What Are Structured Products?
Structured products are financial instruments that combine multiple underlying components to create custom risk/reward profiles. In DeFi, these typically combine yield positions, options, and lending protocols to offer payoffs impossible through simple spot trading.
Unlike spot assets where you're fully exposed to price movement, structured products let you shape your exposure: cap your downside, enhance your yield, gain leverage, or participate in upside while protecting principal.
Risk Management
Define maximum loss before investing. Know exactly how much you can lose in worst case.
Yield Enhancement
Earn higher yields by accepting different risk profiles than simple holding.
Custom Exposure
Tailor your market exposure to your specific view and risk tolerance.
Passive Strategies
Set and forget—vaults automatically manage positions and rollovers.
Principal-Protected Products
Principal-protected notes (PPNs) guarantee return of your initial investment at maturity while offering upside participation. They're ideal for investors who want crypto exposure without risking capital loss.
How Principal Protection Works
Capital Split
Deposit $10,000. Vault puts ~$9,500 in yield position (staking, lending) and ~$500 in call options.
Yield Accumulation
Fixed position earns ~5% APY. Over 90 days, this generates ~$120 in yield—covering the options cost.
Maturity Outcome
If ETH rises: Options pay out, you get principal + participation. If ETH falls: Options expire worthless, you get principal back from yield position.
Example Payoff Structure
ETH Falls 30%
$10,000
Principal Protected
ETH Unchanged
$10,000
Principal Returned
ETH Rises 30%
$11,500
50% Participation
⚠️ Important Caveats
- • Protection only applies at maturity—early exit may result in losses
- • Participation rate caps your upside (typically 50-80%)
- • Smart contract risk still applies to deposited funds
- • Yield assumptions may not hold in all market conditions
Leveraged Tokens
Leveraged tokens (like 2x ETH or 3x BTC) are ERC-20 tokens that automatically maintain target leverage through rebalancing. Unlike margin trading, you can't get liquidated—the token just becomes worth less.
How Rebalancing Works
A 2x ETH token rebalances daily (or at thresholds) to maintain 2x exposure. When ETH rises, the protocol sells some to reduce leverage back to 2x. When ETH falls, it buys more to increase leverage back to 2x.
✓ Advantages
- • No liquidation risk
- • No margin management
- • Simple to hold (just buy token)
- • Automatic rebalancing
✗ Disadvantages
- • Volatility decay erodes value
- • Poor for sideways markets
- • Management fees compound
- • Not suitable for long holding
Volatility Decay Explained
In choppy markets, leveraged tokens lose value even if the underlying ends flat. This "volatility decay" happens because rebalancing locks in losses.
Example: 2x BTC Token
- Day 1: BTC +10% → Token +20% (value: $120)
- Day 2: BTC -10% → Token -20% (value: $96)
- BTC net change: -1% | Token net change: -4%
- This decay compounds over time
When to Use Leveraged Tokens
- Strong directional conviction: Use only when you expect clear trend, not chop
- Short holding periods: Days to weeks, not months
- Tactical trades: Event-driven plays where you want leverage without liquidation risk
Yield-Enhanced Vaults
Yield-enhanced products boost returns by selling options premium. You earn higher base yield but accept limited upside or increased downside exposure. The classic structure is the covered call vault.
Covered Call Vaults
Deposit ETH into a vault that sells weekly out-of-the-money call options. You keep the premium (5-15% APY) plus any appreciation up to the strike price. If ETH moons past the strike, your upside is capped.
ETH Drops
Keep premium, still exposed to downside. Better than spot by premium amount.
ETH Flat/Slight Rise
Ideal outcome. Keep premium + full appreciation. Best risk-adjusted return.
ETH Moons
Keep premium but upside capped at strike. May underperform spot holding.
Put-Selling Vaults
Deposit stablecoins and sell put options. Earn yield while agreeing to buy crypto at lower prices. If prices crash below strike, you get assigned (buy crypto at strike price minus premium earned).
Best for investors who want to accumulate crypto at lower prices anyway—you get paid to wait for your entry price.
Autocall & Exotic Structures
Autocall notes automatically "call" (redeem) if the underlying hits certain price levels. They offer fixed coupons with early redemption features.
Autocall Example
Buy ETH autocall at $2,600 strike, 18% annual coupon, 6-month term, with monthly observation dates.
- If ETH ≥ $2,600 at any observation: Note redeems early, you get principal + pro-rata coupon
- If ETH stays below $2,600 but above barrier: Full coupon at maturity
- If ETH crashes below barrier (e.g., -40%): Principal loss proportional to drop
Other Exotic Structures
Earn yield for each day price stays in a range
Product terminates if barrier is breached
Profit from moves in either direction
Returns based on worst performing asset
Evaluating Structured Products
Due Diligence Checklist
Understand the Payoff
Can you draw the payoff graph? Know exactly what you make/lose in all scenarios.
Check Audit Status
Reputable audits from firms like Trail of Bits, OpenZeppelin, or Consensys Diligence.
Review Counterparty Risk
Does the vault use CEX options or on-chain protocols? What happens if counterparty defaults?
Calculate Total Fees
Management fees, performance fees, withdrawal fees all compound. Know the true cost.
Check Historical Performance
How did the product perform in the last crash? In sideways markets? Backtest if possible.
Red Flags to Avoid
- Unrealistic promised yields (100%+ APY without clear risk)
- Unclear or undisclosed strategy mechanics
- No audit or audit from unknown firm
- Locked withdrawals without clear unlock conditions
- Anonymous team with large deposit requirements
Interactive Payoff Calculator
Explore different structured product payoffs. See how principal protection, leveraged tokens, and yield-enhanced products behave under different market scenarios.
ETH Principal Protected Note
livePayoff Structure
Risk Notice: Structured products have complex payoffs and may not perform as expected. Principal protection only applies at maturity. Early exit may result in losses. Always understand the product mechanics before investing.
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Frequently Asked Questions
Structured products combine multiple DeFi primitives (options, lending, staking) into single instruments with defined risk/reward profiles. Examples include principal-protected notes, leveraged tokens, autocall vaults, and yield-enhanced products. They offer payoff structures impossible to achieve with simple spot trading.
Principal protection typically works by depositing most capital in yield-generating positions and using the yield to buy options. If options expire worthless, you keep your principal. If options pay off, you capture upside. Protection only applies at maturity—early exit may result in losses.
Key risks include: smart contract vulnerabilities, counterparty risk if products use CEX options, liquidity risk on early exit, complexity risk from misunderstanding payoffs, and opportunity cost compared to spot holding. Always understand the exact payoff structure before investing.
Leveraged tokens are ERC-20s that automatically maintain target leverage through rebalancing. Unlike margin, there's no liquidation of your position—the token rebalances instead. However, volatility decay can erode value over time, making them unsuitable for long holding periods.
Evaluate: audit status, TVL and track record, underlying asset liquidity, fee structure (management + performance), counterparty exposure, and historical performance in different market conditions. Prefer established protocols with transparent strategies.