Empowering Structured Products on Solana • A Friktion Deep Dive
A deep dive into what are structured products in DeFi and how Friktion is bringing structured products to Solana, its product offering, community, and much more.
Today, our focus project is solving one of the biggest problems in the capital ecosystem i.e Yield. Everyone with their capital wants to generate maximum yield while taking a minimal risk, whether be it a retail investor like us or big VCs investing in early-stage startups for the maximum returns.
Friktion, one of the leading DeFi protocols on Solana is also trying to solve for yields. How? By offering access to DeFi powered, risk-adjusted return generation strategies for DAOs, individuals, and traditional institutions through institutional-grade structured products and risk management. It introduces cool concepts like Volts and Circuits into the DeFi ecosystem, which offers both active and passive portfolio management strategies.
You might have heard about Conservation of Energy which states that energy can neither be created nor destroyed; energy can only be transferred. As you know with great power comes great responsibility, and with those yields come great risks. Friktion believes that Risks can never be destroyed, only transformed. So here, Friktion gives you those sustainable yields through their structured products optimized for specific risk and reward profiles. But, What are volts, How do they work, and How do you get the most out of Friktion? let’s find out. 👇👇👇
Let’s first begin with what problems retail investors face📈
Problems in building a Crypto portfolio:💰
While more than 300M retail investors have now access to crypto-assets, very few have access to structured and complex DeFi products. Even, within the rails of traditional financial services, such products have a few barriers to participation. There are a few reasons for that:
(1) Accessible only to High Net Worth Individuals, i.e. more than $10M+
(2) Portfolio manager’s discretion
(3) Lack of transparency into risk methodologies.
Now, these are some of the portfolio management problems, faced by retail investors. But how, do they generate returns from their portfolio. There are other two ways:
- Increase in the price of the Assets
- Investing in yield-generating Assets
The first option is quite volatile and not everyone has the risk appetite to expose themselves to such assets. The demand for fixed income assets that generate sustainable yields was needed not just for the traditional finance world, but also for the crypto world.
Yield Generation in Crypto:
There are multiple ways yields are generated in the DeFi world:
- Lending: Since DeFi has opened whole new possibilities for borrowing and lending in a completely decentralized way. Retail investors who are holding tokens, can simply lend them in these protocols and earn interest.
- Providing Liquidity: One can become a Liquidity provider (LP) in Decentralised Exchanges (DEXs) like Uniswap, and earn yield for providing liquidity.
- Staking: For Proof of Staking (PoS) networks like Solana, validators can stake their tokens and earn staking rewards. Once can stake their tokens to these validators, and receive yield.
While all of these are great as they offer decent yield with low risk, there’s one big problem with all these yield strategies: Sustainability.
Typically in DeFi, during the early days, these protocols offer insanely high APYs (Annual Percentage Yields), which are mostly paid out of their reserves in their native tokens. When the native token’s price starts decreasing, APY starts decreasing and the users start shifting to a newer DeFi protocol that offers higher APY.
What’s the Solution for Sustainable Yields?
Remember, we mentioned earlier that services like portfolio management or a hedge fund are out of reach for many. These are the solution that promises high yields while having lower risk. But how do they achieve this? One way, they achieve this is by investing in structured products!
But, What are structured products?
They are financial products, whose performance or value is linked to that of an underlying asset, product, or index. These may include market indices, individual or baskets of stocks, bonds, commodities, currencies, interest rates, or a mix of these. Structured products aspire to provide investors with highly targeted investments tied to their specific risk profiles, return requirements, and market expectations.
But for our discussion, we will focus on options-based structured products. Options are complex yet one of the most sought financial products in the history of mankind. Big hedge funds on Wall Street run many complex strategies on top of these options to generate high returns while maintaining adequate risks. But as mentioned earlier, there’s a problem: these are only accessible for High Net worth Individuals as it requires good upfront capital.
But, how do options strategies generate high yields? Let’s get started with the basics and then move ahead.
Options basics 💰
Derivatives in simple terms are a bet between two parties about an ‘underlying asset’ without actually owning that asset. Futures & Options are two major classes of derivatives, which derive their value from an underlying asset like stocks, commodities, or even cryptos!
More precisely Options contracts give the choice to the traders to either buy or sell an underlying asset at a specified price on a predetermined date with a fraction of the price upfront. Unlike spot trading which is based on the current market price and has linear returns.
Options allow creating complex and more non-linear returns while having the market view.
So what are the components and entities associated with Options? let’s understand.
As the name depicts, Options are literally the “Option” to buy or sell an asset at a future date! For example, buying Solana (SOL) Options at a strike price of $100 would mean, you will have the right to buy Solana at $100 after 3 months (it’s the expiry), whatever be the price of Solana.
So, if the price of the SOL is $200 after 3 months, a trader will simply buy the SOL at $100 from the options derivatives, and then sell it at $200. Simply, a profit of $100.
Now, if the price of SOL is $50 in the market, the trader wouldn’t like to buy the SOL at $50. He will simply reject the option to buy. This is simply the ‘call option’.
It might seem like, the option buyer is in a win-win situation because they can only exercise options when it benefits them?🧐
Obviously, there’s no “free lunch” in finance. So, every option has a price that the buyer pays to the seller. This is called the premium and is paid regardless of whether the buyer exercises the option or not (You can think of it as the price you have to pay to get into this type of Contract). Let’s suppose, in our example, the premium is $10.
But, why that? Because fundamentally the seller was holding the contract before you who has this choice of exercising them in the future, but as you are taking that from the seller you are paying the seller for that.
Covered call & How it works 🏄
Covered calls are a popular options strategy in which a trader sells an out-of-the-money call option (when the underlying price is below the strike price) on an asset while simultaneously holding the asset.
This strategy allows traders to maintain their existing assets while generating instant yield from the contract’s premium. This strategy is generally employed when your outlook on the assets price is neutral to moderately bullish.
If the price of the asset remains below the strike price at expiry, the options are worthless and the user has earned the full premium as their return for the period.
if the price of the asset exceeds the strike price at expiry then the options will be exercised by their owner at a lower strike price instead of the current market price. As a result, the trader has now sold the underlying asset at a lower price point instead of benefiting from its full price appreciation.
A Covered Call is just one simple strategy. There are literally thousands of complex strategies which can be formed out of options. Now, not everyone has the expertise and time to build such strategies, and hedge their risks.
Just like DeFi is solving access to financial services beyond borders, someone has to solve for the Structured products. Now, Solana makes a natural fit for a variety of financial primitives because it has a distinct advantage of high throughput (TPS) at low transaction costs, and fast settlement rates. And on top of that, the inspiring developer innovation happening there is exciting to experience.
So, who’s building Structured products on Solana?
Enter Friktion ⚡️- THE DeFi portfolio management ecosystem
Crypto asset management isn’t easy, so Friktion offers active and passive strategies to maximize returns while capturing volatility yield in various market environments. And they are called Volts. Not only that, but Volts are also Solana’s first structured products.
Volts are Friktion’s native designed products. They allow anyone to invest and trade structured products with principal protection, yield generation, and volatility in mind. Friktion aims to identify sustainable sources of yield and bring risk management into the DeFi ecosystem!
The Friktion team is cool, so they have introduced fancy terms like Volts, Circuits, Voltage, etc inspired by electrical theory.
Volts are Friction’s native capital allocation strategies, while Circuits provide on-demand portfolio management for DAO Treasuries, and create custom risk frameworks whereas, Volts provide volatility protection and returns in turbulent markets.
Let’s understand them in simple terms.
What are Volts 💡
Volts are simply Structured products on steroids, on DeFi.
Volts identify and capture the best options, futures, perpetual, and spot pricing across on-chain exchanges, market makers, and within the protocol. These yield strategies generate returns across market environments so that anyone can invest in and trade products that are built with principal protection, yield generation, and volatility in mind. Once you have deposited, funds are deployed into the current epoch (cycle) and the Volt becomes your active portfolio manager
High voltage ⚡represents an increased risk which means higher chances of the option being exercised. So for taking on increased risk, expected option premiums are higher, resulting in higher APYs. Simply, it represents a high risk and high return.
The first Volt strategies include Covered Calls, Protected Puts, Volatility Yield, and a custom Hedge for Impermanent Loss.
So there are 4 types of volts, out of which 2 are now live on Friktion and 2 are in the pipeline for their exciting launch, along with their supported assets. Let’s deposit all Volts one by one:
Volt #01 — Income generation
This volt lets you generate income through covered call overwriting, which historically produces higher yields in periods of volatility. So, by focusing on running automated covered call selling, it determines option strikes and expiries algorithmically to maximize your returns and minimize the chance of an option being called or an underlying asset assigned.
Once deposited, funds are deployed into the current cycle and the Volt becomes your active portfolio manager. Your deposits are auto-compounded weekly. And withdrawing funds can be pre-set and claimed once the withdrawal window opens.
But how it happens!
Let’s understand it with an example: Let’s say SOL is currently $100 and we deposited 1 SOL into Volt #01’s covered strategy which is writing a call option at a strike price of $110 expiring in 1 week, collecting a $5 (0.05 SOL or 5%) premium.
As you know, after a week, SOL can either up, down, or stay flat. Let’s take these scenarios:
Scenario 1: SOL is flat at $100 at expiry
The option will expire worthless, and collect $5 from selling the option.
Profit: +5% (+0.05 SOL)
Scenario 2: SOL price falls to $80 at expiry
The call option expires worthless and collects $5 from selling the option.
$5/$80 = (+0.0625 SOL)
Scenario 3: SOL price is above the strike, say $120 at expiry
Deliver 1 SOL for $110 (strike price) which will result in a $10 loss, and collect $5 from selling the option.
$(5–10)/$120 = (-0.041 SOL)
We might seem to lose money from the strategy, but eventually, the value of SOL we had put in this strategy has gone up by 20%!
To summarise, we are earning in SOL in the first 2 scenarios while we will be losing in SOL in the last scenario. Overall, we are in profit or loss, depending on the SOL’s price.
Volts #2 — Sustainable Stables
This volt lets you generate yield on your stablecoin deposits, which auto-compounds weekly just like volt #1. This employs the “Cash Secured Put” strategy, which has a similar payout profile to the “Covered Call”. Traders will sell a put option and maintain enough cash to purchase the underlying asset at the predetermined strike price. This strategy is relatively low risk because a 100% collateral ratio is maintained.
But how does it work
A cash-secured put is where we put up a quoted asset (all of them are USDC on Friktion currently) against an underlying asset. The goal of this strategy is to acquire the stock at a lower price than the market’s offering if the option gets assigned to us.
By selling a cash-covered put, you can collect money (the premium) from the option buyer. Selling a secured put is anticipating an asset’s market value will stay above a certain price.
Upcoming volts
Volt #3 Crab strategy
These volts will look to generate yields from high volatility or sharp price movements and are built to earn returns that are negatively correlated to the market. They will profit from arbitrage between implied and realized volatility.
Volt #4 Hedge IL
This strategy will look to neutralize exposure to Impermanent loss while earning great APYs providing liquidity across Solana. In simple words, impermanent loss incurs when the tokens with high volatility keep fluctuating in value.
Do check out this thread, It explains why they have one of the most advanced product features.
Also If you want to know more about Friktion’s infrastructure, check out their docs.
An electrifying guide to Friktion 🔦
Step 0: Visit app.friktion.fi and connect your wallet (nowadays it’s even lame to say that :p)
1: Depositing your asset
You can deposit assets anytime into desired strategies which will be deployed when the upcoming Epoch begins (Friday, UTC).
Upon deposit, you receive a Volt Token, which represents your ownership of the Volt (think of it as a receipt token).
2: Withdrawing your asset
- Select the “withdraw” tab
- Type the Quantity of deposited asset you may be looking to remove.
Inspect and approve the transaction
You can see all initiated Pending Withdrawals in the Your Portfolio section of the Income page, as shown below:
Note once a withdrawal is QUEUED, your deposits will no longer be auto compounding unless you cancel the pending withdrawal before the Epoch ends.
You can easily track when the Epoch ends on the asset modal as shown below:
Analytics
With Friktion’s best-in-class Portfolio Analytics! you get the best portfolio management experience across CeFi and DeFi with deep transparency and high-quality data. How cool is that!
For more in-depth use cases visit Friktion docs
Future Roadmap: Create a DeFi ecosystem
They don’t have a roadmap per say as the team is constantly shipping lightning stuff ⚡⚡ What you can expect next though is Volt #3 — the crab strategy and more Volts coming up.
Why Friktion might make it Big 🦄
- Because it provides the best risk-return profiles across the board and offers the simplest user experience. That’s the whole value out of Fintech as well.
- UI/UX 🦄
Most of the DeFi apps look very technical. And as the ecosystem is so engineering-heavy that start-ups must often prioritize the underlying tech at the expense of good UI/UX. Good UI/UX is a MOAT!
Friktion takes great lengths to design a sleek, user-friendly experience and deliver that inertia directly to the users.
3. Boosting DAOs by managing the risks of the treasuries 📦
DAOs, as we will see, introduce new dimensions that exceed what the operating principles of a digital cooperative normally surround. In certain cases, this may feel apt, but as some DAOs evolve toward maintaining basic infrastructure, such inequality becomes undesirable. Friktion gives access to institutional-grade DeFi powered, structured products and risk-adjusted return generation strategies for DAOs, individuals, and much more.
Community & DAO 🏌️
Web3 is indeed a web2^(community).
With Decentralized community governance, Friktion wants to align its wide range of stakeholders that interact with the protocol including Retail users, developers, traders, DAO Treasuries, DeFi protocols, Institutions, FinTech Applications, and other service providers, and mature into a DAO, and what they say Taskforces, where the best products can integrate with Friktion products as they launch and offer them to a growing number of DeFi users.
Partners & Backers 🤝
Friktion is backed by some of the top and prominent investors of the ecosystem starting from Jump capital and including the esteemed Solana capital, DeFiance Capital, Pillar, Libertus Capital, Delphi Ventures, Sino Global Capital, and more.
Friktion is rapidly scaling the organization and building out the dream team for growing Friktion into Full-stack portfolio management built to perform across market cycles 🦸.
Things on our watchlist for Friktion
We are waiting for a time where THERE WILL BE NO GENERIC DEFI PRODUCT WITH JUST A NEW UI, Just kidding 😂. (is it getting too real, Yash?)
But there is still room for growth, Improvement, and interesting things to look at. By embracing the ethos of Web3 and DeFi, Friktion looks to transform yield generation for the better.
and here are the things that are on our watchlist for Friktion Labs.
- Product- How can be an effective contribution to the strategies?
- Community- How they can integrate with Friktion products to teams and communities looking to integrate with Friktion?
- UX: How they're able to make it a seamless experience across CeFi and DeFi?
Will that be transparent? How the Data is going to turn around?
And It will be interesting to watch!
Conclusion: Leading Solana DeFi to the Moon 🚀
Friktion is on a mission to transform yield generation for the better. In building a truly decentralized and permissionless protocol for yield generation. Crypto is built by code but composed of people. So as more people, DAOs, and Institutions start using FRIKTION and get those exciting yields with a simple and good User experience, Friktion is on its way to winning big not only in crypto and DeFi but broader than that.
We are not saying DeFi and Friktion are the next big thing, but we are saying useful consumer experiences built on Crypto and DeFi are the next big thing.
Will that happen? How well that’s going to happen? ⏱️
It will be interesting to see…
We are ready with our watchlist 📔 and some electrifying Popcorn 🍿! Are you?
until then…
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That’s all folks!! That was an electrifying deep dive into Friktion ⚡️ and how it is making it big in DeFi.
If we missed something or you have any suggestions and just want to have some interesting conversations around web3, we would love to get in touch— Yash Agarwal and Sitesh.
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References:
Some of the Images and information are taken from Friktion’s official sources and third-party references. If you want to know more you can also read their docs. The information contained herein is for informational and entertainment purposes only. Nothing herein shall be construed to be financial, legal, or tax advice, do their own research before making any decisions. Read the full Disclaimer.
