Enabling Structured Financial Products on DeFi — with Struct Finance

Introducing Struct Finance

Struct Finance aims to bring the power of structured financial products to investors of all risk appetites — not just risk-off crypto natives.

They have identified a “clear lack of fixed-yield returns” which deters both larger institutions and smaller players with a lower risk profile. More specifically, they recognise that although most products can cater to users with different risk profiles, protocols are still competing for liquidity. This fragments liquidity, impeding on its efficiency and hurts the space.

As you may have guessed, Struct is out on a mission to introduce Structured Financial Products on-chain to solve these problems.

Product

What Struct Finance is offering is, at time of writing, one product; Interest Rate Products. Their product caters to both risk-off investors looking for a stable fixed yield ánd to risk-on investors looking for higher yields by making them work together. This is done by pooling their capital into one position (their vaults), which then goes out to farm yield using the underlying strategy. When the indicated term of the vault has ended, the yield is then paid out to investors using a method called ‘tranching’ to cater to its investors — and that is where the beauty of Struct comes in.

Features and benefits

1. Tranching (Subscription period): During the subscription period for the vault, users choose one of two options; the fixed tranche, or the variable tranche. The fixed tranche will provide users with a stable, fixed yield. However, you can only get the maximum yield that you subscribe to. If the yield is better, this all goes to the variable tranche. The variable tranche gets all excess capital that is over after the users in the fixed tranche have received their share. This can be less or more than expected depending on the performance of the vault.
2. Tranching (Distribution): All capital (principal deposits plus the farmed yield) is pooled into one position. After the term, this capital will then be distributed towards investors in the fixed tranche first. When these investors have received what they were owed, then everything that is left goes towards investors in the variable tranche. The below image may illustrate this further.

3. Liquidation-free leverage: Since risk-off investors will only receive their promised yield, all excess capital goes towards risk-on investors. This basically means that you are farming on leverage without the risk of liquidation. The amount of leverage that you farm with depends on the ratio of the vault.

4. Ratio: This ratio is a fixed parameter and is made public during the subscription period. There are three options; 50:50, 66:33, and 75:25. When the ratio is 50:50, this means that the vault consists for 50% out of capital of risk-off investors and 50% of risk-on investors, which translates to farming on 2x leverage. When the ratio is 66:33, that means 3x leverage, with 75:25 being 4x.

5. Automated position: Struct’s vault deploys this pooled capital on one platform only. The position of the vault does not require any managing from the investors’ part. It offers a hands-off yield opportunity.

6. Liquidity efficiency: All capital deposited into Struct is put to work. No idle capital covering a loan or waiting to be swapped in a Liquidity Pool. Both sides’ capital is farming yield and working for the ecosystem.

If you would like to dive into Struct Finance a bit more, they have their own general Risk & Fact sheet.

What does this mean for you?

In short: When you deploy your capital into Struct’s vaults to earn a stable fixed yield or a leveraged variable yield, you don’t have to actively manage your position. Struct’s vault will take care of everything using the benefits and features mentioned above. The only thing you have to be cognisant of is the strategy behind the vault and what it would mean for you — which I will cover in a bit.

First, let’s tackle your choice of yield. If you have a low-risk profile, meaning that you protect your assets rather than chasing yields, the fixed tranche is just for you. Thanks for Struct’s tranching, you are the first to get your deposited capital + rewards. If you sign up for a fixed yield of 8%, even if the yield from the underlying strategy averaged 6%, you would still get 8% yield on top of your deposits.

If you are much of a risk-on yield farmer, the variable tranche may be more appealing to you as you will get all excess returns from the vault. The fixed tranche will only get what they are promised, the rest is all for you. Let’s a vault has a fixed yield of 8% with a 1:1 ratio and the returns of the underlying is 12%, you will receive (12%*2)-8%=16% yield, plus your principal. This image may explain it much better

Vault’s Strategies

Aside from choosing your preferred tranche, you also have to consider the underlying strategy and how that impacts your returns. Struct Finance does have a few requirements of the protocols and strategies they integrate;

1. Sustainable Yield; The yield is accrued from protocol revenue rather than token emissions
2. Security; All integrated protocols have been fully audited
3. Ease of integration; No complex integrations, it needs to be reasonably doable, because why not.
4. Multi-chain; Struct can easily move across chains if they already have integrated protocols that are multi-chain as well.

On to your considerations. The two most important considerations to note is which asset you deposit, and what the underlying strategy means for your returns. So for Struct’s vaults, you have to consider the vault’s position as a whole to evaluate how the underlying strategy will impact your returns.

Currently, the only integrated strategy on Struct is with GLP from GMX. For those not familiar, GMX is a perpetual decentralised exchange enabling traders to take leveraged bets on the direction of the market. LPs take the other side of this trade and are rewarded with fees paid by traders, as well as price movements of GLP itself.

The implication for you differs depending on composition of the vault. In this, the direction of the market has an impact on your returns. Generally, if you purchase $GLP using $USDC and the market moves up, you make a profit. If the market moves down, so does your position. If you purchase it with a volatile asset ($BTC, $ETH, $AVAX), then you make a profit when the market goes down since the underlying assets decrease more than GLP.

The vaults usually have two sides; fixed and variable. So we have to account for both assets when evaluating what GLP means for it. The TLDR here is that if the vault is USDC-USDC, you are basically long on the market. If it’s BTC-USDC, you are ‘market-neutral’. Whereas a vault being BTC-BTC, that means the entire position is short on the market.

An upcoming vault on Struct Finance is the AutoPools of Trader Joe, which Struct has covered in a thread recently. If you’ve tried TJ’s Liquidity Book, you have experienced some of the effort needed to do it well. Enter AutoPools; the one-click option if you want to farm the Liquidity Book. It provides you with an automated strategy dubbed ‘The General’

The General has four aspects;

1. It rebalances the AutoPools approximately every 30 minutes
2. It also adapts and responds to market trends and new environments to keep an optimal position to farm yield
3. Prefers to be Market-Neutral over all else, that means prioritising the health of its position to farm yield rather than making directional bets on the market
4. It adheres to Asset Feedback — If you know what this entails, please share

Back to Struct with the same considerations, which assets are in the vault and what does that mean for your returns. The first Auto-Pool is AVAX-USDC. Both of these assets will likely be part of the vault (similar to BTC-USDC). Auto-Pools are intended to stay as market-neutral as they can so it can yield the most in environments of low volatility. The market-neutral aim of The General seems in line with the vault’s composition. Your choice between a fixed or variable tranche will most likely depend on your own risk profile with this one.

To recap: Consider the entire composition of the vault, and what the underlying strategy means for the returns of the vault. As for platforms, vaults on GMX will shine in times of volatility, whereas Trader Joe’s AutoPools will perform better in a sideways market.

Future

In the grand scheme of things, Struct Finance intends to bring all different kinds of structured financial products on-chain. They have already hinted at Foreign Exchange, RWA’s and more, as well as a “next big integration”.

The short-term, however, will likely give us AutoPools and new vaults for GMX V2 — All of which I will cover in due time.

Another development regarding their Interest Rate Products is the Struct Factory. This will allow anyone to create custom vaults requiring only 5 parameters; underlying strategy, tokens in the vault, subscription length, duration of the vault, and the fixed/variable rates. This opens up so many possibilities and it will liven up the community to come together as #DeFi enthusiasts.

Ultimately, I am a big proponent of what they are building. It may not be as ‘sexy’ as some degen plays, but it is a huge boon for the space and #Avalanche and it drives us forward onto new frontiers. I’m keeping an eye on this one.