If you’re reading this, there’s a good chance you’ve probably bought, held and sold crypto before. This means that on crypto, you’ve traded Spot.
If you’ve been around the space for more than a few months, you have most probably also traded with leverage, whether either on a centralized or decentralized exchange. This means that you’ve traded with Perpetuals on crypto.
If you’ve really been ahead of the curve, chances are you’ve played around with DeFi Options Vaults, like Dopex. Dopex Single-Sided Options Vaults (SSOVs) pool together user funds to earn yield from Crypto Options — which entails betting on what the future price of a crypto asset will be by a specific date.
Each of the financial instruments above have their respective pros and cons. There isn’t a one-size-fits all winner for all market conditions.
- Spot Trading (buying, holding, selling) is simple to understand, but profit potential is limited.
- Perpetuals Trading allows the use of leverage for higher risk vs reward trades, but you can lose all your entire trading position if you get Liquidated.
- Options Trading essentially locks you into buying or selling an asset (or crypto token) at an already agreed-upon-price in future.
Unlike Spot Trading and Perpetual Trading that require the price of an asset to hit a certain level for you to profit, Options Trading additionally allows you to profit if the price of that asset stays within a certain range for a certain frame (above or below the strike price). To oversimplify — Spot Trading and Perpetual Trading shine when there is lots of up and down movement in the market, but Options Trading can adapt to more market configurations depending on their product offerings.
But what if there were a financial instrument that offered even more flexibility than Options Trading in terms of different market configurations you can profit from?
There actually is a class of financial instruments that let you cherry-pick the best attributes from an assortment of other financial instruments while remaining properly risk-managed. They’re called Structured Products.
A Structured Product is a basket of several other financial instruments like equities, interest rates, forex, indices, commodities, spot, derivatives (such as perpetuals and options). Structured Products allow you to combine and configure any and all of the above financial instruments into one package to give you a single product with multiple redemption possibilities. It provides tailored solutions shaped by specific strategies that work in all market conditions.
Structured Products are the most flexible financial instrument precisely because they’re able to assimilate every other financial instrument. They allow you to profit when the market goes up, down, or sideways — all at the same time — depending on your strategy. Given their flexibility, Structured Products have some unique advantages:
- Capital Protection — Depending on the preferences of the investor, downside protection typically accompanies many Structured Product offerings. With capital protection, the upside vs downside becomes asymmetrical.
- Market Access — Investors can access asset classes that they normally would not be able to otherwise use, thanks to the breadth of Structured Products.
- Yield Enhancement in Sideways Markets — As stated above, the problem with many derivatives like perpetuals is that they require market volatility to be profitable. Structured Products can allow you to profit in any market configuration, including when the market is quiet.
- Reduced Exchange Risk — Buying the assets contained within a Structured Product separately oftentimes requires using different currencies to purchase each asset individually. This opens you up to exchange risk as well as having to pay many multiple fees. As a basket of different risk assets, using a Structured Products bypasses exchange risk and minimizes the fees required to use all the underlying instruments.
Aside from these advantages, why else would anyone want to use Structured Products — specially as it relates to the crypto markets?
It’s no surprise that the crypto market is primarily narrative-driven. A strong narrative is no replacement for strong fundamentals — but there are fewer catalysts stronger than a project with solid fundamentals that is being propelled forward by a current or future narrative.
Despite crypto narratives achieving near-mythological status as being impossible to predict, there’s always enough writing on the wall that can hint as to what may be coming next. As much as Web3 natives don’t want to admit it, one such predictor is that DeFi trends follow TradFi trends — especially when it comes to the preference of using different financial instruments.
Looking at the trends above, Open Interest in ETH Futures (similar to Perpetuals) is down 40% from the 2021 all-time-highs. On the other hand, ETH Open Interest in Options is currently experiencing a period of all-time-highs right now. DeFi-natives are slowly becoming more sophisticated and are starting to trade more complex financial instruments like Options in favor of Futures.
Here’s the kicker: This move from Futures/Perpetuals to Options is not unique to crypto. It’s the natural sequence that takes place in financial markets that are maturing.
Now that an Options narrative is starting in crypto — a suitable question to now ask is: what comes after Options?
The Endgame for Financial Markets
In maturing markets in traditional finance, an interest in Structured Products is the next step after a market explores Options trading. This makes logical sense because Structured Products assimilate all of the earlier financial instruments, including Options. Structured Products are the current final evolution of financial instruments — or last stop — in the life cycle of mature financial markets.
This is also due to their inherent complexity precisely because they are so customizable.
What if there were a protocol that could simplify the usage of Structured Products for the end user to get all of the advantages, using a fraction of the complexity?
Stay tuned for the upcoming articles to find out!