Financial Building-Blocks: Structured Products and Blockchain

Let’s take a look at this in more detail.

Streamlining Processes and Cost Reduction

In the realm of conventional structured products, various intermediaries including brokers, custodians, and clearinghouses are involved, resulting in operational expenses that amount to 1-5% of the investment value each year. As per Accenture’s estimates, blockchain technology has the potential to reduce infrastructure costs for leading investment banks by approximately 30%. This equates to annual savings ranging from $8 to $12 billion.

As a blockchain analyst, I would highlight that the cost-effective capabilities of blockchain technology are especially noteworthy when it comes to managing the intricate lifecycles of structured products. By leveraging blockchain’s increased transparency and robust audit trails, we can potentially minimize regulatory capital requirements.

As a researcher in the field of blockchain technology and smart contracts, I can attest to their potential in revolutionizing the way we create customizable financial solutions. In particular, they offer an enhanced level of composability when it comes to managing intricate financial products, such as derivatives and structured instruments.

Enhancing Accessibility for Creators and Financial Backers:

Growth of the DeFi Structured Products Market

As a researcher studying the evolution of decentralized finance (DeFi), I’ve observed a notable surge in the popularity of structured products. These financial instruments, known for their advanced risk management features such as principal protection and downside barriers, have seen remarkable growth over the past year. Notably, DeFi platforms like Pendle with a total value locked (TVL) of $6 billion and Ethena with a TVL of $3.6 billion have experienced significant expansion. This trend is anticipated to persist as the market infrastructure matures further and the product offerings continue to expand.

Tokenization Standards: New developments such as ERC-1155, ERC-404, and ERC-1400 are tackling issues related to identifying securities, segmenting offerings, and implementing regulatory oversight in the issuance of structured products using blockchain technology.

DeFi Prime Brokerages: Platforms such as Arkis are innovating with advanced margin systems for evaluating individual assets, facilitating netting of margins across different assets, and managing liquidations across various blockchains.

Institutional risk management solutions, meticulously crafted by companies such as Talos (Cloudwall) and Gauntlet, are indispensable for attracting institutional investments.

Decentralized Option Vaults (DOVs): DOVs play a crucial role in the realm of on-chain structured financial products. They offer automated yield generation, risk mitigation, and seamless interoperability with other Decentralized Finance (DeFi) systems.

Chainlink’s Cross-Chain Interoperability Protocol (CCIP) strengthens data dependability and facilitates cross-chain interactions, bridging the gap between conventional and crypto markets and different blockchain networks.

Automated crypto platforms such as AEVO and Hegic offer on-chain options that seamlessly work with algorithmic structured products.

Developing additional benchmarks and indices, like the Coindesk 20 Index (CD20) and CESR Composite Eth Staking Benchmark, offers investors clear and effective benchmarks to articulate their investment perspectives and act as valuable risk management instruments.

Tokenization: Tokenization forms the base for making traditional financial products compatible with blockchain technology, with the total value locked (TVL) projected to reach between $130-170 billion, which includes stablecoins, by 2024 based on RWA.xyz predictions.

In the crypto community, it’s commonly recognized that digital assets carry a distinct risk-reward profile. To address this issue, financial instruments like structured products are designed to create a more defined risk-return dynamic while maximizing the benefits of investing in this sector. For instance, principal-protected notes serve to minimize the risk of depegging by securing the initial investment amount.

The future of on-chain structured products doesn’t hinge on technology alone; instead, it lies in creating captivating applications that demonstrate their value. As tokenization progresses, merging conventional and digital assets in structured products will grow more frequent, bridging the divide between traditional finance and cryptocurrency.

Disclaimer: The perspectives shared in this article are my own and may not align with those held by CoinDesk, Inc. or its stakeholders.