Structure.fi: Bringing TradFi assets into blockchain through Tokenization
Founded in 2020, Structure.fi introduces traditional assets to the blockchain in the form of tokens. It is a centralized trading platform that offers 24/7 trading of cryptoassets, US stocks and ETFs across the globe with fractional trading support on a clean, intuitive mobile UI rarely seen in Web3 applications. Through tokenized traditional assets, Structure.fi helps to expand the current range of DeFi assets and improve the efficiency of their use.
Highlights of Structure.fi
Introduction of traditional financial assets into blockchain networks, allowing for diversified trading variety
For investors, compared to other trading platforms that only provide a small number of asset classes (eg: Binance only provides cryptoasset trading, Tiger and Futu only provides traditional financial trading assets), Structure.fi not only allows for cryptoasset trading but also provides Stock and ETF trading to cover both traditional financial and decentralized financial products, enabling a richer trading variety and experience for investors. Structure.fi has also established an offline equity custodian to correspond with the on-chain tokenized assets.
Microtransactions and long-term narratives: Stock tokens in DeFi
Structure.fi is friendlier to small and medium-sized investors as it does not have a minimum transaction threshold nor a fixed transaction fee. By tokenizing US stock assets, holders of small stocks can lend stock tokens to obtain yield. At the same time, applying traditional financial assets such as tokenized stocks to DeFi application scenarios will give Structure.fi an even greater narrative.
Greater market scale, breaking through time and geographical restrictions: 24/7 global trading
Due to the tokenization of equities, Structure.fi supports 24/7 trading and can cover greater global markets compared to platforms such as Robinhood, WeBull and eToro, which have limited trading hours and are subject to different regulatory policies in different countries.
Risks of Structure.fi
A. Transaction depth of trading pairs,
B. Timeliness and transparency of equity custodian disclosures,
C. Security of smart contracts
Main Content
I., Industry size and Potential
A. Market size and Classification
B. Industry growth enablers: no licensing required and higher DeFi yields
— 1) No licensing required on blockchain networks; borderless and de-KYCed, promoting the tokenization of traditional financial assets
— 2) DeFi yield on the blockchain network is much higher than that of the traditional world, facilitating the inflow of traditional assets into DeFi
C. Impediments to the development of the industry: liquidity, collateral mechanisms and rights protection mechanisms
— 1) Liquidity challenges: how to boost trading volume in the early stage?
— 2) Collateralisation mechanisms: how to balance growth and risk in the system?
— 3) Rights protection mechanisms: how to help users understand and agree with the rights of tokenized assets?
II., Analysis of several stock token models
A. Equity Custodian model
B. Brokerage model
C. Crypto-asset collateral minting model
III., Comparison of basic information of platforms offering cryptoassets and stock trading
A. Centralized stock trading platforms generally have US stock entities as collateral and better reputation
B. The blockchain network can cover the global market and support fractional trading of assets
I., Industry size and potential
A. Market size and breakdow
According to Foresight Ventures, in 2020, the traditional stock market was worth US$56 trillion, the derivatives market will be approximately US$840 trillion and the bond market will be US$119 trillion. In contrast, according to CoinGecko, the current cryptoasset market size is only US$1.1 trillion and DeFi assets worth US$0.1 trillion. If traditional financial assets are tokenized through smart contracts, this may potentially bring a huge increase in assets for blockchain networks.
We assume that 5%, 10% and 15% of the traditional assets will enter the blockchain through tokenization. It is estimated that US$50.75 trillion, US$101.5 trillion and US$152.25 trillion of traditional financial assets will enter the blockchain network, which is an approximate increase of 461%, 9227% and 13840% in existing crypto assets. Thus, the total size of crypto assets may increase to US$51.85 trillion, US$102.6 trillion and US$153.35 trillion respectively based on different assumptions.
B. Industry growth enablers: no licensing required and higher DeFi yields
1) Blockchain networks are permissionless, borderless and de-KYCed, facilitating the tokenization of traditional financial assets
One of the characteristics of blockchain networks is its borderless nature, where users can use the decentralized applications (dApps) on the blockchain from any part of the world as long as they have internet access. Additionally, compared with traditional financial assets that impose strict restrictions based on user identity information (such as geographical restrictions for equity investors in the US and China), dApps enable users to access investments without having to endure complicated procedures such as account opening, capital verification and identity verification.These processes usually end up deterring a significant number of individual investors.
Trading cryptoassets, on the other hand, does not require KYC verification, so the participation threshold for trading financial assets such as stock tokens and onchain derivatives is greatly reduced, which is more conducive to the participation of ordinary users.
2) DeFi returns on the blockchain network are much higher than those in the traditional world, promoting the flow of traditional financial assets into DeFi
When traditional financial assets are tokenized, they can participate in various DeFi activities in the blockchain network. Compared to traditional finance with bank interest rates of around 1% or even negative, cryptoassets have yields of up to 10% or more. While there are risks associated with higher yields in cryptoassets, we believe that the level of risk control varies greatly from project to project, so there are projects with higher yields but more controllable risks to choose from. There is a clear gap between such projects and the rate of return provided by traditional finance, which will cause funds in the traditional world to flow to the blockchain network with higher yields. Buying stock tokens on the blockchain network is one such option, and should promote the development of the stock token market.
According to Defillama data, among the top 10 TVL pools, the yields of the top 3 pools are 8.54%, 5.44% and 3.9%, well above the zero interest rates that the Eurozone has had for a long time.
C. Impediments to the development of the industry: liquidity, collateral mechanisms and rights protection mechanisms
1) Liquidity challenges: how to boost trading volume in the early stage?
The problem of protocol liquidity has always been a difficult aspect of the industry’s development, and is one of the main factors hindering the development of such markets. The liquidity of tokenized Amazon ($AMZN) on Mirror Protocol is only $1.65 million UST, while in traditional finance, the total market value of AMZN is $1.37 trillion USD.
The weak liquidity of stock tokens is a common phenomenon. Due to the limited trust in the security of smart contracts and the stock tokens themselves, the enthusiasm of users to participate in trading is still weak. Therefore, how to attract and motivate users to participate in the trading process has become a difficulty and pain point for the development of the entire industry.
2) Collateralisation mechanism: how to balance growth and risk in the system?
By reviewing the whole process of the collapse of Luna and its stablecoin UST, we believe that the Luna Foundation had insufficient risk control awareness, flawed design and inadequate measures taken during the project operation process. The aspects that were not properly controlled for risk were: the scale of stablecoin issuance was too large, the volatility of collateral Luna tokens was too high and the purchase pace of the second reserve token BTC was not well controlled.
The introduction of traditional assets into the blockchain network through tokenisation also requires collateral assets. The choice and setting of the types of collateral assets, and the mortgage rate, will have a significant impact on the entire system.
Our statistics show that several centralized trading platforms such as Structure.fi and FTX use physical stocks to issue stock assets as collateral with a collateral rate of 100%, while decentralized trading platforms Gains Network, NasDex, Mirror Protocol and Beyondfi have a collateral rate of 110%, 150%, 150% and 300% respectively. Out of these designs, the 1:1 collateralised tokens are safest; the overcollateralized stock tokens still face considerable risk due to high volatility.
3) Rights protection mechanisms: how to help users understand and agree with the rights of tokenized assets?
The rights and obligations of traditional financial assets are guaranteed by the laws of the issuing country. For example, holding shares of a company can afford rights stipulated in the securities law, such as dividend rights, voting rights, etc. However, tokenized stock assets raise the following questions:
a)What are the rights of stock tokens?
b)Are the dividend and voting rights of the traditional financial system enjoyed in stock tokens?
c)How are dividend and voting rights secured? How is it delivered to the users?
d)How do users value stock tokens? Is it only a contract with transaction value, or are there other inherent meanings?
II., Analysis of several stock token models
We have analyzed how some projects on the market deal with the relationship between stock tokens and stock entities. Generally speaking, there are three main models:
A. Equity Custodian model: platforms buy US stocks and establish an equity custodian partnership with a third-party traditional institution
Examples include Structure.fi and FTX, where FTX has partnered with Canco GmbH (FTX Switzerland) as its stock custodian. Canco GmbH (FTX Switzerland) is an institution regulated by the Swiss financial sector and is licensed to provide tokenization services to other institutions, so users must undergo KYC2 certification on FTX Pro and pass the compliance requirements before trading. The platform will send dividends directly to the user’s FTX Pro account. However, stock token holders do not have the right to vote and participate in meetings, which are held by the stock custodians on their behalf. Users can choose to transfer stock tokens back to stock entities, so they have full legal rights.
With this type of platform, as the stock tokens are issued by the team, we believe that the rights of the stock tokens are backed by the reputation of the company/project and are not guaranteed by the law, so the credibility of the project is very important.
B. Brokerage model: direct purchase of stocks
Regulatory-compliant brokerages such as Robinhood and Webull allow users to enjoy all the rights to the shares as guaranteed by law, but do not offer any form of tokenization, thus limiting utility by preventing these assets from being used in DeFi.t
C. Crypto asset collateral minting model: generating stock tokens by collateralising crypto assets, which are usually governance tokens, stablecoins and liquidity pairs.
Models such as Gains Network, NasDex, Mirror Protocol and Beyondfi basically issue their own governance tokens first, expanding the total size of the governance tokens and thus collateralising the stock token issuance.
Let us take Mirror Protocol as an example:
The advantage of this model is that it does not require physical equities as collateral, and the scale of issuance can grow rapidly. However, since the collateral is its own governance token or related liquidity pair, there is considerable volatility, which affects the value of the collateral. The overall market value further affects the scale and liquidity of the equity tokens, and such projects will always eventually blow up in a rapid crash, like Luna and UST under huge selling pressure and panic.
For example, Gains Network stock tokens are backed by DAI collateral and provide liquidity through LP pairs of DAI and GNS tokens, which will be limited by the market value of the GNS governance token and affect scale. Beyondfi is backed by a governance token BYN to mint the stablecoin USDb, so the size of the issuance is also limited by the size of the governance token BYN. The volatility of BYN and GNS governance tokens also directly affects the scale of the stock tokens.
III., Comparison of platforms offering cryptoassets and stock trading
According to our research, platforms that offer trading in both crypto assets and equities can be divided into two categories: Centralised and Decentralized. Centralized trading platforms include Structure.fi, FTX, Robinhood, eToro, Plus500, Oanda, Webull, Juno Markets, while Decentralized trading platforms include Gains Network, Nasdaq, Mirror Protocol and Beyondfi.
Additionally, we also found some platforms that offer both cryptoasset trading and tokenized forex trading, such as Kwenta on Optimism using the Synthetix framework, Onomy on Polygon and Cosmos, Definity (deployed on CHX, BSC, Cardano, Ethereum and Polkadot), Jarvis Network on Polygon and BSC, which all aim to bring traditional financial assets onto the blockchain.
A. Centralized stock trading platforms generally have US stock entities as collateral with better reputation
Centralized stock token trading platforms generally entrust a third party to manage them in the form of US equity custodian, or directly buy stock entities, while some other platforms offer contracts for difference (CFDs) such as eToro, Plus500, Oanda and Juno Markets. Since CFDs are contract products, they do not require the purchase of physical assets as they do not involve an actual asset, and are thus subject to conflicts of interest and instability.
B. The blockchain network can cover the global market and support fractional trading of assets
Compared to trading platforms such as Robinhood and Webull that use existing centralized networks, platforms built on blockchain networks can leverage the borderless nature of blockchain to cover the network reach and market space. Concurrently, the 24/7 nature of trading hours and support for fractional equity tokens can expand demand scenarios, such as for low-income investors.
In terms of price anchoring mechanism, the price-feeding mode of oracles is generally adopted, which helps to pass price data from traditional financial markets into the blockchain network and is anchored at the target price through contraction or expansion of collateral assets.
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Written by Evan Gu
