Ribbon Finance settles first on-chain Ether ‘autocallable’ with Marex and MEV Capital.

Ribbon Finance settles first on-chain Ether 'autocallable' with Marex and MEV Capital.

The Rise of Onchain Structured Products in the Blockchain Industry

In a significant development within the blockchain industry, crypto trading firms are collaborating with traditional market players to trade onchain structured products. This trend is driven by a growing regulatory push in the United States to oversee the industry and encourage innovation.

Taking a major leap forward, digital assets manager MEV Capital and London-based financial services provider Marex recently executed an “autocallable” structured product tied to ether (ETH) through a smart contract built by leading decentralized derivatives platform Ribbon Finance, which has now rebranded as Aevo. This collaboration marks a significant milestone for both Ribbon Finance and the structured products industry as a whole.

An autocallable is a type of structured note that allows investors to earn contingent interest if the underlying asset, in this case, ether, closes at or above a specific level on periodic observation dates. It offers investors an opportunity to earn above-market rates of interest, along with contingent downside protection when held to maturity. Autocallables can be redeemed early, providing flexibility to investors.

The autocallable traded by MEV Capital was denominated in the dollar-pegged stablecoin USDC. It had a barrier set at 85% of the initial price, an autocall trigger at 100%, and a guaranteed coupon of 0.5% per week (annualized at 26%). Marex acted as the hedging agent in this transaction.

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Here’s how it works: If, after one week, the spot price of ether is above the initial price at the time of the trade, the trade terminates early, and the buyer receives the initial investment plus the 0.5% coupon. If, on expiry, ether trades 15% lower from the initial price, the buyer is still protected and receives the principal in full along with the coupon. However, if the 85% protection barrier is breached (ether drops over 15%), the buyer takes a loss, but it is partially compensated by the coupons received.

The deployment of exotic options like autocallables on the Ethereum blockchain offers several advantages. Laurent Bourquin, Managing Partner at MEV Capital, explained that on-chain deployment allows for market-neutral strategies while staying on Ethereum, a public blockchain familiar to them. This highlights the potential for blockchain technology to enhance financial instruments, such as autocallables, by leveraging the transparency and security features of smart contracts.

To eliminate the counterparty risk associated with traditional structured products, Marex, MEV, and Ribbon leveraged the immutable and audited nature of smart contracts. They locked the maximum payout and collateral into a secured onchain smart contract. By doing so, they removed the need for a traditional issuer as the counterparty, thereby mitigating the risk of investors losing money due to the failure of a bank backing the product.

Harry Benchimol, Co-Head of Derivatives Engine at Marex Solutions, expressed his enthusiasm for the onchain autocallable, stating that bringing such structured products onto the blockchain and leveraging smart contract features increases transparency for investors, enables instant settlement, and eliminates issuer credit risk. He believes that blockchain technology will revolutionize the way financial products are transacted.

The arrival of autocallables in the fast-evolving decentralized finance (DeFi) ecosystem is also noteworthy. Yield farming, a popular practice in DeFi, can be combined with autocallables to extract yield while providing some downside protection to investors. This integration opens up new opportunities for investors to engage in innovative yield-generating strategies within the blockchain industry.

In summary, the collaboration between crypto trading firms, traditional market players, and blockchain platforms is driving the adoption of onchain structured products in the blockchain industry. By implementing autocallables through smart contracts, these stakeholders are transforming traditional financial instruments, making them more transparent, efficient, and secure. The rise of such products marks a significant development in the evolution of the blockchain industry, showcasing the transformative power of blockchain technology in the financial sector.

The payoff chart for the autocallable executed onchain. (Marex) (Marex)