An Expanded Vision of Index Coop

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In this post, we outline an expanded vision of the Index Cooperative - something much bigger than most of us would have initially imagined.

The opportunity for structured products is massive and the timing is now

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From 2018-2020, we saw the foundational pieces of DeFi laid down. This includes borrowing/lending protocols (e.g. Compound, Aave), trading venues (e.g.Uniswap, Curve, Balancer), and asset issuance (e.g. USDC, DAI, WBTC, and governance tokens). In the coming years, we expect these foundational layers to continue to grow significantly in scale, size, and liquidity.

Significant lending and trading liquidity on this layer enables a whole new layer of new financial instruments to now be built - which include structured products (e.g. Index Coop), options/futures (e.g. Hegic, Opyn), insurance (e.g. Nexus Mutual), and fixed income/lending (e.g. Barnbridge).

Blackrock has a $100B market cap and the total market value of structured products can be estimated to be 5-10x bigger ($500B-$1T). If there is any translation into DeFi, this means there’s a significant opportunity.

Typically, index ETFs are the highest AUM, but a majority of Blackrock’s revenue comes from other sources. The DeFi Pulse Index is the product that is the tip of the spear that is expected to pierce to the broadest audience.

Structured products are broader than indices

So far the Index Coop has been about indices - a structured product most people know about. And the Index Coop has launched the DeFi Pulse Index, as its first and flagship product and is collaborating with CoinShares for a second index product.

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If one takes a magnifying glass and looks at the ETP landscape in terms of volume, the landscape of products is much broader than indices. In fact, it’s just the tip of the iceberg. Other voluminous products include:

  • Leveraged/Inverse Products: Products that allow users to easily get leveraged or inverse exposure without needing to deal with margin requirements or liquidation risk.
  • Bond ETP: Products that allow users to get simple exposure to a portfolio of debt instruments with a targeted risk/reward profile
  • Volatility Indices: Products involving futures/options that allow users to make bets on the market or sector volatility.

Given the ingenuity and composability of DeFi, there are probably numerous other products that can’t be imagined yet that will be possible.

Structured Product Roadmap

  • Indices (Today): Analyzing the index opportunity landscape, there are ideas of L2, data protocol, and NFT indices but there is limited opportunity for indices outside of DeFi today that can grow to significant size ($100M+ in TVL). There are some opportunities to launch smart beta DeFi products and to collaborate with large asset managers for other unique indices (e.g. Coinshares).
  • Leveraged / Inverse Tokens (2021): Many projects like dYdXand bzx have tried leveraged/inverse products, but they historically haven’t worked due to lack of secondary market access and liquidity. With Uniswap and its deep liquidity on pairs, that has changed and products such as leveraged/inverse ETPs are finally feasible (h/t @scott and DeFi Pulse for this idea).
  • Bond ETPs (Late 2021/2022): As traunched debt positions are not yet live, the community today can only build relationships with up and coming providers like Barnbridge and Saffron Finance to launch debt-related ETPs when the products are mature and liquid.
  • Volatility Indices (Late 2021/2022): Similar to Bond ETPs, the technologies here are early and the correct action is to build relationships with futures/options/synthetic technology providers (e.g. UMA, Opyn, Hegic) and brainstorm solutions.

User Acquisition Progression

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In terms of growing Index Coop’s structured product adoption, we can see it as a progression of dominoes - where knocking one down allows the knocking down of the next.

  • DeFi Native (Today): Today, the marketing/BD has been focused on gaining market share of existing Ethereum holders (those who can use Metamask/hardware wallet) - of which we likely have 10-20% market penetration and want to grow to 60-70% (closer to lending/borrowing and exchange levels).
  • Crypto Exchange Users (2021): A big part of the efforts today is getting listings on CeFi exchanges (e.g. Binance, Coinbase) - as it unlocks millions of new users who can access Index Coop’s products.
  • MainStream Users (2022): Once on crypto exchanges, the next step is to get on mainstream web2 financial applications like Robinhood, Square, and Paypal - unlocking more users.
  • Mainstream Exchanges and 401k (2023+): In the next 5-10 years, it can be imagined that people can get Index Coop products on the NYSE, Nasdaq, and via retirement accounts.

Launching new products and DPI as the spearhead

Up until now, the Index Coop has focused on growing the DeFi Pulse Index - with the current view that it is better to get a single index to scale first then launch additional indices. The DPI is expected to be the spearhead / flagship IndexCoop product in which most retail users gain exposure to Index Coop offerings. Once users have learned about the DPI, there will be a plethora of other products that they can adopt and follow up with. Although most of our marketing/BD focus should initially be on the DPI, the vision is to have a range of products that Index Coop users can choose from.

The Index Coop can only truly be successful with a suite of useful and widely adopted products and the DeFi Pulse is just the tip of the iceberg.

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Very Exciting! Looking forward to the new developments. I suggestion moving up the time line on Volatility Indices.

As highlighted in the post both leveraged tokens and bonds are already being tackled by players in DeFi. A crypto VIX equivalent is something that currently is not offered by anyone is DeFi.

Launching a volatility index would :

  • Attract many DeFi traders

  • Benefit the eco system as a whole as a tracking tool

  • Further cement INDEX as an innovator in crypto

Just my two sats. Keep up the good work.

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This is super helpful :raised_hands:

Focusing on DPI, the core questions that come to my mind: What problem do DPI holders want solved now? And then, what structured product(s) can be created to solve that problem(s) for them?

basically :point_down:

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Couple thoughts here in freeform:

:earth_americas: Existing leveraged inverse ETP use futures/options to keep the roll forward mechanisms and liquidity going, and there’s usually slippage in form of backwardation/contango for the holders.
Consider this - these are hugely more liquid markets at present time than existing on the blockchain, and you would need appropriate audit/sufficient liquidity with preferred platform to make it work… I see the greater adoption of Opyn and other derivative platform success needing to predate the launch of a product like this.

:earth_americas: A “Corporate Bond ETP” - fixed crypto payments in stablecoin from the treasury, sort of like TZROP is doing, but baskets of those companies income streams could be huge as more companies issue balance sheet assets on the blockchain. Or get even fancier and offer an evolution index, an additional fund, option to pay in native token as secured debt a la Celsius? Basket of those maybe? :exploding_head:

:earth_americas: Love the idea for momentum, rotational , “smart-beta” strategies. It should be fairly straightforward to develop a methodology that rotates between oracles, lending, insurance plays, DEX, yield farm protocols, and the like into a “Smart Beta Rotational Crypto Index.” The hard part will be back testing and developing the optimal thresholds and methodology for rebalancing. Which leads me to another thought I take it you were alluding at : SECTOR INDEX!! Yes, looking at you my friends at State Street.

:earth_americas: Sector indexes, like the ones mentioned above, could themselves be the components of the smart-beta rotational strategy as theyve done with the SPDRs. So start with issuing the “Oracle Index”, the “Yield Farm index”, the “DEX index” and a methodology there, and we evolve into the rotational strategy from there when more liquidity is present.

:earth_americas: Final thought for now is the natural progression of risk down the ladder over mainstream adoption during this next bull market- as more get saturated and enamored in the DeFi large cap tokens like the components of DPI, the more newcomers in the market will be looking for your “rising stars.”
We’ve been throwing around the idea internally in our small crew on a responsible filtering methodology for investing in your lower cap tokens, like Dia, Rarible, and the likes, based on other factors than sector-specific commonalities. More fundamental-based, so newcomers can feel more comfortable stepping down the ladder without the larger threat of them getting rekt.

:dove: -TGT

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Woah, awesome post!!

Had a question, what do you mean by: “Or get even fancier and offer an evolution index, an additional fund, option to pay in native token as secured debt a la Celsius? Basket of those maybe?”

Additionally, the current big issue with launching sector indices or smart beta indices is bootstrapping liquidity in secondary markets without spending a ton on liquidity mining programs. Any ideas on how we could work around that?

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Yes, let me see if I can clarify better.
So for the crypto bond ETP, you could offer a “safe” bond which is baskets stablecoin payments tied to the cashflows of the companies in the basket - no different that your LQD bond (vanguard long term corp bond ETF). That’s of course assuming these DAOs would be willing to issue “bonds” out of future cashflows generated by their token holders, like UNI for example, to help fund further operational growth and development rather than giving away further voter/equity instead. My guess is they will, just like their centralized counterparties. They provide equity initially as a bootstrapping ability, and evolve onto debt financing as you expand and your equity is worth more.
By evolution, I meant further down the risk ladder for another separate fund, more like convertible bonds, where instead of being paid in stablecoin payments, you could be payed the same cashflow concept, but in their native token , kind of like how Celsius will pay you interest in CEL - but instead, a basket of those tokens that pay in their native token. Just sort of brainstorming on that, and may not be possible - I’ve not-fully-thought-through economic incentives yet.

Yeah - the liquidity bootstrapping issue is a big one. Even if we could source enough tokens to issue a substantial amount of initial creation units, getting sufficient secondary market liquidity is going to be tough. Is there not the natural incentive to buy the basket over the components for simplicity? Will that force not be strong enough to bring ample liquidity once a critical mass has been hit?
How did DPI bootstrap initial liquidity? Was the main incentive dumping INDEX to holders? So it sounds like if I’m understanding correctly, the current (and undesirable) solution is, we’d all need to dilute ourselves by issuing a ton more INDEX in order to attract more players through liquidity mining incentives?

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Thanks for explaining! That makes sense.

Yea currently we initially put up liquidity using our own balance sheets and then boosted it with liquidity mining. Looks like we actually won’t have to spend that much more $INDEX to keep the pool big and liquid.

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Here’s another idea for a product we could build.

No Impermanent Loss AMM Strategy

Firms like 3 Arrow Capital are huge liquidity providers on Uniswap because they are able to hedge out the risk of impermanent loss by taking option positions on centralized exchanges against their position in the AMM. This allows them to earn risk-free yield from the transaction fees on Uniswap.

Similarly, Index Coop could make a structured product that supplies liquidity to a big Uniswap pool, like USDC - ETH (current APY at 38%), and automatically buys the options positions to hedge out the IL risk. Turning supplying liquidity on Uniswap into a risk free activity that generates significant passive yield.

Such a product would not only be huge from a TVL perspective (risk-free passive yield products have insane product market fit in crypto), but also help increase the liquidity on AMMs and make them more competitive with CEXs. Boosting the DeFi ecosystem.

We can work with options protocols like Opyn to help bring to market such a product.

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@setoshi Thank you for laying out the vision - I agree with you that Structured Products are a massive opportunity for Index Coop!

One area where I disagree slightly, is that I think Index Coop is more likely to get significant traction from retirement accounts (i.e. 401k, IRA) than MainStream App Users in the short-term (less than 1 year time horizon).

Here are the reasons I believe this to be true:

  1. Now that we are in another Crypto Bull Market, I think it’s likely a massive number of new users will be onboarded onto Crypto Exchanges like Coinbase in the coming year.

  2. Index Coop has a great opportunity to increase the TVL of DPI by unlocking those users’ retirements accounts for investment. Companies like Alto IRA will likely soon enable users to invest the money in their tax-advantaged accounts through Coinbase!

In fact, here’s a brief exchange I had on Twitter with the Founder of Alto IRA, Eric Satz:

You may already know this, but Alto IRA already has an “Alto CryptoIRA” that enables users to invest 401ks and IRAs on other brokerages on Coinbase:

  1. PayPal, Square, Robinhood do not even currently support buy/sell for any DeFi tokens, let alone a new structured product like DPI. Coinbase and other Crypto Exchanges are likely to going to lead in this regard.

Personally, I am planning to 2x my investment in DPI through my 401k using Alto IRA on Coinbase after I leave my job at the beginning of March 2021 (my employer limits what I can buy through my 401k). I also know people who will only buy crypto through tax-advantaged accounts, and personally know someone whose crypto holdings were primarily purchased through a ROTH 401k on Coinbase with Alto IRA.

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Really cool stuff. I didn’t even consider the possibility of DPI being able to be purchased via 401ks/IRAs, but this has really opened my eyes. Does Coinbase need to list DPI first and/or what type of timeline could we expect for Alto IRA to add DPI?

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Risk free is a tough word here. Is it really risk free? Is there no counterparty risk to the options paying in the event of major liquidity crunch? Sounds like we’re tying our fate to Opyn in that regard?

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@setoshi If you read the Alto Crypto IRA FAQ, it looks like Coinbase just needs to list DPI:
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This makes me believe that Coinbase is the blocker from a technological perspective to onboard tax-advantaged retirement funds into DPI.

I wrote a thread on Twitter about how I believe DPI will succeed where Coinbase failed largely because:

There are tons of people who want exposure to that “Crypto stuff” and don’t want to go through the effort of researching every coin on Coinbase - I would not be surprised if this is why BCH and LTC still exist and retain significant value.

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I haven’t heard about Alto IRA. Already have a coinbase account - interesting. Like this a lot for my HODL coins I’ll purchase next year. If we can get DPI on there I’ll max it out :slight_smile:

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Indeed!!! I’ve got several friends asking how to buy it in retirement accounts. What things can we do to get more likely to list on coinbase? An audit of the issue/redeem process?

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Seems like it would be worth reaching out to both additional Crypto Exchanges (i.e. Poloniex, Kraken, etc.) and Alto IRA. I wonder how much effort it would be for Alto IRA to enable DPI purchasing through exchanges other than Coinbase. Might be very hard, Coinbase has cleared a lot of regulatory hurdles that I am not sure these other firms have, but would still be good to know.

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Poloniex is owned by Circle, who is the big player of Centre io alongside coinbase, the USDC issuer.
I take it theyre likely of the same opinion and regulatory status? Maybe not.

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Hmm I thought Opyn’s vaults were collateralized. Will have to look into that though.

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Yeah they are - but that’s assuming they can find a buyer of their collateral at fair market value during a period of liquidity crisis, like we saw in March.
Just throwing things out there we need to be thinking about if we’re wanting to get these more complicated structured products in place down the line. In order to maintain credibility as an index issuer cooperative, we need to prevent catastrophic design failure of anything we launch.

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I think this is a solid idea but it also seems like it puts us into yearn territory, that is very similar to what the Vault products are doing. Do we see Index Coop as a Yearn competitor in the sense we are making products that automatic strategies? Not that it matters too much, but it would be good to identify competition to compare metrics etc.

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I don’t think there’s anything here that’s directly competitive to Yearn. Their niche is yield farming not automated strategies as a whole, in fact we (Set) have been doing automated trading strategies for over a year now. The “automation” is more out of an interest in transparency and resilience. Now if we launched some sort of yield farming index that may be more directly competitive but frankly if we wanted to do that it might make more sense just to try to collab with them on it.

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