I’m new to this forum but I’ve been following Centrifuge, Goldfinch, Maple Finance and other protocols for a while now and also been discussing $REAL with @photonscapital and @sidhemraj
I currently work as a product lead at an institutional investment firm that manages $1+ Trillion with $500 Billion in fixed income investments. Structured products such as ABS, MBS, CMBS, CLO, etc. constitute approximately $30 Billion of the investments within fixed income at my firm.
Reading the posts on this forum, I agree with a lot of excellent points that have been made about the opportunity and potential for $REAL. I can’t stress enough the size of the opportunity here, so I wanted to share my thoughts, some of which have already been posted on the forum by others.
The structured products market is huge ($7+ Trillion) and plays an important role in the economy by packaging debt into investable securities with various return-risk profiles; this enables institutional investors such as pension funds to participate in AAA rated senior tranches of a structured product, and enables other institutional players such as hedge funds with a higher risk appetite to participate in junior tranches that are high yield securities.
Creating structured products is a long (3-6 months) and inefficient process with multiple players (lawyers, administrators, rating agencies, etc.) that each charge a fee for their services. Not much has changed in the securitization process since the first MBS was created in the 70s and the securitization of debt as CDOs started in the 80s. The creation of a structured product and administering is still a very manual process.
Institutional investors consider the structured product market to be:
Complex: these are securities that pool loans from multiple borrowers into a hierarchical structure with
multiple tranches and follows a waterfall payment model for distribution of repayments.
Inefficient: this is a result of the complexity I mentioned in addition to the large amount of data required
to analyze structured products. Valuation inefficiencies are also caused by the lack of a consensus
method to value structured products. Rating agencies are not reliable in evaluating the risks of
structured products. The financial crisis of 2008 is the strongest evidence of rating agencies not being a
reliable evaluator of credit risk.
A complex and inefficient market is an opportunity for return alpha to institutional investors. Structured products also cater to the mandates of various institutional players by offering a tranche that fits their return-risk profile in a low yield environment.
Disrupting the structured finance and private credit market is a huge opportunity for DeFi protocols such as Centrifuge, Goldfinch, TrueFi, Maple Finance, etc. Simply put, these protocols are essentially creating structured products by leveraging the power of blockchain.
So, why create structured products on-chain? I believe there is a very good opportunity to simplify the securitization process, to efficiently manage and administer structured products and improve transparency by providing data that enables easier analysis of structured products.
Structured products and private credit funds are generally less accessible to individual investors and are currently almost exclusively marketed to institutional investors. I strongly believe that $REAL is an opportunity for individual investors to invest in stable, lower risk and higher yielding securities as an alternative to risky (volatile) investments in non-real-world digital assets and low yield traditional securities. As the volume of structured products created on-chain grows, I expect to see participation from traditional institutional investors simply because this is an efficient, simpler, transparent, and attractive alternative to traditional debt securities.
I’m super excited about the potential for structured products created on DeFi protocols and the opportunity for the $REAL token to generate attractive yields. With $REAL, we finally have an institutional grade product that is available to individual investors.