Structured Product

A structured product designed to return the investor's initial capital at maturity, regardless of the performance of the underlying asset. The product's returns are generated by using a portion of the capital to purchase options or derivatives.

• Mechanism: Capital is split between a zero-coupon bond (for principal protection) and a call option (for upside).
• Blockchain Example: A vault that deposits 90% of funds into a stable yield protocol to guarantee principal, and uses 10% to purchase perpetual futures positions for yield.

A yield-generating product that automatically redeems (or "calls") itself if the underlying asset's price meets a predefined condition on an observation date, paying a coupon. If not called, it continues until the next date or final maturity.

• Key Feature: Offers periodic high coupons but limits upside by early termination.
• Smart Contract Role: The contract autonomously monitors oracle price feeds against barrier levels and executes the call logic, distributing coupons in native tokens.

An income-focused product where the investor sells a put option, receiving a high coupon in exchange for accepting the risk of taking delivery of the underlying asset if its price falls below a strike. The investor's principal is at risk.

• Risk Profile: Coupon income is premium from the sold put. Maximum loss occurs if the underlying asset becomes worthless.
• On-Chain Execution: The smart contract mints a token representing the sold put obligation, with settlement in the underlying asset or stablecoins based on final price.

A broad category of structured products where the investor's initial investment is not guaranteed and can be partially or fully lost based on the performance of the underlying assets. This includes reverse convertibles, leveraged trackers, and barrier options.

• Contrast with Principal-Protected: These products offer higher potential returns in exchange for accepting direct market risk.
• Blockchain Utility: Enables the creation of complex, transparent payoff functions that are auditable and enforceable via code, reducing counterparty risk.

The foundational financial instrument—such as an option, future, or swap—whose value determines the payoff of the structured product. The structured product is essentially a wrapper that combines these derivatives with other components.

• Common Underlyings: Perpetual futures contracts, call/put options, volatility indices (like the DeFi Pulse Index), or interest rate swaps.
• On-Chain Sourcing: Derivatives are often sourced from decentralized protocols like dYdX, GMX, or Synthetix, with prices settled via oracles.

A barrier option mechanism embedded in a structured product that creates or extinguishes a payoff feature if the underlying asset's price hits a specified barrier level.

• Knock-In: A option only comes into existence if the barrier is hit (e.g., a put option that activates to protect principal).
• Knock-Out: The product or a feature terminates early if the barrier is hit (common in Autocallables).
• Oracle Dependency: Smart contracts rely on high-frequency price oracles like Chainlink to monitor for barrier breaches in real-time.

These products aim to provide upside exposure while protecting the initial capital. They often use options strategies to generate yield, which is then used to purchase out-of-the-money call options on a volatile asset. If the asset price rises, the user participates in the gains; if it falls, the principal is returned. Examples include Ribbon Finance's Theta Vaults and Opyn's Squeeth.

This structure splits a yield-generating asset into multiple risk tiers, or tranches. The senior tranche receives lower, more stable yield with priority in payouts, while the junior tranche absorbs initial losses in exchange for higher potential returns. This creates distinct risk/return products from a single underlying asset pool. BarnBridge's SMART Yield was a prominent example.

Smart contracts automate complex options positions to create set-and-forget yield strategies. Common examples include:

• Covered Calls: Selling call options against a held asset to generate premium income.
• Put Selling: Selling put options to earn premium, with the obligation to buy the asset if it falls below a strike price.
• Structured Notes: Packages that combine a zero-coupon bond with derivatives to offer non-linear payoffs. Platforms like Ribbon Finance and Friktion (now defunct) popularized these.

These products provide leveraged exposure to an asset's price movement without requiring users to manage collateral ratios or liquidation risk directly. They achieve this through perpetual futures contracts, options, or delta-neutral strategies funded by yield. dYdX's Leveraged Tokens and Gearbox Protocol's leveraged liquidity provision are key implementations.

Structured products that represent a curated basket of underlying assets, providing diversified exposure through a single token. The structure may include automated rebalancing and fee-generating mechanisms. Examples include DeFi Pulse Index (DPI), which tracks major DeFi governance tokens, and PieDAO's diversified yield-bearing baskets.

These aim to provide predictable, fixed yield returns in a volatile market. They often involve interest rate swaps or bond-like instruments minted against future yield streams. Element Finance's Principal Tokens allowed users to lock assets to receive a fixed yield, while the variable yield was sold to other participants. Notional Finance also offers fixed-rate borrowing and lending.

By programmatically layering and automating strategies, these products can generate yield from multiple sources simultaneously. Common mechanisms include:

• Yield stacking: Earning rewards from staking, lending, and liquidity provision in a single vault.
• Option premium harvesting: Systematically selling options (e.g., covered calls, cash-secured puts) to collect income.
• Delta-neutral strategies: Using perpetual futures or options to hedge price exposure while earning funding rates or premiums.

Smart contracts encode specific risk parameters and rebalancing logic, removing manual intervention. This can include:

• Automatic stop-loss triggers based on oracle price feeds.
• Dynamic adjustment of leverage or strategy allocation in response to market volatility (vol targeting).
• Automated exercise or roll of options contracts at expiry, ensuring the strategy executes as designed.

They democratize access to sophisticated derivatives strategies typically reserved for institutional players. Retail users can gain exposure to:

• Structured notes with non-linear payoffs linked to asset performance.
• Volatility products (e.g., vaults that earn yield during low-volatility periods).
• Exotic option payoffs like barrier options or autocallables, all packaged into a simple tokenized vault.

Products can be engineered around specific market views or macroeconomic themes. Examples include:

• Bear market vaults: Combining short positions with yield-generating collateral.
• Inflation-hedging products: Linked to the performance of real-world assets (RWAs) or commodities.
• Cross-chain yield strategies: Aggregating opportunities across different blockchain ecosystems to optimize returns.

The output of a structured product is often a tokenized position (e.g., an ERC-20 vault share). This token can then be integrated into the broader DeFi ecosystem, enabling:

• Use as collateral in lending protocols.
• Trading on decentralized exchanges (DEXs) for secondary market liquidity.
• Further nesting within other structured products or meta-vaults, creating layers of financial logic.

A structured product that guarantees the return of the investor's initial capital at maturity, while offering potential upside linked to the performance of an underlying asset (e.g., a stock index or basket of cryptocurrencies). The principal protection is typically funded by allocating a portion of the investment to a zero-coupon bond, with the remainder used to purchase options for upside exposure.

The process of dividing a pool of underlying assets into multiple slices, or tranches, each with distinct risk-return profiles and payment priorities. Common in collateralized debt obligations (CDOs) and structured credit products.

• Senior Tranches: Highest priority, lowest risk, lowest yield.
• Mezzanine Tranches: Medium priority and risk.
• Equity/Junior Tranches: First to absorb losses, highest potential return.

A financial contract whose value is derived from the performance of an underlying asset, index, or interest rate. Derivatives are the fundamental building blocks of structured products. Common types include:

• Options (Calls/Puts): Provide the right, but not obligation, to buy/sell.
• Swaps: Contracts to exchange cash flows or assets.
• Futures & Forwards: Agreements to buy/sell an asset at a future date.

A structured note that automatically redeems (or "calls") itself before maturity if the price of the underlying asset meets predefined conditions (e.g., is at or above its initial level on an observation date). Upon autocall, the investor receives the principal plus a coupon. If not called, the note's final payout depends on the underlying's performance, which may include capital loss.

The specific financial instrument or benchmark upon which a derivative or structured product's value and payoff are based. It is the source of the product's risk and return. Examples include:

• Equities (single stock or index like S&P 500)
• Interest Rates (LIBOR, SOFR)
• Commodities (gold, oil)
• Currencies (FOREX pairs)
• Cryptocurrencies (BTC, ETH)

A set of techniques used in structured finance to improve the credit rating of a debt issuance and reduce risk for investors. This makes the senior tranches more attractive. Methods include:

• Over-collateralization: Pledging assets worth more than the issued securities.
• Cash Reserves: Setting aside funds to cover potential losses.
• Surety Bonds & Insurance: Third-party guarantees.
• Subordination: Using junior tranches to absorb losses first.