Holding Based derivatives are smart contracts that hold the underlying tokens and give users ERC-20 tokens as a voucher for the assets that make up the derivative.
Anyone can create (mint) these tokens by putting in the proper proportion of the underlying tokens; however, depending on your volume, it might be cheaper to buy the derivative directly on a secondary market.
Users can also destroy (burn) these tokens and get the underlying tokens back.
Yes! Since they are smart contracts, any logic can be encoded to them. For example, let's say we have a derivative that switches between ETH and a stablecoin (USDC).
Using market-based rules, the derivative could sell all of its ETH for USDC when markets look bearish and sell all of its USDC for ETH when markets look bullish.
As another example, group or single user could define a smart contract that allows them to build an index fund. They could have logic that allows them to add and remove tokens from their index token.