Traditional APs are a regulated oligopoly. In TradFi ETFs, a handful of large banks like Goldman Sachs and JPMorgan act as the exclusive intermediaries who create and redeem fund shares, controlling liquidity and arbitrage. This structure creates a high-barrier, permissioned system that is antithetical to crypto's open-access ethos.
institutional-adoption-etfs-banks-and-treasuries
Blog
The Future of Authorized Participants: Oligopoly or Open Access?
The battle for control of Bitcoin ETF creation and redemption will define market efficiency, liquidity, and systemic risk. We analyze the incumbent financial giants versus emerging crypto-native contenders.
introduction
THE GATEKEEPERS
Introduction
The evolution of Authorized Participants from a financial oligopoly to a programmable, open-access role defines the next infrastructure battle.
On-chain APs become programmable infrastructure. Protocols like EigenLayer and Renzo transform the AP function into a permissionless, slashed role. Any node operator with sufficient stake can perform validation and settlement duties, commoditizing a function that was once a lucrative franchise.
The battleground shifts to intent and execution. The new competitive layer is not who is authorized, but who provides the best intent-solving and execution quality. Systems like UniswapX and CowSwap abstract the AP function into a solver network, where competition is based on gas optimization and MEV capture, not regulatory licenses.
Evidence: The $16B in TVL restaked via EigenLayer demonstrates the market demand to unbundle and re-bundle trusted roles. This capital is voting for a future where financial plumbing is software, not a club.
key-trends
OLIGOPOLY VS. OPEN ACCESS
Executive Summary: The AP Battlefield
The role of Authorized Participants (APs) is the central bottleneck in modern finance, from ETFs to DeFi. The fight for control will define the next decade of capital markets.
01
The Problem: The BlackRock Vanguard Duopoly
Traditional finance APs are a permissioned cartel, creating systemic risk and extracting ~$10B+ annually in arbitrage rents. Their closed model is antithetical to crypto's ethos.
- Single Points of Failure: A few firms control all ETF creation/redemption.
- Regulatory Capture: High barriers to entry protect incumbents.
- Inefficient Pricing: Leads to persistent NAV premiums/discounts.
2
Dominant Firms
$10B+
Annual Rent
02
The Solution: On-Chain APs via Smart Contracts
Replace trusted intermediaries with deterministic code. Protocols like MakerDAO (PSM), EigenLayer (restaking), and intent-based systems (UniswapX, CowSwap) demonstrate the model.
- Programmable Liquidity: Creation/redemption triggered by on-chain conditions.
- Permissionless Participation: Any entity with capital can compete for arb.
- Transparent Settlement: Eliminates opaque pricing and settlement risk.
24/7
Settlement
0
Human APs
03
The Battleground: Cross-Chain Asset Portability
True open access requires assets to move freely. This is the domain of LayerZero, Wormhole, Axelar, and intent-based bridges like Across.
- Composability Crisis: Siloed liquidity fragments the AP role.
- Universal Liquidity Pools: Cross-chain messaging enables a single AP to service multiple venues.
- Security/UX Trade-off: Verifiable security (e.g., light clients) vs. capital efficiency (liquidity networks).
50+
Chains
$1B+
Bridge TVL
04
The Catalyst: Real-World Asset (RWA) Tokenization
Tokenized T-Bills and equities are the Trojan horse. They force the legacy AP system to interface with on-chain settlement via entities like Ondo Finance and Matrixport.
- Regulatory Bridge: Licensed entities act as hybrid APs, bridging TradFi and DeFi rails.
- Yield Bearer: Creates native demand for on-chain settlement and custody.
- Proves the Model: Demonstrates efficiency gains, pressuring the old guard.
$1T+
Potential Market
24/7
Markets
05
The Risk: Recreating the Oligopoly with Extra Steps
Without careful design, crypto APs will centralize around the largest stakers, LPs, and node operators. Lido's dominance in Ethereum staking and Jump Crypto's role in early Solana are cautionary tales.
- Capital Concentration: MEV and staking rewards accrue to the largest players.
- Protocol Governance Capture: Large APs can vote in their own favor.
- New Middlemen: Relayers and sequencers become the new gatekeepers.
>30%
Lido Share
Centralization
Key Risk
06
The Endgame: Dynamic, Algorithmic Market Making
The final form of an AP is not a firm, but a swarm of competing algorithms. This is the vision of dYdX (order books), Uniswap v4 (hooks), and MEV-aware AMMs.
- Intent-Driven: Users express desired outcomes; solvers compete to fulfill.
- MEV as a Service: Arbitrage profit is democratized and redistributed.
- Continuous Liquidity: Markets are made by code, not capital calls.
~500ms
Arb Cycles
Algorithmic
APs
market-context
THE OLIGOPOLY
The Current State: A Bulge Bracket Cartel
The authorized participant (AP) role in crypto ETFs is controlled by a handful of traditional finance giants, creating a permissioned bottleneck for asset creation.
APs are permissioned gatekeepers. Only a select group of bulge bracket firms like JPMorgan, Goldman Sachs, and Jane Street are approved to create and redeem ETF shares. This centralizes the critical arbitrage mechanism that keeps ETF prices pegged to NAV.
The crypto-native ecosystem is locked out. DeFi protocols, market makers, and DAOs cannot directly participate in primary market arbitrage. This creates a structural inefficiency where on-chain liquidity is disconnected from the primary creation/redemption engine.
The cartel model is intentional. Regulators and issuers like BlackRock and Fidelity prefer dealing with a few known, regulated entities for compliance and operational simplicity. This prioritizes regulatory safety over market efficiency.
Evidence: The SEC's approval orders explicitly name the initial APs, and the list for major spot Bitcoin ETFs is identical across issuers. This formalizes the oligopoly before a single share is created.
THE FUTURE OF AUTHORIZED PARTICIPANTS
AP Model Comparison: TradFi vs. Crypto-Native
A comparison of the institutional gatekeeper model from traditional finance (TradFi) against emerging, permissionless models enabled by blockchain infrastructure.
| Core Feature / Metric | TradFi ETF Model (Oligopoly) | Crypto-Native Model (Open Access) | Hybrid Model (e.g., Ondo Finance) |
|---|---|---|---|
Onboarding & Capital Requirement | $10M+ & Regulatory Approval | Smart Contract Bond (< $1M) | Varies by Jurisdiction |
Creation/Redemption Latency | T+1 Settlement (1-2 Days) | Atomic Settlement (< 1 sec) | T+0 to T+1 |
Primary Liquidity Source | AP Inventory & Market Makers | Automated Market Makers (e.g., Uniswap) | AP Inventory + On-Chain Pools |
Arbitrage Execution | Manual OTC Desk | Permissionless Bots (e.g., MEV Searchers) | AP-Managed + Bot Hybrid |
Fee Capture for AP Role | Bid-Ask Spread & ETF Fees | MEV & Liquidity Provider Fees | Structured Product Fees + Yield |
Censorship Resistance | |||
Regulatory Compliance Native | |||
Typical Number of APs per Fund | 3-10 | Unlimited | 1-5 (Whitelisted) |
deep-dive
THE ARCHITECTURAL IMPERATIVE
The Open Access Thesis: Why Crypto-Native APs Win
Crypto's permissionless composability dismantles the traditional ETF creation/redemption oligopoly, creating a superior market structure.
Permissionless creation/redemption wins. Traditional APs are a regulated cartel; crypto-native APs are any smart contract that can post collateral and follow protocol rules, enabling continuous, competitive arbitrage.
Composability is the moat. A crypto AP is not one entity but a stack: a solver on CowSwap for sourcing assets, a Safe wallet for custody, and Chainlink for price feeds. This modularity lowers barriers.
Liquidity fragments, then consolidates. Early competition creates a fragmented AP landscape, but efficiency forces aggregation through meta-protocols like UniswapX or intents-based systems, which route orders to the best execution venue.
Evidence: The DeFi arbitrage ecosystem for stablecoins and liquid staking tokens (LSTs) proves the model. Protocols like Aave and Curve rely entirely on permissionless actors to maintain peg stability, processing billions in daily volume without a central AP.
counter-argument
THE REALITY OF SCALE
Steelman: The Case for the Oligopoly
A concentrated market of specialized, high-capital Authorized Participants is the inevitable and optimal structure for scaling cross-chain liquidity.
Capital efficiency demands specialization. A fragmented network of small, generalist APs creates redundant liquidity and systemic risk. Oligopolistic APs like Jump Crypto or Wintermute achieve superior capital velocity through dedicated infrastructure and algorithmic market-making.
Security is a function of skin-in-the-game. Open access models dilute accountability. A closed, vetted consortium of high-reputation entities provides stronger slashing guarantees and faster recovery from bridge exploits, as seen in Wormhole's recovery post-hack.
Interoperability standards consolidate power. Protocols like LayerZero and Axelar create natural moats. APs integrated into these dominant messaging layers capture network effects, making new entrants non-viable without massive capital and integration overhead.
Evidence: The top 5 market makers control over 70% of CEX liquidity. This concentration is not a bug; it is the efficient equilibrium for deep, stable markets and will replicate in cross-chain systems.
risk-analysis
THE FUTURE OF AUTHORIZED PARTICIPANTS
Fragility Vectors: The Dangers of a Closed System
The current ETF model relies on a handful of trusted intermediaries for creation/redemption, creating systemic risk and rent-seeking. The blockchain-native alternative is a choice between replicating this oligopoly or building open access.
01
The BlackRock Problem: Rent Extraction by Design
Traditional Authorized Participants (APs) are a closed club of ~30 firms. They control the primary market arbitrage mechanism, capturing ~$1B+ in annual revenue from spreads and fees. This creates a single point of failure and stifles competition.
- Systemic Risk: A major AP failure can halt ETF arbitrage, causing NAV deviations.
- Economic Rent: High barriers to entry protect incumbents, with costs passed to end-investors.
- Opaque Pricing: Spreads are not transparently competed away on a public market.
~30
Firms
$1B+
Annual Rent
02
The Permissioned Bridge Trap: Recreating Wall Street on-chain
Many blockchain projects default to a whitelisted validator set for cross-chain asset transfers, mirroring the AP model. This creates the same vulnerabilities: censorship risk, validator collusion, and governance capture.
- Fragile Security: A 5/9 multisig bridge holds $10B+ TVL.
- Regulatory Target: A defined set of entities is easy to subpoena and shut down.
- Stagnant Innovation: Permissioned systems lack the competitive pressure of open, permissionless networks.
5/9
Multisig Risk
$10B+
TVL at Risk
03
The Open Access Solution: UniswapX for ETF Flows
The end-state is a permissionless network of competing solvers (like UniswapX, CowSwap) for creation/redemption baskets. Anyone can post capital and compete to fulfill orders, driving spreads to zero. This replaces trusted APs with cryptoeconomic security.
- Radical Efficiency: Open competition eliminates rent, passing savings to holders.
- Anti-Fragility: No single point of failure; the system strengthens with more participants.
- Native Composability: Basket flows integrate seamlessly with DeFi lending (Aave) and derivatives (dYdX).
0
Whitelist
-99%
Spread
04
The Liquidity Fragmentation Challenge
Open access fragments liquidity across many solvers. The winning architecture must aggregate this fragmentation without a central coordinator, using mechanisms like intent-based mempools (Across, Anoma) or shared sequencers.
- Solver Discovery: How do issuers find the best price across 1000+ competing market makers?
- Settlement Guarantees: Requires robust slashing conditions and bonding curves to ensure solver performance.
- Cross-Chain Complexity: Must work seamlessly across Ethereum, Solana, and Bitcoin layers, unlike siloed bridges like LayerZero.
1000+
Potential Solvers
<1s
Settlement Goal
future-outlook
THE FUTURE AP
The Path Forward: Hybrid Models and On-Chain Settlement
The role of Authorized Participants will bifurcate, creating a hybrid model where permissioned entities manage risk while open networks handle execution.
Permissioned Risk, Permissionless Execution defines the hybrid model. Specialized entities with deep capital and compliance frameworks will underwrite cross-chain liquidity and manage counterparty risk, while open solver networks like Across and Stargate compete for optimal execution. This separates trust from performance.
On-chain settlement becomes the universal layer. Protocols like UniswapX and CowSwap demonstrate that intent-based flows settle trustlessly on a destination chain. The AP's role shifts from custodian to a risk-bearing guarantor whose obligations are enforced by smart contracts, not manual processes.
The oligopoly is a temporary artifact. Current AP concentration stems from legacy ETF infrastructure and regulatory moats. In crypto-native systems, the capital efficiency of pooled risk models and on-chain enforcement will favor a dynamic, competitive market of APs, not a static cartel.
Evidence: The growth of intent-based architectures and shared sequencer networks like Espresso and Astria proves the market demands execution separation from issuance. These systems abstract settlement away from a single privileged entity, making the AP function modular and contestable.
takeaways
THE FUTURE OF AUTHORIZED PARTICIPANTS
TL;DR for Builders and Investors
The traditional ETF model of a few trusted intermediaries is colliding with crypto's ethos of permissionless innovation. Here's where the battle lines are drawn.
01
The Oligopoly Trap: Why the Old Model Fails
Legacy APs are a regulated bottleneck, creating systemic risk and extracting rent. In crypto, this translates to centralization points vulnerable to censorship and creating market inefficiencies.
- Single Points of Failure: A handful of entities control the creation/redemption mechanism.
- Rent Extraction: High fees for a service that could be automated.
- Innovation Lag: Slow, manual processes incompatible with 24/7 crypto markets.
5-10
Dominant APs
>50 bps
Typical Spread
02
The Open Access Playbook: Unbundling the AP
The solution is to decompose the AP role into verifiable, competitive components using smart contracts and decentralized networks like Chainlink and EigenLayer.
- Settlement Layer: Use Across, LayerZero, or native bridges for asset transfers.
- Proof Generation: Leverage zk-proofs or optimistic verification for basket compliance.
- Liquidity Provision: Source from automated market makers (e.g., Uniswap, Curve) and intent-based solvers (CowSwap, UniswapX).
~24/7
Operation
-90%
Cost Potential
03
The Hybrid Reality: Regulated DeFi Wrappers
Pure decentralization hits regulatory walls. The near-term future is regulated entities operating DeFi primitives. Think Ondo Finance or Maple Finance models applied to fund creation.
- On-Chain Compliance: Programmable KYC/AML via zk-proofs or whitelisted pools.
- Institutional Gateway: TradFi entities act as legal wrappers, while execution is automated.
- Liability Shield: Smart contracts handle deterministic logic; legal entities handle exceptions and disputes.
$1B+
TVL in RWA
T+0
Settlement Goal
04
The Endgame: Autonomous, Algorithmic Funds
The final unbundling: funds as autonomous, rebalancing smart contracts with no human APs. Creation/redemption becomes a continuous function of market demand and portfolio weights, enabled by Keepers and MEV searchers.
- Dynamic Baskets: NAV is a real-time oracle feed, not a daily print.
- Competitive Execution: Searchers bid to fulfill mint/burn orders for profit, minimizing slippage.
- Protocol-Owned Liquidity: The fund itself provides exit liquidity via its treasury, akin to OlympusDAO mechanics.
<1 min
Creation Time
Algorithmic
Pricing
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