The Structured Products Trend in DeFi
|By Chris Coney|
Our minds can only handle so much complexity.
As a result, complicated concepts need to be simplified in order to make them easier to understand.
Let’s take the ever-evolving nature of computer technology, for example.
At the start of the computing revolution, programmers would have to write programs directly into the hardware, using the exact machine code the hardware could execute.
Shortly after that, more general programming languages were invented. This made programs simpler to write, then automatically be converted into machine code by a compiler.
Later on, even more programming languages were developed on top of that, with lower-level language and the same automation. This further simplified the process.
Essentially, each new programming language made it easier to learn and faster to write a program that did what you wanted.
The ultimate benefit was enabling a greater number of people to write programs with less and less of a learning curve, ultimately leading to greater productivity.
Today, the internet contains many tools that allow you to write computer programs simply by dragging and dropping features. You don’t need any computer programming knowledge whatsoever, making the process simple and effortless.
Application to Economics and Investing
The exact structure I’ve just laid out can be directly applied to economics and investing.
Even metrics like the Consumer Price Index are examples of huge amounts of data that have been streamlined to produce a single number you can reference. In the CPI’s case, it’s the inflation rate.
Index funds are another example of an asset class that was created to lift many layers of investing complexity.
By owning shares in an index fund, you do away with the complexity of having to analyze individual stocks and sectors. Instead, you can gain exposure to “the market,” which is whatever the overall return is for the market the fund is invested in.
This is an example of what I would call a structured product.
You, as the investor, can buy and hold a single asset — in this case, shares in the index fund. Then, all the complexity of diversifying the funds evenly across the assets in the index is done by the fund managers.
This also includes the ongoing process of rebalancing the fund as the value of individual assets fluctuate.
In this way, you can enjoy the benefits of investing without taking an active role in managing your portfolio.
If you take a look at one of my oldest YouTube videos from 2016, you’ll see that back then Bitcoin (BTC, Tech/Adoption Grade “A-”) was $676, Ethereum (ETH, Tech/Adoption Grade “B”) was $15.03 and we had just 647 crypto assets with $13 billion in total market cap.
At that time, it was just about manageable to keep up with everything that was going on with all the top projects and report them to the world in a daily roundup video.
Fast forward to today, and we have 22,165 crypto assets and $806 billion in total market cap.
Not only has the number of assets increased … so has the complexity of the whole space.
In 2016, there was no DeFi, no Ethereum scaling solutions, no Bitcoin Lightning Network and very few retail investors compared to today.
Now that the complexity has increased so much and the space is no longer occupied by tech heads and crazy enthusiasts, the need to simplify the complexity has come.
Structured Products in DeFi
Back in 2016, if you knew what you were doing, you could manually carry out many advanced trading strategies brought over from traditional finance.
Today, though, there’s a lot of what I would call layman's capital in crypto.
In other words, earning the same gains offered by complicated strategies … but without the need for 10 years of experience in financial markets.
Enter the DeFi structured products trend.
The groundwork for DeFi structured products is similar to TradFi, such as in the index fund example.
But as you probably already know, DeFi is systematically either automating or tokenizing existing financial assets.
Here are a couple of examples of the types of structured products that are popping up in DeFi.
Please note: The projects featured in this article are intended purely to illustrate the concepts being explained and are not recommendations to use them. I have not evaluated any of them for investment suitability; only as examples.
Structured DeFi Product No. 1: Overnight
Overnight operates like an investment fund … but with a DeFi twist.
That means investors invest their USD Coin (USDC, Stablecoin) and receive USD+ tokens as a representation of the capital invested.
The USDC is then invested in many complex DeFi investment strategies to earn yield and capital gains.
From an investor’s point of view, it's simply a case of buying and holding the USD+ token and watching it go up in value as the investment managers work their advanced strategies and make gains (or losses).
Using DeFi to do this means the asset managers can collect investment money from anyone, anywhere with USDC to invest.
Since Aug. 14, 2022, USD+ has achieved an impressive annual percentage yield of 13.8%.
Structured DeFi Product No. 2: Olive
With Olive, you can invest BTC, ETH or USDC in various structured options products.
Whether you want to make money when the market goes up or down, you can invest in structured put or call options with attractive APYs of between 11% and 53%.
I call DeFi a radically open platform for financial innovation, and the structured products trend is a prime example of that.
With much of the technological complexity taken care of, seasoned finance professionals can invent whatever financial products they can think of.
And by simplifying the investment complexity, retail investors can use the low-friction rails of DeFi to gain access to a much broader range of opportunities for a true win-win.
But that’s all I’ve got for you today. Let me know what you think about the structured products trend in DeFi by tweeting @WeissCrypto.
I’ll catch you here next week with another update.