Financial Engineering in DeFi

Transcript

thank you very much guys for being here um as uh as I've introduced I'm Jeremy I lead cone strategies at ribbon which is the largest and first um Structured Products uh protocol uh in D5 so my background is in traffic and before deep diving into uh actually structuring exotic dirty in defy let's explore a few takeaways from tradify and look at the most traded products in trade file as most of the innovation has been coming from their up until now and server products so broadly we can break down um strong products into two categories yield enhancement products on the one

hand and principal protected products on the on the other hand and they both have different risks and different sorts of yields if you look at yield enhancement products um sorry the idea there is that you are selling a downside volatility what do I mean by selling dance wait let me just go back to the first slide what do I mean by selling downside volatility is that you are basically selling put options selling production means you are basically betting that the price of the underlyer doesn't go below a specific

price now this is already done in in crypto but try to find enhances the yield in two ways um which is using two tricks which are using done inputs instead of vanilla puts and using a feature residue which is called a word start feature let's dive into these ones so first one the down and inputs a downline input is a type of put option which is activated only if this if the price of the underlyer goes below a specific Bearer price now you can see um you can see on the graph that basically the red line represents the payoff of a down and input while the green line represents the the payoff of vanilla puts obviously these

have much higher yield but because they have much much more risk the reason is that they could be both advertised at 70 protected protected up to 70 basically but if you go down past the 70 line on the downline input you will lose 31 dollar while you would lose only one on the normal put so this increase in Risk uh obviously increases the yield as well now there's one thing about this that's um that's that can be very problematic is that for very low barriers so if you're moving the bearer much lower to the left um you would get virtually no risk because the probability of the put being exercised is very low while basically

you are exposed to tail risk which is in crypto as we as we all know is a bit more uh present than any other Market basically now the second the second feature is the worst of future so basically the worst of options works in the sense that the you have a basket of assets and the underlying asset will be the worst performing assets of this baskets sounds like a great idea right so obviously it increases the likelihood of the put being activated so you get more yield but the risk is very different if you look at the graph below uh if you if you had a basket of let's say three assets like Bitcoin ethereum and Solana the actual assets that will be used for the final payoff

will be the worst performing one in this case if and the last thing about is that it adds some risk which is called correlation risk which in nascent derivatives Market can be very very difficult to hedge for market makers making a product even more risky and can be toxic from the environment as well now moving on to the second uh set of products we're looking at principle protected products here the idea is quite simple is that it sort of guarantees that you will get back whatever you invested in a nutshell if you put 1 million you should get back 1 million at the end of the at the end of the 10 of the product the way it works behind the hood is that basically you're learning a high percentage of the capital as long as

this loan is repaid you will get back your principal and whatever is not loan basically the interest that you get from the loan will be used to purchase options um now one of the tricks that's been used in traffic is to use Bears to limit basically your upside uh potential gain which will cheapen the structure as a whole making sure you can you can basically buy more optionality with this the issue with this product is again there is massive create risk um most interest-fire most products Traders we assume when they're issued by Banks which are very strong criterating that this risk is virtually in existence in crypto as we've seen again this week

clearly it's not the case so we have this uh this hierarch this hierarchy risk uh which can be uh which can be very dangerous so now that we've seen a bit what's been done in traffic how can we basically leverage defy to create products which are not as toxic and um and yeah just better for the for the ecosystem we're seeing new opportunities with a lot of protocols um to First have an alternate source of funding to replace the uncollateralized lending which is used in principle protected products liquid staking is a really good example and we're looking at for example Lido

which would allow us to basically generate some yield and use this yield to buy options basically replacing and collateralized lending as a source of funding now the second thing is most of these rates in crypto are variable and protocol like volts which are using interest rate swap to basically lock these rates in advance offer structures the ability to structure in a more certain way in the sense that you know which rates are going to get such that you can actually build a product build a product guaranteeing a fully principal protection and that's the ribbon we've been we've been doing exotic derivatives setting on

chain uh for now a bit more than three months and uh this is a this is again one way to to use uh to basically fit into the into the whole uh compressibility and use this to to build new products so today I'm very excited to introduce our Earl if which is almost um The Pinnacle of compatibility for stronger products in D5 which what we're basically using um all of these features to build the products which has no credit risk and uh and it's fully uh fully on chain so as mentioned before deposits will be if and the yield will be accured on stf

with Lido we'll use interest rate swaps to basically ensure we get a fixed Trace for the entire lifetime of the product uh offering a base API of 0.5 percent and the bonus epiwa which can go up to 14 we decided to go with the bluish structure the reason for this is that we we believe most if holders are indeed bullish and if and want to be exposed to the upside participation of a website performance of if and so basically similar to all our products you would be weekly liquidity um with no credit risk with the only risk coming from this product uh being the uh Exchange price between if and as

if thank you very much feel free to to reach out in the um and to ask any questions