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How Blockchain Improves Cost-Effectiveness, 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 bond market is estimated at over $2 trillionand blockchain is expected to help expand the scope of the market, from creation to investor base.
Let’s look at this in more detail.
Streamlining processes and reducing costs
Traditional structured products involve multiple intermediaries such as brokers, custodians and clearing houses, resulting in operational costs ranging from 1% to 5% of the value of the investment each year. According to AccentureBlockchain technology can reduce infrastructure costs for large investment banks by an average of 30%, translating into annual savings of $8 billion to $12 billion.
Blockchain’s cost-reduction potential is particularly significant for structured products due to the complexity of their lifecycle management. Blockchain’s enhanced transparency and audit trails can help reduce these regulatory capital requirements.
Improved composability to create customizable financial solutions
Smart contracts are particularly interesting for the management of complex financial products such as derivatives and structured products, enabling rapid and innovative financial engineering. This modularity allows investors to create tailor-made products, such as the combination of yield-generating DeFi protocols, tokenized assets and risky derivatives such as options or futures.
Improving accessibility for initiators and investors
Structured products have traditionally been accessible only to institutions. Blockchain’s scalability simplifies product structuring and creation by eliminating intermediaries, while fractional ownership broadens investor access and reduces friction on 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 Pendulum (TVL of $6 billion) and Ethena (TVL of $3.6 billion) have seen significant growth, reflecting strong demand for new derivative products. This trend is expected to continue, driven by an increasingly mature market infrastructure and an expanding product range.
Tokenization standards: Innovations such as ERC-1155, ERC-404 and ERC-1400 address challenges related to bond identification, product segmentation and regulatory controls for the issuance of structured products.
DeFi Prime Brokerage: Platforms like Arcisintroduce sophisticated margin engines for asset-specific valuations, cross-margining, and cross-chain liquidation.
Risk management:Institutional-grade risk management systems, developed by companies such as Talos (Cloud Wall) And Glove are essential to facilitate the entry of institutional capital.
Decentralized Options Vaults (DOV): DOVs are important for on-chain structured products because they offer 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, and facilitates integration between traditional and crypto markets and cross-chains.
Cryptocurrency Options: Platforms like AEVO And Hegic provide automated on-chain options, which integrate well with algorithmic structured products.
Tokenization: Tokenization is fundamental to bringing structured products on-chain, with TVL reaching $130-170 billion (including stablecoins) in 2024 according to RWA.xyz.
One of the prevailing sentiments in the crypto space 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. Principal-protected bonds, which mitigate the risk of withdrawal, are one example.
The path forward for blockchain structured products begins not 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 bridging the gap between traditional finance and crypto.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.