In June, we reported in our annual State of the Onchain Structured Product Market white paper that this niche market makes up just 0.21% of the overall crypto market with a combined Total Value Locked (TVL) of $2.46bn. At the same time, there were $48.29bn of assets in the DeFi market and $1.19tn in assets in the crypto market.
The relatively small size of the onchain structured product market might bewilder some market participants. After all, structured products are an easy and efficient way for institutions and individuals to access strategies and indexes. We believe that onchain structured products will ultimately come to play a very large role in digital asset markets. In our annual report we shared some of the reasons for optimism, including the transparency, accessibility and security benefits of onchain products.
But despite our enthusiasm and some early successes in the space, the onchain structured product market is still emergent. To understand more about why that is the case, we asked six experts for their opinions and insights.
While our experts spanned asset managers and indexing brands in TradFi, dApps and DeFi protocols, there were nevertheless overlapping themes in their insights and opinions.
Regularity ambiguity was cited by Christopher Jensen at Franklin Templeton, as well as Javier Martin Diaz at Summer.fi. Hopefully, within a few years, this issue will be reduced via the efforts of lobby groups and politicians in Eastern and Western markets. Security was also cited as an issue holding back the space, which isn’t surprising given not just the number of hacks onchain but also the mismanagement of CeFi crypto businesses such as BlockFi and FTX.
Another issue cited as holding the sector back was insufficient accessibility (which we’d bucket with suboptimal UX also), with more integrations in quality, large-scale user interfaces needed to overcome this. This is something our Partnerships Team is constantly working on at Index Coop, but we have much more to do. Transparency regarding the products themselves was also cited by Christopher Jensen at Franklin Templeton and Brian Luke at S&P Dow Jones.
Finally, some of our experts felt that structured products might not be a natural starting point for new crypto users, and that degens wouldn’t use them due to their preference for short-term market engagement behaviors. While some crypto users do indeed enter the space via the majors BTC and/or ETH, in time would others prefer a simple large-cap index to gain initial exposure? And, while degens and onchain natives might not be buying a large cap index, it is interesting how much of the onchain structured product market today consists of automated, leveraged LST yield strategies.
Although it wasn’t mentioned by our experts, we have wondered if we also need larger, more trusted brands to enter the space, reductions in digital asset correlation (which make indexes more value-adding) and the tokenisation of successful systematic or automated proprietary strategies before we see larger scale onchain structured product use.
Thank you to our six experts, all leading builders in our space:
Now, let’s hear from them:
Steven Zapata - Head of Growth and Community, Instadapp
“While I think that a large amount of current, heavy crypto users are not interested in investing for the long-term - and are therefore not interested in onchain structured products - I do think there are issues with accessibility and product which are holding back potential users today.
These products are not available in apps and UIs at scale, including yours from Index Coop. They are available in locations like Argent for example, but not Uniswap and other larger apps, dApps and protocols. Also, onchain structured products are suited to dollar cost averaging (DCA) into, but they are mostly on Ethereum today, which means that smaller sized users looking to DCA cannot do so cost-effectively. Lower entry costs would help this and better off/onramps. If buyers could DCA via automated transfers from their bank or CEX, that would be cool too.”
Christopher Jensen - Director of Research Digital Asset Management, Franklin Templeton
“The innovations in the onchain structured product market are quite encouraging, but the largest barrier to adoption in my mind is regulatory ambiguity. The industry needs a regulatory framework for dealing with onchain structured products before much larger pools of capital and larger numbers of customers can engage with this space.
While the industry's current product suite is already quite impressive, personally, I'd like to see the marginal unit of effort today go towards: i) improved security, ii) transparency, and iii) better UI/UX.”
Mona El Isa - Founder, Enzyme Finance and Avantgarde Finance
“Onchain asset management infrastructure is still pretty nascent. However, as the space matures this will change. The recent issues around custodial solutions and lack of transparency have made it clear we need to move more products onchain. But, growth in the sector will only really happen if we find a way to make onchain structured products available to wider audiences.”
Brian Luke - Head of Commodities and Real Assets, S&P Dow Jones Indices
“Generally, we believe that cryptocurrencies or digital assets are still nascent compared to other segments of the global financial markets. This is still a rapidly evolving space, with a lot of volatility, so to drive utilisation and adoption there will need to be a lot of education to increase awareness and transparency.
Speaking from the perspective of an independent index provider, we think one of the ways to help increase adoption in cryptocurrencies/digital assets and build an ecosystem of products around them is through reliable, transparent and rules-based indices or market benchmarks that can help track and measure performance, as well as provide additional data and insights for market participants to make informed decisions. To this end, S&P Dow Jones Indices has been offering both single coin and broad-market cryptocurrency or digital asset indices and indexing capabilities since 2020, but does not currently license indices for onchain structured products.”
Javier Martin Diaz - Social Media, Summer.fi
“The broader crypto market is relatively young and many participants are just getting used to the foundational aspects of crypto and DeFi. Structured products are more complex and may not be the immediate focus for new users. They can require a deeper understanding, not only of crypto, which can be daunting for users who might still be trying to grasp basic crypto concepts.
Our industry goal, and especially at Summer.fi, is to eliminate friction and provide extra value to users and dApps. By providing a curated list of protocols and features, plus working hard on the UX, we aim to increase DeFi adoption in the upcoming years. Also, regulatory certainty would help the industry as a whole.”
Corn - B2B Integrations, Yearn Finance
“Smart contract risk is the biggest thing holding this product space back. The risk profile of onchain structured products needs to become safer given where [US] Treasury yields are today. Risk-adjusted, onchain structured products often have less appeal today given where rates are.”
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