How can structured DeFi products meet investors with different risk preferences?
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How can structured DeFi products meet investors with different risk preferences?
DeFi structured products will also be present in the next bull market.
Navigating Web3 tides with focused insights
Written by: The DeFi Investor
Translated by: TechFlow
Structured products will bring mass adoption to DeFi, unlocking high-yield opportunities with relatively lower risk.
Structured products can be defined as pre-packaged investment vehicles whose returns are linked to the price behavior of at least one underlying asset, with some allowing users to speculate on volatility rather than price direction.
Vaults are among the most common DeFi structured products, enabling investors to easily access complex strategies.
Then, what about their risks?
Risk is proportional to the yield generated. Below is a list of DeFi structured products tailored to various risk appetites:
1. DeFi Indices
The S&P 500 and Nasdaq index funds are extremely popular in traditional markets.
Can on-chain index funds replicate their success?
Index Coop, launched two years ago, has quickly become a leader in on-chain index products. Its goal is to simplify life for retail investors.
Among its offerings, the most popular are:
- DPI — A market-cap-weighted index where allocation weights are based on DeFi project valuations. It provides one-click exposure to a basket of DeFi tokens.
- icETH — Enables holders to earn enhanced ETH staking yields by depositing Lido’s liquid staked ETH token (stETH) into Aave, borrowing ETH against it, swapping that ETH back into stETH, and repeating the cycle.
Risks: Liquidation risk (mitigated through built-in safety mechanisms), smart contract risk, stETH depeg risk, etc.
Clearly, Index Coop offers many interesting products, yet its TVL remains relatively low (~$64 million). However, DeFi is still a young industry, so it may take time for these products to gain attention and achieve widespread adoption.
2. DeFi Option Vaults (DOVs)
Ribbon Finance pioneered the DOV concept in 2021.
DOVs generate yield for depositors by selling weekly-expiring options. In exchange for premium income, depositors effectively trade the volatility of the underlying asset.
Ribbon Finance primarily offers three strategies:
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Covered Call (holding spot while selling call options) — Weekly sale of low-risk call options on all deposited assets;
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Selling Put Options — Weekly sale of low-risk put options on all deposited assets;
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Ribbon Earn — Uses deposited capital to provide undercollateralized loans to vetted market makers;
The lending yield is used to purchase options, ultimately generating higher profits.
Friktion is another mature protocol offering similar strategies. Deployed on Solana, Friktion offers two additional strategies beyond those from Ribbon:
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Crab Strategy — Performs best in low-volatility environments;
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Base Yield — Excels in negative funding rate environments;
3. Y2k Finance's Earthquake
Earthquake allows users to speculate on volatility risks associated with pegged assets—such as betting that a pegged asset will lose its peg. Just imagine if such a product had existed before the UST collapse...
While numerous insurance protocols offer coverage for pegged assets, there's a key limitation: none allow users to freely buy and sell insurance at dynamically adjusted prices based on demand. Earthquake aims to change that.
4. Unique DeFi Option Vaults
These vaults aim to deliver better returns than classic DOVs, using options designed as financial instruments with customizable payoff structures.
Cega is a representative protocol in this category.
It offers strategies tailored to each risk profile, with its products known as Fixed Coupon Notes (FCNs). The most intriguing FCN is named Autopilot.
Under Autopilot, investors bet that BTC and ETH prices will not drop by more than 70% within 27 days. If correct, they earn a 13% APY in USDC.
An increasing number of innovative structured products are emerging in this space, and structured products have recently seen remarkable growth in traditional markets as well. Therefore, I expect DeFi structured products will also play a significant role in the next bull market!
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The DeFi Investor
