The Structured Product Trend in DeFi: A Deep Dive
Dear Reader,
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, and 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, fund managers deal with the complexity of diversifying funds evenly across the assets in the index.
This also includes the ongoing process of rebalancing the fund as the value of individual assets fluctuates.
In this way, you can enjoy the benefits of investing without taking an active role in managing your portfolio.
DeFi Application
If you take a look at the historical snapshot of CoinMarketCap from 2016, you’ll see that back then?Bitcoin (BTC)?was $629,?Ethereum (ETH)?was $13.85 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 newsletter.
Fast forward to today, and we have more than 23,000 crypto assets and $2 trillion 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 currently offered on Algoo Strategies, that are popping up in DeFi.
Please note:?The projects discussed in this article have been carefully selected by the Algoo Strategies team and are recommended for practical use. They have been thoroughly evaluated for investment potential and conceptual relevance and can only be accessed on the Algoo Strategies platform.
Structured DeFi Product No. 1: Algoo Strategies Yield ETH (xETH)
The xETH-wrapped index is like a basket that lets you invest in various strategies related to Ethereum (ETH) to earn yield.
It spreads your investment across different ways of earning, such as providing liquidity (which helps trading happen on decentralized exchanges) and staking ETH (locking up your ETH to help run the network and earn rewards). The goal is to give you a good return on your investment, aiming for about 10% to 15% each year, while balancing the risks.
Structured DeFi Product No. 2: Algoo Strategies Pendle Index
The index primarily focuses on using ETH in liquidity pools on a platform called Pendle. It takes advantage of advanced techniques like liquid staking, where ETH is locked up to earn rewards, and liquid restaking, which allows for further earning.
The index earns rewards in the form of PENDLE tokens and airdrops, which are like bonus tokens given to active users. Additionally, the index manages and optimizes these liquidity pools, ensuring they stay profitable by adjusting them when necessary. By doing this, it aims to provide investors with up to a 30% annual return, with all systems fully audited for safety.
Structured DeFi Product No. 3: DeFi Token Farming Index
DeFi token farming is like a high-interest savings account for cryptocurrencies, focusing on well-established assets like FXS, CRV, and CVX on the Ethereum mainnet. This strategy involves putting these "blue-chip" tokens into liquidity pools on Convex Finance to earn rewards. The idea is that as the crypto market grows, these proven tokens will continue to be valuable. The pools offer extra rewards and are carefully balanced to maximize returns, aiming for a high return on investment (around 40%) while generating a steady income.
Structured DeFi Product No. 4: GLP Index
The GLP Index is an investment product that aims to give annual returns of 0% to 30% in Ethereum (ETH). By investing in GLP, you provide crucial funds for traders on GMX, a decentralized trading platform, and earn money from their trading fees and losses. The index mainly consists of Bitcoin (BTC), Ethereum (ETH), and stablecoins like FRAX and USDC, with stablecoins making up about 40-45% and BTC and ETH the rest.
Investing in GLP offers a relatively safe way to gain exposure to ETH and BTC and can yield around 30% in ETH. It tends to perform well during market volatility when traders lose money.
Conclusion
I call DeFi a radically open platform for financial innovation, and the structured product 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 we’ve got for you today. Let us know what you think about the structured products trend in DeFi by commenting below
I’ll catch you here in two weeks with another update.
Until then,