The Rise of On-Chain ETF Products: An Analysis of Haya's H20 Index

On July 23, the SEC officially approved the S-1 applications of multiple ETF issuers, allowing the Ethereum spot ETF to be listed for trading. Initial trading is expected to begin on Tuesday morning (Beijing time tomorrow).

Imagine if ordinary investors could complete investment transactions in cryptocurrency asset ETFs on-chain through simple NFT minting or token swaps in one stop; this would be a very attractive scenario. This is exactly the goal that Haya is striving to achieve.

Since October 2023, spot Bitcoin ETFs have become one of the core factors driving the market rebound. Especially after the SEC allowed Ethereum spot ETFs to be listed for trading on July 23, market sentiment was reignited. However, crypto ETFs still pose obstacles for many ordinary investors looking to gain exposure to crypto assets: high entry barriers, expensive fees, complicated trading processes, and currently limited to the two mainstream options of Bitcoin and Ethereum, failing to cover a broader range of growth targets with more Alpha.

Haya keenly detected this incremental market demand and is committed to creating a more friendly, convenient, and low-threshold on-chain crypto ETF investment environment for ordinary investors, enabling more ordinary investors to participate in crypto asset investment and share the dividends of market development.

The surge of crypto ETF investment is in full swing

An ETF, as an open-end fund that can be freely bought and sold on a stock exchange, allows users to achieve portfolio allocation across an entire industry or market through a basket of assets, without the need for in-depth knowledge of specific assets, but instead based on an understanding of industry development trends. This approach enables users to gain "fuzzy correctness"—to obtain near Beta industry net growth returns and share in the growth dividends of the overall crypto market.

Currently, both the United States and Hong Kong have launched influential crypto ETFs mainly focused on Bitcoin and Ethereum, but there has not yet been an index crypto ETF.

According to statistics, as of July 22, 2024, the total net asset value of 11 U.S. Bitcoin ETFs exceeds $60 billion, with an ETF net asset ratio of 4.61%. The historical cumulative net inflow has exceeded $17 billion, setting a new historical record. At the same time, the total asset management scale of 6 Hong Kong virtual asset spot ETFs exceeds $350 million.

The Bitcoin spot ETF in the United States has reached a scale of over $60 billion in just about half a year, fully demonstrating the enthusiasm of the market, especially among off-exchange incremental users, for crypto assets. However, the high entry barriers, high transaction fees, and complex trading processes of traditional crypto ETFs still hinder many ordinary investors from participating, and they also fail to cover a wider range of growth targets with greater Alpha, such as BNB, SOL, and TON.

In the context of an increasingly diverse range of on-chain crypto asset categories and quantities, the on-chain ETF form of crypto portfolio allocation targeting different asset categories and different track directions has become increasingly important and necessary. Haya is precisely targeting this area, committed to providing ETF-form crypto investment products on-chain, simplifying the entry threshold for investors into the crypto market, and helping users easily share the long-term, stable, and efficient growth dividends of the crypto market.

H20: The First Index On-Chain ETF Product

Haya's H20 is the first index on-chain ETF product, composed of 20 constituent tokens, which can be subscribed and redeemed at any time. Users can track the performance of quality Tokens in specific areas of the blockchain through subscription, trading, and redemption operations of the ETF product, achieving diversified investment goals.

The selection of the 20 component tokens for H20 follows a rigorous screening process:

• Selected based on market capitalization and 90-day cumulative trading volume to ensure representation of the most important and actively traded assets in the market.
• The weight is determined by market capitalization and adjusted based on factors such as circulating supply and trading volume, with a maximum weight limit of 25% for a single component token to prevent excessive concentration.
• Rebalance once per quarter to reflect changes in market conditions and ensure representation of the current cryptocurrency landscape.

The first batch of 20 constituent tokens includes BTC, ETH, BNB, SOL, DOGE, TON, ADA, SHIB, AVAX, TRX, DOT, LINK, NEAR, MATIC, LTC, UNI, RNDR, APT, FIL, ARB. Among them, Bitcoin and Ethereum each account for 25%, cumulatively reaching half of the weight, ensuring that the index has both the Beta as a ballast and can share the Alpha dividends of the other 18 tokens.

Based on historical backtesting data, the overall net value of H20 perfectly aligns with the overall cyclical trends of the cryptocurrency industry, not only significantly outperforming the overall performance of the S&P in the U.S. stock market during the same period but also surpassing the returns of holding only BTC.

The benchmark date for this index is May 19, 2024, with a basis point of 100. As of July 21, the latest net value is 105.23, achieving a return of over 5% in just two months.

H20 Dividend Participation Form

H20 is the first index on-chain ETF product launched by Haya. In the future, Haya plans to launch multiple crypto concept ETFs based on the weight of quality assets in different fields. Haya has partnered with the Singapore ETF service provider Enlighten Tech, which is responsible for the global compliance issuance of the crypto ETF. Enlighten Tech is working with Malaysian financial institutions to apply for compliant ETF products and is advancing in markets including other Southeast Asian countries, the Middle East, Brazil, Europe, and North America.

H20 will also become a key component of the Pan Haya ecosystem in the future (index fund H20, stablecoin HAI, DeFi platform Haya). The functions of H20 include but are not limited to: serving as an over-collateralized asset for HAI issuance, participating in liquidity mining LP to earn rewards, and rights to transaction fees/clearing fees and other expenses.

Since the H20 smart contract is deployed on Arbitrum, assets on the Arbitrum chain (such as USDT, USDC, ETH, and WETH) can be used to obtain H20 shares.

Users can hold ETF assets on-chain through H20 in two main forms (both with a fee of 0):

1. Minting: Users can directly convert a basket of tokens into corresponding ETF shares (in token form) through a smart contract.

2. Buy: Users purchase completed ETF shares (in token form) from other minters or holders through the DEX.

The redemption implementation logic is opposite to the two implementation methods of minting, which grants users the power to freely combine assets. Any user can create a cryptocurrency ETF and accept user fund injections.

Conclusion

The market tends to overestimate the short-term effects of new things while underestimating their long-term impact. Based on the diversity, operability, and programmability of the Web3 ecosystem, DeFi products have long been stacked together like Lego blocks, creating innovative and diverse financial products. This means that for an increasing number of incremental crypto users, they need to face dazzling learning costs and investment thresholds.

At the same time, cryptocurrency ETFs listed on traditional securities markets such as NASDAQ are essentially traditional securities trading, which has latency in both portfolio creation and trading compared to the 24/7 continuous trading and rapid innovation of the on-chain world.

Therefore, how to help crypto users freely create portfolios on-chain, such as a package of new public chains, DeFi tracks, or even more segmented scenarios, while directly enabling instant and simple multi-exposure asset allocation, is a topic that the crypto world needs to seriously consider in the face of incremental users.

Decentralized ETF platforms like H20 under Haya more professionally meet such needs, attempting to provide service products for simple asset allocation directly on-chain for a certain track or sub-direction, which is worth continuous attention.