“Be prepared to lose all your money” has been the common advice for crypto traders. What if you are guaranteed to keep all your money while having the potential to get 50% APY or higher? With principal protected products, the advice should be changed to “be prepared to lose all the profit”.
In traditional finance, a principal protected note (PPN) is a structured finance product that guarantees a rate of return of at least the principal amount invested, as long as the note is held to maturity. A PPN is structured as a zero-coupon bond – a bond that makes no interest payment until it matures – and an option with a payoff that is linked to an underlying asset, index, or benchmark.
Reproduce the Concept in DeFi
With the adoption of DeFi zero-coupon bonds such as Notional Finance, it is possible to create a principal structured product by packaging the bond and options. For example, suppose you have $1000 USDC and you are bullish on ETH. The current price of Notional Finance’s fUSDC which expires in 90 days is $0.95. You can spend $950 USDC to buy 1000 fUSDC, and $50 to buy out-of-money ETH call options. If ETH price has risen after 90 days to above the strike price of the call option, you can exercise your option to get profits. On the other hand, even if the ETH price does not go up after 90 days, you won’t lose anything since 1000 fUSDC will be worth $1000 at that time. The cost of the call options is covered by the fixed interest rate of zero coupon bond.
Vovo Principal Protected Products
Is there a way to re-innovate Pincipal Protected Prodcuts(PPP) as a native DeFi product rather than just copying it over from traditional finance?
Absolutely. With the composability and transparency of DeFi, the product can be constructed in a more flexible and potentially more profitable way. Instead of buying fixed interest rate products to earn yield, Vovo PPP does direct yield farming into pools and collects rewards, which is more flexible and free from any locked period like normal fixed interest rate products. Periodically, Vovo Principal Protected Product collects and invests whatever daily floating profit into high risk/reward products.
Also, while traditional product normally buys options to generate profit with a fixed expiry, Vovo has the flexibility of investing in products like high leverage perpetual swaps(e.g., 20x leverage), which has a better on-chain liquidity than options and their profit can be collected anytime rather than only at expiry. Vovo protocol can rebalance the leverage position daily to harvest the trade profit and reinvest into yield farming pools. This could potentially bring more profit compared to traditional principal protected products if the trade direction is correct.