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How Blockchain Improves Cost Efficiency, Composability, and Accessibility
Traditionally the domain of institutional investors, structured products combine various assets and derivatives to create customized risk-return profiles. With the advent of blockchain, the potential for this market segment is enormous, promising significant cost reductions, improved composability, and improved accessibility. Currently, the global structured note market is estimated to be worth more than 2 trillion dollarsand blockchain will help broaden the market from origination to investor base.
Let’s take a closer look.
Simplify processes and reduce costs
Traditional structured products involve multiple intermediaries such as brokers, custodians and clearing houses, resulting in operational costs ranging from From 1% to 5% of the investment value annually. According to AccentureBlockchain technology can reduce infrastructure costs for major investment banks by an average of 30%, resulting in annual savings of $8-12 billion.
The cost saving potential of blockchain is particularly significant for structured products, due to their complex lifecycle management. Blockchain’s improved transparency and audit trails can help reduce these regulatory capital requirements.
Improved composability to create customizable financial solutions
Smart contracts are particularly attractive for managing complex financial products such as derivatives and structured products, enabling rapid and innovative financial engineering. This modularity allows investors to create bespoke products, such as combining yield-generating DeFi protocols, tokenized assets and risk-management derivatives such as options or futures.
Improving accessibility for originators and investors
Structured products have historically been accessible only to institutions. Blockchain’s modularity simplifies structuring and origination by eliminating intermediaries, while fractional ownership broadens investor access and reduces friction on both the supply and demand sides.
Growth of the DeFi Structured Products Market
Structured products offer advanced risk management through mechanisms such as capital protection and downside barriers. Over the past year, DeFi structured products such as It hangs ($6 billion TVL) and Ethena ($3.6 billion TVL) have grown significantly, showing strong demand for new derivatives. This trend is expected to continue, driven by maturing market infrastructure and an expanding product suite.
Tokenization Standards: Innovations such as ERC-1155, ERC-404 and ERC-1400 address challenges related to bond identification, product tranche division and regulatory controls for the issuance of structured products.
Prime DeFi Brokerage: Platforms like Arkare introducing sophisticated margin engines for asset-specific valuations, cross-margining, and cross-chain settlement.
Risk managementInstitutional-level risk management systems, developed by companies such as Talos (Cloud Wall) AND Gauntlet are crucial to facilitate the entry of institutional capital.
Decentralized Options Vault (DOV): DOVs are important for on-chain structured products as they provide automated yield generation, risk management, and integration with other DeFi protocols.
Oracles: Chain link Cross-chain interoperability protocol (CCIP) improves data reliability and cross-chain functionality, facilitating integration between traditional and crypto markets and cross-chain.
Cryptographic options: Platforms like AEVO AND Egyptian provide automated on-chain options, which integrate well with algorithmically structured products.
Tokenization: Tokenization is key to bringing structured products on-chain, with TVL reaching $130-170 billion (including stablecoins) in 2024 according to RWA.xyz.
One of the most common sentiments in the cryptocurrency world is that products often have barbell-shaped risk-return profiles. Structured products solve this dilemma by creating a specific risk-return profile while capturing the substantial upside of this asset class. An example of this is capital-protected notes that mitigate the risk of depegging.
The journey for on-chain structured products does not begin with technology, but with developing compelling use cases to showcase their potential. As tokenization advances, the integration of traditional and crypto assets into structured products will become increasingly common, further narrowing the gap between traditional finance and cryptocurrency.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.