Crypto trading firms are teaming up with traditional market players to trade onchain structured products amid a U.S. regulatory push to oversee the industry.
Digital assets manager MEV Capital and London-based financial services provider Marex have executed an “autocallable” tied to ether(ETH) through a smart contract built by the leading decentralized derivatives platform Ribbon Finance, now rebranded as Aevo.
“We are thrilled to provide the smart contract for the first fully on-chain autocallable trade, which represents a significant milestone for both Ribbon Finance and the structured products industry at large,” Jeremy Obadia, Head of Structured Derivatives at Ribbon Finance, told CoinDesk. “Encoding complex payoffs on-chain not only removes the counterparty risk but also allows for a trustless and automated trade lifecycle.”
An autocallable is a structured note that allows investors to earn contingent interest, usually at an above-market rate, if the underlying asset closes at or above a specific level on periodic observation dates. It can be redeemed early and often offers contingent downside protection when held to maturity.
MEV purchased the two-week ether autocallable denominated in the dollar-pegged stablecoin USDC, with a barrier at 85% of the initial price, autocall trigger at 100% and guaranteed coupon of 0.5% per week (annualized 26%). Marex acted as a hedging agent.
How it works: If, after one week, the ether spot price is above the initial price at the time of the trade, the trade terminates early, with the buyer receiving the initial investment plus the 0.5% coupon. If, on expiry, ether trades 15% lower from the initial price, the buyer stands protected, receiving the principal in full along with the coupon. However, if the 85% protection barrier is breached (ether drops over 15%), the buyer takes the loss, which is compensated by coupons to some extent.
“On-chain deployment of exotic options such as autocallables would allow us to enhance several of our market-neutral strategies while staying on Ethereum – a public blockchain we are familiar with,” Laurent Bourquin, Managing Partner at MEV Capital, said.
The autocallable traded by MEV is suitable for market conditions where ether’s price is not expected to move much in either direction. That’s because the buyer stands to lose if the price drops below the barrier level. Similarly, the buyer stands to lose on the upside, as the product is terminated if the underlying trades above the initial price after one week.
The payoff chart for the autocallable executed onchain. (Marex) (Marex)
Structured products like autocallables can be set up in a myriad of ways and are quite popular in traditional finance. More than $70 billion in U.S. structured notes were issued last year. Banks typically issue these, with the issuing lender acting as the ‘counterparty’ for investors. As such, there is a risk of investors losing money not because the product fails to deliver but because of the demise of the bank backing the product.
Marex, MEV and Ribbon eliminated the so-called counterparty risk by locking the maximum payout and collateral in a secured and audited smart contract.
“Bringing Autocallables on-chain and leveraging smart contract features make these products more transparent for investors, allowing instant settlement, seamless lifecycle and removing issuer credit risk. The blockchain technology will change the way products are transacted,” Harry Benchimol, Co-Head of Derivatives Engine at Marex Solutions, said.
“Given how yield farming is important in DeFi, it is exciting to see the Autocallable entering this fast-evolving ecosystem, providing a new way to extract yield while having some downside protection,” Benchimol added.
