Author: Kyle Liu, Investment Manager at Bing Ventures

Introduction: Over time, the crypto industry is developing its own structured products. These products mostly appear in the DeFi space, meaning that investors utilize smart contracts to represent their investment strategies without connecting to any centralized exchanges.

DeFi structured products are a new type of financial instrument based on blockchain and cryptocurrency, similar to structured products in traditional finance. These products can be composed of various combinations of crypto assets and derivatives, featuring predefined maturity dates, different yield curves, and return profiles, such as capital protection products, yield enhancement products, and leveraged products. In the DeFi space, structured products are primarily dominated by options products. Unlike traditional structured products, the underlying assets of DeFi structured products are cryptocurrencies. This gives DeFi structured products greater flexibility and innovation, while also facing higher risks and uncertainties. Source: Bing Ventures

Trends in DeFi Structured Products

DeFi structured products provide investors with a simplified way to invest, allowing more people to participate in crypto asset investments. The emergence of these products is due to the increasing number of projects and the complexity of yields in the crypto asset market, necessitating the introduction of more simplified investment methods. The design of DeFi structured products is based on existing financial products and strategies, innovating and improving through technologies like blockchain and smart contracts. These products are typically based on DOV and PPV models.

DOV Model

The initial crypto structured products were found in what is known as Decentralized Option Vaults (DOVs). DOVs are on-chain option vaults where users can buy and sell options. Users must lock tokens in the vault to prevent their counterparties from exercising options, ensuring that the vault's funds remain sufficient. The initial strategy for DOVs was a simple call and put option strategy, but investors still faced the risk of a decline in the value of ETH itself. The development direction of DOV protocols is to provide more advanced financial derivatives, ultimately evolving into a complete solution for private banking-type products.

PPV Model

Principal Protected Vaults can be understood as a capital-protected investment tool, similar to structured products in traditional financial markets. It operates based on smart contracts, providing users with a low-risk investment opportunity while ensuring the safety of their principal investment. The basic structure of Principal Protected Vaults includes three parts: collateral, asset locking, and margin. Users can purchase this investment tool by depositing cryptocurrencies or other digital assets into the collateral. These cryptocurrencies or digital assets will be locked in the smart contract until the contract matures. During the asset locking process, users can earn a certain yield, while the margin is used to protect the safety of the principal investment.

Products themed around "Principal Protected Vaults" are gaining attention. Principal-Protection Vaults are an extension of the DOV issue and are expected to become the next innovation point, providing risk-averse investors with methods to generate low-risk, high-return opportunities. Although these products protect investors' principal to some extent, they still carry certain risks, particularly regarding the exchange rate risk of stablecoins. Additionally, the yields from these products mainly come from governance token rewards, and increasing governance token rewards may help enhance yields, but such returns are limited. Source: DefLlama

Future Evolution of Structured Products

As the crypto asset market develops, the number and types of DeFi structured products are also increasing. The design of these products aims to provide investors with a more simplified investment method, attracting more people to participate in crypto asset investments. DOVs and PPVs are currently the most common DeFi structured products, based on existing financial products and strategies, and utilizing technologies like blockchain and smart contracts for improvement. Although DOVs have some issues, the future of DeFi structured products will become more diverse and innovative with market development and technological advancement. We believe that DeFi structured products will evolve in the following directions:

Greater Popularization

As the DeFi market continues to expand and the number of users grows, DeFi structured products will increasingly attract attention and recognition from investors. In the future, these products will become more popular, becoming an important tool for investors in asset allocation and risk management. These products will cover more categories and fields, providing different types of services for different types of investors. For example, in the lending sector, there may be more categories and forms of lending protocols; in the trading sector, there may be more categories and forms of trading strategies.

With intensified market competition, DeFi structured products will become more specialized, such as liquid staking and synthetic assets. In the future, these products will require higher levels of technology and expertise to meet investors' needs for risk control and yield optimization. For instance, in the quantitative trading field, there may be more trading strategies based on machine learning and artificial intelligence technologies.

Tranched Lending

Tranched Lending is an important form of DeFi structured products. It is an investment tool that slices debt investment opportunities into different parts, each with its own risk/return profile. Investors can choose different investment parts to obtain varying levels of risk and return. For example, in Tranched Lending, investors can achieve more stable returns by investing in higher-rated debt parts, while also opting for lower-rated debt parts for potentially higher returns. This form of product is very popular in traditional financial markets.

However, currently, the demand for higher-rated debt parts in the DeFi market is not very large, leading to relatively low returns for lower-rated debt parts. Nevertheless, this also provides opportunities for institutional investors to enter the DeFi market. With continuous technological development and market maturation, DeFi structured products will become an important means for institutional investors to enter the DeFi market.

Sustainable Yield Generation Opportunities

Yield generation opportunities in the DeFi ecosystem are gradually moving towards sustainability. Providing financial insurance or capital to borrowers for stable returns has become an important form of DeFi structured products. In the future, DeFi structured products will focus more on providing valuable products and services to better meet user needs and achieve sustainable development of the DeFi ecosystem.

Capital preservation is very important in DeFi structured products. There is an increasing demand for products that allow trading and investing in a decentralized environment. More and more DeFi structured products are providing secure, efficient, and transparent investment methods by leveraging external DeFi protocols for base yields and creating derivative structures using on-chain/off-chain hybrid methods. Source: STFX

With the rapid development of the DeFi industry, we believe that outstanding DeFi structured products in the future will need to possess the following characteristics to adapt to the evolution of the industry:

• DeFi structured products should offer more attractive return rates. Product designers need to have a deep understanding of the DeFi industry and use systematic investment strategies to effectively capture industry development trends and achieve better investment returns.
• DeFi structured products should provide a rich variety of asset allocations. Future DeFi structured products should encompass assets from major industry sectors and be able to adjust asset allocations in a timely manner according to market changes to ensure diversity and flexibility in asset portfolios. Additionally, considering the inclusion of some non-standard asset types could expand the range of market participants.
• DeFi structured products should maintain relatively low risk levels. Structured products should employ scientific risk control methods to lower the overall risk level of the product portfolio, ensuring product stability.
• DeFi structured products should meet diverse customer needs. Future DeFi structured products should offer different investment thresholds and yield levels to satisfy the needs of institutional and professional investors. Moreover, the flexibility and customizability of products will also be important characteristics of outstanding DeFi structured products in the future.
• Future DeFi structured products need to better integrate into the traditional financial system. Strengthening risk control for DeFi products, such as enhancing compliance reviews, establishing risk control systems, and improving fund security management, can effectively enhance the stability of DeFi products and better serve institutional and professional investors.