Automated Indices Pod Strategy 2022

[afromac]

Simple Summary

Index Coop’s product pipeline has been stifled by an overreliance on external partners to generate ideas. We have seen little innovation in recent months, and we have minimal influence over our roadmap. Index Coop needs to pivot to being a more proactive product organization, that designs products in-house and seeks out collaboration with high value partners.

The Automated Indices Pod will transition towards a more active design role, and begin to target a new theme of products defined as meta-structured products. The underlying philosophy is to leverage the tech created by other protocols in order to integrate sophisticated features we want to provide to our customers. This will also enable us to expand the range of products that we offer while limiting the amount of new smart contract work that is required.

Problem

Index Coop is overly reliant on methodologists. Our current product strategy is to wait for an external third party to tell us their idea for a thematic index. This enables third parties to extract a high degree of value from Index Coop, while also staking their claim on broad sectoral indices and themes that block us from creating superior (competitor) products in future.

Additionally, many of these ideas are largely interchangeable - a market cap weighted basket of a popular theme in crypto is not an innovative idea. We should no longer pretend that it is.

This strategy has been unsuccessful of late - in the 6 months prior to launching GMI and Polygon FLI, we launched two products that have a combined TVL of ~$7M USD (DATA & BED). In addition, the current tokenomics and design of governance structurally disadvantages PWG vis-a-vis prospective methodologists.

Overhauling governance and voting can do much to address this, but a different strategy to bring products to market can also do much to shift the balance of power and enhance our product offerings.

Q: Should Index Coop develop the in-house expertise to design our own products?

A: In order to survive, we have to be able to do this

Key Realization

It is the role of Index Coop to select appropriate partners and steward them through the process of deploying their product on Set Protocol, as well as acting as the asset manager after deployment.

Index Coop should not position itself as a service provider to anyone with a nice idea. Our role is to proactively assess opportunities for products and build relationships with high value partners to collaborate on products. We should be working with successful protocols and distribution partners where there are opportunities for positive sum partnerships by leveraging each others’ tech, networks and expertise. We need to reduce the amount of effort and resources that we dedicate to partners who are entirely reliant on Index Coop to execute their idea.

Product Design Principles

The Automated Indices Pod is designing a product roadmap to break the gridlock in our process and begin to deliver a swift and diverse offering of products that are designed to appeal to a multitude of investors. The design of our products are guided by four principles:

1. Partner with sophisticated teams and protocols who are already building world class DeFi products.

2. Find ways to reduce our engineering workload by utilising the technology that has already been built - by our team and others. We should always be looking to connect DeFi Legos together.

3. Work closely with our infrastructure partner Set Labs to harmonise our workflows and ensure our teams are unified around a central vision and roadmap.

4. Grow massive TVL by bringing easily understood and economically attractive products to the market through the tokenization of proven trading strategies that have already been implemented to the highest standard in DeFi.

Product Strategy

To date, the products that we have offered have been largely focused on thematic indices. While these products are easily understood and provide excellent value to the intended customer, we can grow tremendously as an organisation by expanding the range of product categories that we offer.

To make a comparison to traditional finance, the global issuance of equities makes up a tiny proportion of the global issuance of assets. By comparison, the issuance of fixed income assets alone exceeds that of equities by a significant margin. If we limit ourselves to baskets of governance tokens (a stand-in for equities), we are ignoring a huge market signal for where demand exists in the real economy.

Similarly, the global stock of equities is dwarfed by the global stock of derivatives. This is another powerful market signal that we should consider when developing our future product strategy. There is huge demand for assets beyonds baskets of governance tokens.

Q: Who can we build products for?

A: Our goal is to offer index products that represent simplicity and peace of mind. Indices are designed to help minimise fees and hassle, while maximising the breadth of choice for digital asset holders.

The above is taken from our Guiding Principles. Our intended customer has not changed. We want to make financial products that the entire world can benefit from. The promise of Decentralized Finance is to remove the layer of hierarchy that obstructs the individual from accessing the same opportunities for wealth creation and protection that are available to the elite. As Index Coop, we do this by enabling ownership to the diverse offering of income generation strategies that we see executed in DeFi.

Traditionally, households have held the majority of their liquid assets in equities. Our bet is that this pattern of behaviour will be fundamentally altered by the emergence of DeFi, and that the average retail portfolio will be optimized to seek out the maximum return. Financial products and services that historically have been available to HNWs and institutions will become commonplace in the normal person’s portfolio. Our value add is to apply the same expertise we already bring to our thematic indices to these product categories. We can ensure that our customers have access to a safe and diverse range of revenue streams that are compiled in one simple token.

Product Design

The AI Pod proposes to spend the next 12 months developing a category we define as meta-structured products. This will be done in close collaboration with our partners in Set Labs. In essence any ERC20 token can be included in a Token Set, while many excellent protocols provide an ERC20 as the claim on your investment in that protocol. We can create products that utilize the sophisticated tech created by other teams by collecting baskets of their ERC20s in our Token Sets. This enables us to offer much requested product features such as intrinsic productivity and income generation, while bypassing the need to develop the tech ourselves. If we are selective and strategic in our design decisions, this should enable us to accelerate product development.

The question then is no longer…

What are we able to build with the resources that we have?

Instead we must ask…

How do we decide what to build with so many options available to us?

Go back to first principles:

• What are people actually using in real world financial markets?
• Where do we see those strategies executed well in DeFi?
• How easily can we connect it to Set’s infrastructure?

Within this framework there are a multitude of categories and services that extend beyond what we have offered to date. Potential product categories and protocols include:

Options Trading

Protocol	Link
Ribbon Finance	https://www.ribbon.finance/
Stake DAO	https://stakedao.org/
Opyn	https://www.opyn.co/
Dopex	https://www.dopex.io/
Siren	https://siren.xyz/
Hegic	https://www.hegic.co/
UMA	https://umaproject.org/

Real World Assets

Protocol	Link
Centrifuge	https://centrifuge.io/
Goldfinch	https://goldfinch.finance/
Maple	https://www.maple.finance/

Fixed Income/Lending

Protocol	Link
Notional	https://notional.finance/
Element	https://www.element.fi/
Yield	https://yield.is/
Horizon	https://horizonprotocol.com/
Swivel	https://swivel.finance/

Market Making/Liquidity

Protocol	Link
Visor	https://www.visor.finance/
Impermax	https://www.impermax.finance/
Gelato	https://www.gelato.network/

Staking

Protocol	Link
Stake Dao	https://stakedao.org/
Lido	https://lido.fi/

Basis Swap / Funding

Protocol	Link
Lemma Finance	https://www.lemma.finance/

Securitization & Tranches

Protocol	Link
Tranchless	https://tranchess.com/
Gro	https://www.gro.xyz/
BarnBridge	https://barnbridge.com/

Investment Management

Protocol	Link
Temple DAO	https://www.templedao.link/
Olympus DAO	https://www.olympusdao.finance/
Yearn	yearn.finance

Hedges/Volatility

Protocol	Link
Float Capital	Float Capital | Home
Perp Fi	https://www.perp.com/

Between these categories and protocols, there are dozens of excellent teams that have deployed successful protocols that we can integrate into our products. To our customers, we can offer 1-click access to a diverse, risk adjusted basket of the best DeFi protocols and strategies, and to our protocol partners we offer increased traffic and TVL to their protocol through our customer acquisition. A potential product pipeline could look like this:

Dream Product Pipeline:

Timeline	Theme	Protocol
Q1	Options Vaults	Ribbon/Dopex/ StakeDao
Q2	Real World Assets	Centrifuge/Goldfinch
Q3	Fixed Income	Notional
Q4	Market Making	Visor/Gelato

The AI Pod has three products currently in the pipeline:

1. An options trading product
2. A real world assets product
3. A fixed income product

Beyond this, we are designing an approach (heavily influenced by the Work Team Analysis process) to help us identify the most valuable products from the categories above that we should prioritize. More information about this process can be found here: Product Roadmap Approach 2022.

In addition, the PWG has begun a process of closer integration with both Set Labs and EWG so as to harmonize our respective workflows, while the Automated and Composite pods are working together to unify our plans into one cohesive roadmap.

A tighter focus, closer collaboration and forward planning will enable the PWG to rapidly scale up deployment of new products. In tandem with a concerted effort by Index Coop and DeFi Pulse to rapidly scale the FLI series as a multichain product, Index Coop will 10x TVL in 2022.

[overanalyser]

This is really exciting to see.

Looking at what new products are available on DeFi and seeing how we can build something that makes them simpler for our users is a core strength fo INDEXcoop.

In addition, as we know the code intimately we can create ideas that can be implemented now! There is a huge gap between what sounds easy to a DeFi native user with a ledger and Metamask and what can be deployed as a robust product. Likewise, a contract can do things that most users would never consider.

INDEXcoop has a massive advantage in understanding in this area, we should be using it to build our own products (and not spending our time educating methodologists in the art of the possible)

[JosephKnecht]

The new strategy makes infinite sense and I can see it being very successful. There are several other benefits I thought worth highlighting:

1. Splitting the role of the Product Designer (fka Methodologist) and the branding/distribution partner will let each party play to their strengths. I thought it was very odd in the previous model that the Product Designer was also responsible for marketing since these are completely different skills.
2. In-sourcing product design will help resolve the fee-split conundrum. However, the risk-reward sharing negotiation will now shift to being between the Coop and the distribution partner. The discussions will become more varied since the distribution partner could range from a passive data/dashboard/protocol provider to a pro-active marketing channel. I would strongly urge us not to copy over the failed previous fee-split model and rather fundamentally rethink how these deals are crafted. Ideally, the arrangement would let partners get value proportionate to their contribution and risk-taking. In particular, we need to avoid a situation where a distribution partner turns into a ghost yet collects streaming fee income in perpetuity. I’d recommend going to a milestone payment model or vesting options to ensure that the branding partner is delivering maximum value instead of simply collecting rent based on their brand.
3. Marketing research is key. I was glad to see we’ll be doing more market research to elicit customer needs. After we pick off the low-hanging product fruit however I expect we’ll need to gauge more implicit market demand (ie, products customers don’t know they want yet) vs explicit market demand (ie, products customers know they want). To date, our market research has focused primarily on the latter but there’ s a huge competitive advantage to also measuring implicit market demand. Addressing implicit, unspoken market demand is how most innovative companies succeed and create a competitive moat. Also, our current marketing research method of contacting users on Twitter is likely to skew towards younger degens when I can imagine the AI products will be more attractive to more sophisticated, ex-tradfi investors. Also the current method is heavily skewed to the English-speaking market. Leveling-up our market research capabilities will help address these issues. The same market research could also assess willingness-to-pay for the streaming fee level. For a start-up like Index Coop with low or negative and very uncertain gross profit margins, how we set prices is one of the most important questions we have as a business. However, so far price-setting has been done very haphazardly. I think it will be particularly relevant for the AI pod because there will be a tendency to psychologically benchmark the pricing against the very low fees of passive index funds, even though many of these products will have nothing to do with index funds. I could see a marketing group also doing the pricing research. Market research is so important I’d tactfully make a recommendation that it not be done by WTA but rather by a dedicated person or group. WTA’s rolling composition would make the market research difficult to activate and standardize. I could see a dedicated professional-level market research person or small team adding enormous value.
4. We need a better term that encompasses the protocol/branding/distribution partner, both to sharpen our thinking but also to clarify roles. I can easily foresee a situation where we think the partnering protocol is going to do distribution but that’s not their understanding .

Congratulations on a great strategy. I’ll look forward to working with you and the team to make it a success.

[epyon]

Very exciting strategy proposal. A lot to unpack but it seems that the potential roadmap and strategies would shape the future of the COOP.

[Ripper80]

Very much agree that the value is not in contributing an idea for a thematic index, and it appears this is how the commercials had been previously structured. You can make a list of Crypto themes in an afternoon. Distribution (aka execution) is where the value transfer occurs.

Assets are either raised or not, and typically there is a rapid adoption rate and then plateau effect as time to market extends. This proposal is better at aligning marketing spend with revenue generation.

In the traditional Asset Manager space, distribution spend is typically a fixed % of basis points on assets raised. This is usually done by marketing to financial advisors, RIAs and Institutional Consultants. One other concept to keep in mind when structuring these agreements, something where traditional Asset Management does a poor job, is NET NEW ASSETS raised. For many of these strategies listed above, they may be niche or secular strategies that will see many in/outflows.

Will you pay a distributor up front for money that leaves when the seasons change?

I think the goal needs to be to capture market share with clear cut industries and sectors first. Be the resource that Institutions look towards when they get wind of a “new” sector in the crypto space. Then define that space. This is the opportunity the Co-op has here.

Tell the market what the relevant industries and sectors are. Then build products that represent that space. And crucially define the asset allocation according to risk COMBINING ALL of these sectors and industries

If you want to go in-house with product generation, have the outcome in mind first: sticky assets that consistently flow in with the goal of having Target risk-defined portfolios for Aggressive, Moderate and Conservative. Index Co-op is in an uncontested market position if they can DEFINE and propose these allocations.

This is going after the Core holding, not the Satellite. You want to be selling portfolios. Not strategies, and paying distributors on net new assets raised, then perhaps a trail that decreases over time.