Ribbon Finance combines different DeFi derivatives to achieve specific risk goals.
Written by: a poplar tree
In the past 2020, we have witnessed incredible DeFi innovation and experienced the explosive growth of the DeFi world. In particular, the DeFi development level covering decentralized transactions, lending, options, fixed income, algorithmic stablecoins, synthetic assets, etc., has become more and more diversified, almost following the pattern of traditional mainstream finance. .
These continuously innovative and iterative DeFi protocols have also created diversified new profit possibilities for ordinary people-lending assets, providing liquidity to automated market makers, casting synthetic assets, and so on.
The “Lego” attribute of DeFi is naturally suitable for constructing structured products that combine different protocols to achieve specific risk goals.
What is a structured product?
Structured products are essentially a combination of financial derivatives. It usually combines a series of derivatives to construct a “combined product” that achieves specific risk goals.
Its advantages are obvious, because although there are a wealth of derivatives tools that can play a combination advantage in trading, there are only a few experienced traders after all, and most people do not know how to incorporate derivatives into their overall portfolio strategy to improve Risk return, this is where structured products come in:
Packing multiple derivative products into one product, anyone can buy it without worrying about the complexity of the structure, in a broad sense, it can be understood as all financial products tailored to customers.
But this also brings a series of problems-extremely opaque, brokers may not be able to honor payments, investment channels are greatly restricted due to geographic location, and only high-net-worth individuals or financial institutions can use it.
What is Ribbon Finance?
This is exactly the vision of Ribbon Finance as an encrypted structured product-removing investment thresholds, bringing new variables to the structured product market, so that any investor with a Metamask wallet can easily participate in investing in structured products.
Because of this, Ribbon Finance chose to focus on creating encrypted structured products on DeFi, and by building new DeFi products that can be combined through cross-DeFi agreements, to help DeFi users obtain a higher risk-reward ratio.
Ribbon currently includes four major product categories, including betting on volatility, increasing returns, principal protection, and compound interest. Each category has a series of specific products to provide users with different risk-return goals with differentiated services.
- Betting on volatility: Allow users to trade various crypto asset volatility products for speculative or hedging purposes
- Increase revenue: through the combination of different rate of return tools (with revenue options), allowing users to earn high-yield active and passive products
- Principal protection: investment products to ensure that users will recover their principal, plus potential upside advantages. They can be constructed through a combination of fixed income products and options
- Compound interest: A product that allows users to gradually and stably accumulate their favorite assets through strategies such as automatically selling put options and reinvesting the proceeds in accumulating more assets
The founder of Ribbon Finance is Julian Koh, a former Coinbase software engineer. LinkedIn personal information shows that Julian Koh worked at Coinbase from May 2019 to October 2020. In 2018, he served as a consultant for the cryptocurrency hedge fund MetaStable Capital.
How does Ribbon Finance achieve its goals?
Take the product of betting on volatility-Strangle option as an example. This is also Ribbon’s first product. It allows users to bet on the volatility of ETH for profit by combining put options and call options with different execution prices.
In order to build this combined product, Ribbon simultaneously obtains liquidity from the two major option agreements on Ethereum, Hegic and Opyn.
First, Ribbon will find the cheapest price for option buyers and sellers from Hegic and Opyn, and then purchase options on behalf of users and package them into smart contracts to build a portfolio of products that bet on ETH volatility.
At present, there are two contract options for Strangle options based on the expiration date-March 12 and March 16, corresponding to different contract costs and return profits.
However, the more frequent and greater the price fluctuation of ETH during the contract period, the more profit. This is also the first multi-protocol structured product betting on volatility on Ethereum.
The three product areas of revenue enhancement, principal protection and compound interest are currently under development and are expected to be launched later. The official has also confirmed that there are two main directions to proceed:
- Continuous integration with other on-chain option protocols to obtain better prices for users and create more complex products;
- Develop a permanent structured product that earns income on ETH by selling options;
It is important to note that as of now, Ribbon Finance has not issued its own tokens, and tokens of the same name appearing on chains such as BSC need to pay special attention to risks.
How big is the imagination of encrypted structured products?
In the traditional financial world, structured products are generally based on fixed-income investments, coupled with a combination of financial derivatives. Usually the financial assets that can be linked to derivatives include stocks, bonds, interest rates, foreign exchange, Various indexes, bulks, funds, etc. (commonly such as ABS, structured wealth management, structured deposits, etc.) have developed rapidly in recent years and have become powerful tools for asset management because they closely follow the individual needs of investors.
In the crypto market, there is also a “structured product” model that has been practiced for a long time-digital asset dual currency wealth management products, as a floating return non-guaranteed investment product, characterized by “one investment, two returns” .
Take the BTC standard as an example
The investor purchased a 10-day “BTC-USD dual currency wealth management” product on March 1. Assuming that the BTC quoted at US$49,200 on that day, other relevant parameters are as follows:
- Linked price: $49,400
- Expiry date: March 11
- Investment amount: 1 BTC
- Yield: 3%
At the expiry date of March 11, there will be two possible settlement methods:
- If the settlement price of BTC is lower than the pegged price of 49,400 US dollars, the settlement will be done in BTC. The settlement amount = (1 + yield) * purchase quantity = (1 + 3%) * 1 = 1.03 BTC.
- If the settlement price of BTC is higher than or equal to the pegged price of 49,400 US dollars, the settlement will be done in USD, and the settlement amount = (1 + yield) * pegged price = (1 + 3%) * 49400 = 508825 USD.
Take the USD standard as an example
The investor bought an 11-day “USD-BTC dual currency wealth management” product on March 1. Assuming that the BTC quoted at US$49,200 on that day, other relevant parameters are as follows:
- Linked price: US$49,000
- Expiry date: March 11
- Investment amount: US$49,200
- Yield: 3%
At the expiry date of March 11, there will also be two possible settlement methods:
- If the settlement price of USD-BTC is lower than or equal to the pegged price of 49,000 USD, investors will settle in BTC. Settlement amount = purchase quantity / pegged price*(1+3%)=49200/19,000*(1+3%) )=1.0408 BTC.
- If the settlement price of USD-BTC is higher than the linked price of 19,000 USD, investors will settle in USD. The settlement amount = (1 + yield) * linked price = (1 + 3%) * 49000 = 50470USD.
In a nutshell, although the BTC-USD settlement price will change on the expiry date, investors will always get a 3% definite return. The only uncertainty is the type of funds returned (BTC or USD).
I believe everyone has discovered that the hedging and risk hedging characteristics of similar options above are more suitable for constructing diversified structured financial products than the “fixed income + derivatives” in traditional finance.
In the crypto world, with the help of smart contracts, liquidity can be obtained from various on-chain derivatives agreements (including option products such as Hegic), and they can be combined freely and efficiently to achieve certain specific risk goals. At the same time, 100% transparency is maintained at all times.
Especially when different track DeFi protocols are combined like Lego-when a variety of DeFi financial instruments (options, fixed income, futures, etc.) are combined, driven by automated algorithms, the value of the entire blockchain network will be more rapid The way is flowing, and the evolution based on various financial innovations will happen like a chemical reaction, thereby providing users with more powerful structured products to increase returns or reduce risks.
This is where the charm and imagination of encrypted structured products lie.
Disclaimer: As a blockchain information platform, the articles published on this site only represent the author’s personal views, and have nothing to do with the position of ChainNews. The information, opinions, etc. in the article are for reference only, and are not intended as or regarded as actual investment advice.