Structured Floor Tokens

Structured Floor Tokens (SFT) are ERC-20 tokens that hold different assets, akin to a fund. Typically, SFTs just like Structured Notes, are made up of:

Debt + Derivative

The key difference from a fund is that it expires (although certain funds in tradfi also do expire when it is wind down), as the option (derivative) in it expires.

  • If the option expires worthless (out of the money = OTM), a floor value is returned to the SFT holder.

  • If it's in the money (ITM), the SFT holder’s return will depend on the participation rate.

  • Floor value is returned at maturity (= expiration) of the SFT.

An SFT has a floor but no ceiling, which means that if the underlying goes up in value, you fully participate in the upside without a cap.

What is a participation rate?

It’s the level of price exposure that an option provides on the underlying asset, in this case ETH. E.g.: If an SFT gives you a participation rate on ETH of 20% then:

  • If ETH goes up by 50% from strike price of $2,500 at maturity, you'll profit 10%

  • If ETH < $2,500 at maturity, you'll get back the floor value (regardless of the price paid)

  • If ETH goes up by 50% from strike price of $2,500 before maturity, then the payoff may be higher as the embedded option still has time value (on top of intrinsic value).

  • SFT price can go < floor price as yields have not been fully realised yet

What are the risks for SFTs?

Mainly 3 type and they are:

1.Opportunity cost

  • If you invest all your capital to buy ETH, you may earn some yield that is not considered here (although is partially embedded in the cheaper option as it should lower the forward rate)

  • If you sell all your assets for stables you earn from yield farming. So if ETH is ranging, you’re better off putting stables in farms.

2.Assumption risks

The SFT assumes that a certain yield from the Yearn vault is fully realised at maturity. If realised yield is lower than that published on Yearn website, then the floor would be lower

3.Smart contract risks

Where can you trade SFTs now? The Marketplace (a tab on our Dapp is visible) is a decentralized exchange (DEX) within the DEXTF Dapp to buy, sell and redeem DEXSTs (Decentralized Structured Tokens). This is a quote-based Marketplace and hence not subject to impermanent loss (IL). We launched in October the very first product to understand market interest. Naturally, some problems had arisen: 1. Liquidity 2. Pricing In particular, Uniswap-like LP are not suitable for assets with:

a) Non-linear payoffs (if market goes down you don't lose much and if market goes up you gain a lot or vice versa) and/or b) Time decay (the embedded option in our SFT loses a bit of value every day). Both these features tend to exacerbate impermanent loss (read here what IL is) and hence lower the liquidity and makes pricing less reliable. In an initial phase, we will maintain this Marketplace and the team will provide the liquidity but the plan is to open it up soon and allow liquidity providers (this will be very interesting for the arbitrageurs in DEXTF) to participate.