Currently options account for less than $1 billion of TVL, which ranks 15/18. Derbit is the number one exchange for crypto options right now. Two problems: it is a centralized exchange and it is incredibly complicated. In traditional markets options are an amazing tool to both lever up positions and manage risk. Ribbon’s value is derived from the simplicity and easy accessibility to DeFi option strategies. As options become more and more popular in crypto, easy to use structured products, like Ribbon, will thrive.
DISCLAIMER: THE YIELD % RIBBON PROVIDES IS NOT RISK FREE/PASSIVE. OPTIONS ARE EXTREMELY COMPLICATED AND VOLATILE. YOU CAN EASILY LOSE YOUR INVESTMENT WITHOUT PROPER KNOWLEDGE
Tranches ($Chess)
Tranchess is a yield enhancement structured product offering portfolio’s risk/returns solutions on BTC and ETH. Tranches was inspired by traditional Tranche funds, which, at any time, portions funded by users are allocated for a fixed period of time and accruing interest.
Essentially Tranchess is a tokenized structured fund. Within the fund there are three tokens that cater to different to different risk appetites. These three tokens are $QUEEN, $BISHOP, and $ROOK with $CHESS being the governance token.
Bishop is a stable yield return, Rook is leveraged crypto asset trading and Queen is long-term crypto holding.
Queen is the main fund, which is a BTC tracking token + a yield farming feature. Queen is fully correlated with BTC’s price.
Now, the fun part. Within the Tranchess Protocol Queen is the main fund, Bishop and Rook are the sub funds. These tokens work hand in hand together. Like I said earlier, Bishop yields a stable return. Bishop holders earn yield by providing liquidity to Rook holders. At its core Bishop is a delta neutral, therefore it is not affected by volatility.
Rook is another sub-fund of Queen. Rook is a leveraged product with no forced liquidation. Rook holders borrow from Bishop (where the stable yield comes from) and gain leverage in the main fund tracking BTC, Queen. Rook holders recieve the gains and losses from Queen. Unlike traditional leveraged portfolios, Rook does not run the risk of liquidation because it is borrowing from Queen.
Tranchess Utility
In traditional finance Tranches are already very popular amongst investors. By diversifying capital within the funds, tranche’s offer different slices of risk for the hungry investors. Tranches is the first tranche fund on the blockchain (that I know of). Tranches will thrive with institutions. As institutions less risk averse to crypto, especially DeFi, a tranche fund holding Bitcoin is extremely attractive. Tranchess value proposition is that is allows different risk appetites to lever up positions, with no chance of forced liquidation, or stay allocated to BTC with a loss risk low yield position.
Goldfinch ($GFI)
The last structured product is Goldfinch, a decentralized credit pool for crypto loans. Goldfinch allows you faster access to capital via crypto loans without crypto collateral. Goldfinch’s documents says, “This is the missing piece that finally unlocks crypto lending for most people in the world. The Goldfinch community makes loans to companies around the world, starting with emerging markets.”
Goldfinch works by extending credit lines to lending businesses. These businesses will take out loans in USDC, and can exchange it for fiat or deploy it as USDC. The protocol’s participants are borrowers, backers, liquidity providers, and auditors. Borrowers are participants who seek to open a line of credit via Goldfinch protocol. Backers assess the borrow pools and decide whether to supply first-loss capital. Liquidity providers supply capital to the pool and earn yield Finally, auditors vote to approve the borrowers.
The protocol is broken down into three pools: senior pool, senior tranche and junior tranche. LPers supply liquidity to the senior pool which is then automatically allocated across the senior tranche via the leverage model. The Senior Pool thereby provides both diversification across Borrower Pools and seniority to the first-loss capital of Backers
Borrowing on Goldfinch isn’t like your typical DeFi borrowing process that Aave and Compound provides. Goldfinch is able to provide crypto loans with no collateral through trust through consensus mechanisms. A Borrow pool is created, which is the smart contract through which Borrowers borrow and repay capital. Once the backers evaluate through a unique entity check (kyc), and the auditors approve (they can deny loans), the loan goes through.
Goldfinch Utility
Goldfinch is looking to solve one of the biggest world problems, lack of financial services to low income demographics around the world. For someone who falls below the poverty line in the United States, it is near impossible to get an attractive loan without a good credit score. I can’t even imagine what it’s like to get a loan in a developing, third world country. Crypto loans, without crypto collateral, provide financial solutions to struggling markets around the world. Easy access to financial services will help future generations get out of poverty, educate, build wealth and further innovate our society.
Ben
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