The Future of DeFi Is in Structured Financial Instruments 

On January 23, 2025, the U.S. Securities and Exchange Commission (SEC) announced the repeal of Staff Accounting Bulletin 121 —a regulatory guideline that compelled conventional banks to categorize digital assets as liabilities on their balance sheets, which in turn discouraged participation from Wall Street. This change represents one of several pro-cryptocurrency initiatives introduced in the U.S. since Trump’s second inauguration.

With a decrease in regulatory obstacles and a rising influx of investments in the digital asset arena, traditional finance (TradFi) organizations are eagerly moving toward blockchain solutions. Industry leaders such as BlackRock and Franklin Templeton already took the initiative by broadening their offerings of cryptocurrency products in November 2024, drawing considerable interest from investors.

As the TradFi industry increasingly interfaces with decentralized finance (DeFi) ventures and the need for diversification in crypto offerings expands, on-chain structured products are strategically positioned to spearhead a renaissance of institutional investment in crypto. These products, similar to their TradFi equivalents, derive their worth from the performance of derivatives, specifically underlying digital assets like Bitcoin or Ethereum. Their distinctive framework enables them to bridge essential market gaps, catering to both mainstream TradFi participants and sophisticated DeFi traders. With the influx of institutions into the DeFi sphere, on-chain structured products can also alleviate heightened risks through innovative engineering strategies, such as sustainable yield distribution systems and rewards structures centered around user experience. This not only enhances risk management but also injects liquidity into the evolving DeFi landscape. An Access Point for Institutional TradFi Investors

For investors from the TradFi sector aiming to diversify their portfolios, on-chain structured products represent familiar financial vehicles, enriched with unique benefits exclusive to DeFi. A prominent illustration is structured products that adopt the TradFi method of tranching, segmenting returns into varying degrees of risk and reward. This technique provides investors with the flexibility to craft personalized strategies that align with their risk preferences, be they conservative or adventurous.

Through the elimination of intermediaries via smart contracts, on-chain structured products can lower transaction fees and often provide yields that outperform traditional finance markets.

While the DeFi landscape is still evolving, the current disparities in market maturity and technological advancement should be seen as opportunities for creativity rather than drawbacks. For example, numerous on-chain structured products utilize algorithms to automate yield optimization strategies. This automation results in better returns, diminishes the risks tied to manual management, and can be more user-friendly than TradFi instruments.

On a broader scale, the increasing embrace of DeFi by institutions has propelled the creation of on-chain structured products that are built on established TradFi frameworks. These hybrid offerings enjoy the advantages of blockchain's transparency and efficacy, combined with the robust regulatory structures of the TradFi environment.

By uniting these two domains, they facilitate interoperability through standardization, allowing DeFi and TradFi infrastructures to work together smoothly and enhancing product capabilities for more extensive investor engagement.

A Strategy for Maximizing Returns for Experienced Traders

For seasoned DeFi traders, the ability to compose on-chain structured products is crucial for maximizing returns, especially in periods of increased market instability. Many DeFi frameworks are crafted for composability, enabling them to function together seamlessly and merge with other blockchain applications to develop new applications.

This adaptability empowers proficient users to devise customized, layered strategies by integrating various on-chain offerings and services to cater to their specific requirements.

The composability of on-chain structured products has shown its value particularly in occurrences such as

in the latter half of 2024, which underscored the risks associated with relying on a singular source of yield in a perpetually changing ecosystem. To counter this gap, DeFi protocols are fostering strategic alliances that grant investors access to diverse yield opportunities throughout the ecosystem.

A prime example is ListaDAO’s collaboration with StakeStone to launch the Ethereum’s lowered staking yield , where depositors on the Binance Smart Chain can tap into a broader array of yield-generating strategies, benefit from cross-chain incentives, and leverage Berachain’s enhanced liquidity. This amalgamation of DeFi structured products enables advanced traders to access multiple revenue streams, providing increased resilience against market volatility.

An Urgent Need for Advanced Product Engineering  Lista DAO Berachain Vault As more institutional investors transition to on-chain platforms, their inclination to execute large-scale transactions is likely to introduce additional volatility and liquidity challenges within the DeFi landscape. To mitigate the ramifications of such heightened risks, there must be a focus on advanced product engineering in on-chain structured products.

Product engineering takes a systematic approach to the design, development, and refinement of blockchain-based offerings. The objective is to create products that are financially sustainable, resilient to market fluctuations, and encourage meaningful engagement from users. This engineering can be localized to a specific blockchain or encompass multiple interoperable systems.

To cater to a larger investor audience, product engineering should focus on two main aspects: security and risk minimization, particularly regarding price volatility. This includes integrating compliance mechanisms within smart contracts and ensuring transactions align with regional or international regulatory standards. Such measures promote transparency and foster trust among users of on-chain products.

To cater to clients with differing risk appetites, product engineering can also integrate adaptive solutions. A notable example is the automated rebalancing feature, which adjusts portfolios based on real-time market conditions and provides users with a cushion against downturns.

By implementing these strategies, sophisticated product engineering not only encourages stability but also brings more liquidity into the DeFi arena.

Setting the Stage for Integration of DeFi and TradFi 

On-chain structured products stand ready to bridge the divide between TradFi and DeFi, providing flexible financial instruments that address various investor demands. Institutional players are increasingly looking to on-chain structured products due to their familiar structures while capitalizing on the distinct benefits offered by DeFi and effectively managing associated risks.

Experienced traders leverage the composability of on-chain structured products to construct tailored strategies and maximize returns across multiple protocols.

With DeFi poised for wider acceptance in 2025, an emphasis on sophisticated product engineering ensures that on-chain structured products remain secure, flexible, and scalable amid rising risks. Collectively, these features will facilitate greater asset movement and support the ongoing evolution of DeFi and TradFi's convergence.

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Danny, a co-founder of Tranchess, a DeFi protocol specializing in structured and liquid staking solutions, boasts over 17 years of experience in investment banking with Société Générale and BNP Paribas. He has significant leadership expertise in trading, sales, and management across the APAC region. Danny also serves as Co-Chairman of the Digital Assets Association (https://digitalassetsassociation.org/) in Singapore, a non-profit organization at the forefront of integrating blockchain technology into the traditional finance landscape.