TradFi, as we discussed in our newsletter last week, is not an exception to the Web3 advancements that are driving innovation. Forecasts predict that more investment products will be developed and traded in a tokenized and on-chain format. What are these products and how do they work?

Digital assets have evolved in the ways that investors can invest. Today, Jordan Tonani of Index Co-op explains how on-chain index products work and what investment exposure they offer to Decentralized Finance (DeFi).

In our Ask an Expert section, Mike Cavanaugh shares his insights into the industry.

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Will Diversified Indices Gain Traction on-chain?

Index products have been the main way for most people to gain exposure over the past 50 years. In Europe, around 20% of assets managed are passive strategies. About half are exchange-traded funds and the other half index funds. Since 2015, the amount of passively managed assets has doubled. Around one fifth of European retail investors owns such products.

Index products are also available on-chain, although most people have not been aware of this. We have built such products, as well as yield-earning tokens, leverage tokens, and strategy tokens, since 2020. These tokens are referred to as on-chain structured products. We believe they will have a bright future.

On-chain products provide advisors and clients with a simple, diversified and accessible way to gain exposure to the key themes of digital assets. Off-chain, there are few products that cover these topics (such as DeFi, Metaverse, Crypto, or liquid stake). These products are also available in countries that have restricted such products. While it may be possible for users of our tokens to duplicate the basic strategies independently, this would require numerous transactions and associated transaction fees, as well as sometimes burdensome reporting requirements depending where they reside. Index tokens, on-chain structured product and other products allow users to access the most important assets within a theme by purchasing just one token. Index tokens are redeemable at any time by the user with the constituents. Like most digital assets index tokens may be traded without permission 24/7.

These products are already popular among a small group of digital asset users. Our on-chain structured product captured more than $550 million of total value locked (TVL) at the peak of the bull market in 2021.

The current bear market may have slowed growth in this sector. However, recent increases in digital asset prices and changes to the DeFi/TradFi landscape indicate that momentum is returning in our space. BlackRock’s ETF for spot bitcoin and Grayscale ETFs for spot Ether are on the verge of approval in the U.S., which will increase awareness and stimulate demand. We believe on chain indexes will be more appealing to a global on-chain user base because they offer increased transparency, enhanced safety, global accessibility and composability.

We’re very bullish about the potential of on chain diversified indexes. Currently, this nascent segment is small, only making up.07%, but it has the potential to grow rapidly in the future. Advisors will need to be familiar with this growing category in the coming years, as more people look for access to digital assets. This area is covered in the Index Coop white paper on the state of on-chain structured products market.

Ask an Expert

Q. What are the implications of a bitcoin spot ETF being approved by the SEC for other popular cryptos?

I believe there will be an interest in ETH but I do not see a scenario that there will be a rush to launch ETFs around every topic. It is expensive to create an ETF, which will deter many from entering the ETF industry.

Q. Q. Do you think this is a sign of a more positive attitude towards crypto or if it’s mainly driven by the anticipation of an ETF for bitcoin?

The HODLers, those who have held BTC for a long time and continue to hold it, are the ones that I believe will generate the most interest in the BTC ETF. They aren’t the natural sellers, but they hold on to their BTC and continue to sell scarcity. Demand for the bid has caused significant upticks in the daily market.

Q. What other uses of cryptocurrencies have caught your attention besides payments?

Tokenization is the hot topic of today. Many projects are using blockchain to facilitate smoother transactions in many industries. I won’t go into specifics about the blockchain or projects, but we have seen that the tokenization is solving real-world problems. The tokenization of assets is solving real world problems in areas such as commercial real estate, supply-chain logistics, ISPs, data governance in social media and HELOC origination.

– Mike Cavanaugh Regiment LLC

Continue Reading

Blackrock receives seed funding for ETF.

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Bradley Keoun is the editor.