An Expanded Vision of Index Coop

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?

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?

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.

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?

@setoshi If you read the Alto Crypto IRA FAQ, it looks like Coinbase just needs to list DPI:
image

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.

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.

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

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.

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.

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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Hi all, happy to join the discussion. A couple thoughts here -

On product - As the entire crypto space develops, I don’t think many people seeing one chain winning out completely above the others. With interoperatibility coming, the more likely scenario is an ecosystem of various chains all working together to do what they’re best at, a classic division of labor.

In that scenario, in addition to the sectors TGT mentioned above, it allows for baskets consisting of the main coin (ETH, DOT, ADA, etc…) plus its strongest on-chain assets. In discussions with those less familiar with the crypto space, the amount of projects out there can be overwhelming especially when you dive into the projects on Ethereum or on PolkaDot when they have just scraped the surface of the main token.

With further adoption will come everyone’s favorite topic - regulation. In my experience when the regulators do come knocking they appreciate those who have been proactive and with recent developments (DoJ report, CFTC guidance on margin etc…) it might be smart to begin thinking about it, especially if we’re talking about eventual adoption of crypto-indices into people’s retirement accounts.

Basically, it may be prudent to begin producing a detailed but easily digestible quarterly report describing performance of the DPI (and any future potential indices) as well as a description of each of the underlying tokens, new developments about those tokens and their historical performance. This would help people get a brief understanding of the index without having to spend hours doing research. The language could even be voted on by INDEX holders. As time goes on, having something like these easily accessible would also help boost the Coop’s credibility and legitimacy in the eyes of the general public, as well as regulators.

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Strong introduction!

Great ideas