The Next Wave of DeFi will be Structured Products
In Brief
On 23 January 2025, the U.S. Securities and Exchange Commission (SEC) rescinded Staff Accounting Bulletin 121—the accounting guidance that required traditional banks to list digital assets as liabilities on their balance sheets and discouraged Wall Street participation. This update marks one of many pro-crypto measures implemented in the U.S. since Trump’s second inauguration.
With fewer regulatory headwinds and growing inflows entering the digital asset market, traditional finance (TradFi) institutions are leaping to transition on-chain. TradFi giants such as BlackRock and Franklin Templeton were already ahead of the curve by expanding their range of crypto products in November 2024, attracting substantial investor interest.
As the TradFi sector increasingly intersects with decentralized finance (DeFi) projects and demand for diversification in crypto products grows, on-chain structured products are well positioned to lead the institutional crypto renaissance. Similar to its TradFi counterpart, they derive their value from tracking the performance of a derivative, which in this case is an underlying digital asset like Bitcoin or Ethereum. Their unique structure allows them to fill key market gaps by catering to the needs of mainstream TradFi users and advanced DeFi traders alike.
With the surge in institutions entering the DeFi space, on-chain structured products can also help mitigate the increased risk through product engineering strategies like sustainable yield distribution mechanisms and user-centric rewards systems. In doing so, they enhance risk management and inject liquidity into the maturing DeFi ecosystem.
A Gateway for Institutional TradFi Investors
For TradFi investors seeking portfolio diversification, on-chain structured products pose as familiar financial instruments with additional advantages unique to DeFi. A noteworthy example is structured products that leverage the TradFi technique of tranching, dividing returns into different levels of risk and reward. This approach allows investors to tailor their customized strategies based on their risk appetites, whether they are conservative or risk-seeking.
With the removal of intermediaries through smart contracts, on-chain structured products can also reduce fees and provide competitive yields that often exceed those of TradFi markets.
While the DeFi sector is still in its nascent stage, this gap in market maturity and technological sophistication should be regarded as an opportunity for innovation rather than a disadvantage. For instance, many on-chain structured products incorporate algorithms that automate strategies for optimized yield generation. This process generates greater returns, minimizes the risks associated with manual management, and can be easier to navigate than TradFi tools.
On a macro level, the rising institutional adoption of DeFi has spurred the development of on-chain structured products built on existing TradFi infrastructure. Such hybrid products benefit from the transparency and efficiency of blockchain technology and the well-established regulatory frameworks of the TradFi ecosystem.
By bridging these two worlds, they enhance interoperability through standardization, enabling DeFi and TradFi rails to interact seamlessly and enhancing the product capabilities for broader investor participation.
A Strategy to Optimise Returns for Advanced Traders
For advanced DeFi traders, the composability of on-chain structured products plays a pivotal role in optimizing returns, especially amidst heightened market volatility. Many DeFi protocols are designed for composability, allowing them to interact seamlessly and combine with other blockchain applications to build new use cases.
This flexibility allows advanced users to develop personalized, layered strategies by combining various on-chain products and services to meet their unique needs.
The composability of on-chain structured products has proven to be especially useful in events such as Ethereum’s lowered staking yield in the second half of 2024, which highlighted the vulnerability of relying on a single yield source amidst ever-evolving ecosystem dynamics. So, addressing this market gap, DeFi protocols are fostering strategic partnerships that allow investors to access a variety of yield sources across the ecosystem.
A noteworthy example is ListaDAO’s partnership with StakeStone to launch the Lista DAO Berachain Vault, where Binance Smart Chain depositors can access a wider range of yield-earning strategies, earn cross-chain rewards and enjoy Berachain’s enhanced liquidity. This combination of DeFi structured products allows advanced traders to access multiple streams of returns, providing greater resilience against market fluctuations.
A Call For Sophisticated Product Engineering
With more institutional investors moving on-chain, their tendency to execute sizable transactions will introduce more volatility and liquidity issues to the DeFi market. To minimize the impact of such amplified risk, an emphasis on sophisticated product engineering in on-chain structured products ought to be in place.
Product engineering adopts a systematic approach toward the design, development, and optimization of blockchain-based products. It aims to create products that are economically viable, resilient to market dynamics, and incentivize meaningful user engagement. Product engineering can focus on a single blockchain ecosystem or span multiple interoperable ones.
To support a broader investor base, product engineering should prioritize two factors: security and minimizing risks such as price volatility. The former includes embedding compliance features into smart contracts and ensuring transaction compliance with relevant regional or international regulatory requirements. This fosters transparency and user trust in on-chain products.
To accommodate users of different risk profiles, product engineering can also involve the incorporation of adaptive mechanisms. A prominent example is automated rebalancing mechanisms, which adjust positions based on real-time market conditions and help cushion users against market downturns.
Through such means, sophisticated product engineering promotes stability and brings more liquidity into the DeFi market.
Setting the Stage for DeFi-TradFi Convergence
On-chain structured products are poised to bridge the gap between TradFi and DeFi, offering flexible financial instruments that cater to diverse investor needs. Institutional investors turn to on-chain structured products for their familiar format whilst leveraging the unique advantages of DeFi and managing risk.
Advanced traders benefit from the composability of on-chain structured products, developing customized strategies and optimizing returns across multiple protocols.
As DeFi is set for broader mainstream adoption in 2025, sophisticated product engineering ensures that on-chain structured products remain secure, adaptable, and scalable amidst increased risk. Collectively, these capabilities drive greater asset flows and support the continued maturation of DeFi-TradFi convergence.
Disclaimer
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About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
