From trust to verifiability: rethinking structured products with Bitcoin

What are structured products?

At their core, structured products are built around a specific financial objective. The process starts with that objective, and different financial instruments are then combined to create a payoff that meets it, whether simple or complex.

Consider a simple example. You hold Bitcoin and want to generate income from your position, and you're willing to give up some potential upside in exchange for that income. One way to achieve this is by combining a long Bitcoin spot position with a short out-of-the-money call option. The result is a covered call strategy: a structured payoff designed to generate option premium income while retaining exposure to Bitcoin, up to a certain price level.

This is the essence of structured products: combining financial building blocks to create tailored financial outcomes. While the underlying financial engineering can be relatively straightforward, the infrastructure required to deliver these products has traditionally been anything but.

The traditional model: trust in the issuer

Consider this simplified lifecycle of a traditional structured product. A client approaches their relationship manager at a bank with a specific investment objective. The relationship manager works with the structuring desk to design a suitable product, while the trading desk manages the associated hedging activities. The client purchases the product and receives a contract defining the terms of the investment and the rights they hold against the issuing institution.

The client holds a contractual claim, but has limited visibility into what stands behind it. They must trust that the issuing institution has sufficient capital to meet its obligations, that its risk management and hedging strategies are adequate, and that it will be able to honor its commitments, even under adverse market conditions. This is issuer credit risk, and it is not theoretical: when Lehman Brothers failed in 2008, holders of its principal-protected notes found themselves among its unsecured creditors.

This dependence on the issuer creates the need for extensive regulation, supervision, and institutional safeguards to protect investors, and these protections come at a cost. Capital requirements, legal complexity, compliance obligations, and operational overhead contribute to high barriers to entry. The result is a market largely dominated by established financial institutions, with limited room for new participants, competition, and innovation.

What if we could fundamentally reduce the amount of trust required?

Bitcoin changes the equation

Bitcoin, together with advances in cryptography and secure computing, opens the door to a different model. A Bitcoin balance can be independently verified onchain. A program running inside a Trusted Execution Environment (TEE) can be subject to cryptographic attestation, allowing participants to verify exactly which code is running within a protected environment. Combine verifiable assets with verifiable execution, and a new model for programmable financial products becomes possible.

Without relying exclusively on an institution's promise to fulfill its obligations, we can design financial products whose collateral, execution rules, price inputs, and settlement mechanisms are independently verifiable.

Let's return to our covered call example. With the right architecture, the same economic payoff can be delivered through infrastructure that allows participants to independently verify key aspects of the product:

• Reserves and collateral: Verify the Bitcoin backing the product and the collateral available to support its obligations.
• Execution rules: Inspect and verify the program governing how the payoff is calculated and executed, and match it against the code attested inside the enclave.
• Price data: Verify the prices the payoff settles against, sourced from identified oracle providers whose data participants can check.
• Secure key management: Verify, through the security architecture and attestation mechanisms, that the signing keys used to execute the agreed payoff are generated and protected within the enclave.
• Recovery mechanisms: Understand and verify the fallback procedures designed to recover collateral in the event of failures or disputes, including a failure of the enclave itself.

The shift is significant: from blindly trusting an issuer's promises to independently verifying the mechanisms designed to fulfill them.

Beyond Bitcoin investment products

The opportunity extends far beyond products offering exposure to Bitcoin. Bitcoin is more than an investment asset; it can also serve as a currency and settlement instrument. This means that the same infrastructure can support financial products linked to entirely different underlying assets and economic objectives.

Consider an oil producer seeking financing linked to future oil prices, or an industrial company looking to hedge its exposure to rising energy costs. These objectives could be addressed through structured payoffs linked to oil prices, using Bitcoin as the collateral and settlement asset. Because Bitcoin collateral moves independently of oil, such products may need overcollateralization or margining, and those rules can be enforced by the same verifiable execution as the payoff itself.

Such products would no longer necessarily require the same vertically integrated institutional infrastructure used to manufacture and distribute traditional structured products. The underlying principle remains the same: start with a financial objective, combine the necessary financial building blocks, and deliver the resulting payoff through verifiable infrastructure.

From closed institutions to an open financial ecosystem

This transition has implications that go well beyond the individual product. Traditional structured products are typically created, managed, and distributed within tightly controlled institutional environments. A verifiable infrastructure creates the conditions for a different market structure: an open ecosystem where specialized participants can collaborate without having to place complete trust in a single central intermediary.

In such an ecosystem, different operators can focus on what they do best. A market maker can provide liquidity and pricing. A vault curator can design and manage investment strategies. An oracle provider can supply the price data that payoffs settle against. A distributor can bring products to clients. Wallet providers and custodians can offer different approaches to asset management and user experience. Application developers can create entirely new ways to access and interact with financial products. Each participant can provide services to others, building on shared infrastructure and independently verifiable rules.

Without requiring every new entrant to replicate the capabilities of a full financial institution, this model allows specialized businesses to emerge, compete, and innovate. As barriers to entry decrease, the range of financial solutions on offer can widen considerably.

Arkade: building the infrastructure for verifiable finance

At Ark Labs, we are building Arkade, a set of tools for creating programmable financial products. Market makers, vault curators, distributors, and wallet providers can each use these tools independently, and the connections between them form through shared, verifiable rules, not through a platform at the center.

Applied to our covered call, it works like this. A contract defines the payoff and its settlement conditions. The Bitcoin collateral sits in a vault governed by that contract. The signing keys live inside an attested enclave and are used only as the contract allows. Prices come from oracle providers, with the possibility of applying simple techniques to reduce trust in any single dependency, such as taking the median of several providers or using time-weighted averages, and the recovery mechanisms define how collateral is reclaimed if something fails. Each of these pieces can be checked by the participants who rely on it.

By leveraging Bitcoin's verifiability together with advances in programmable execution and cryptographic security, our goal is to enable a financial ecosystem where products can be tailored to sophisticated objectives without requiring blind trust in a single institution, and where specialized operators compete on the quality of what they build, not on institutional access.

Structured products have always been about creating financial solutions tailored to specific needs. What is changing is the infrastructure through which those solutions can be built and delivered, and at Ark Labs we are building it to be open, programmable, and verifiable.