IIP: 102
Title: Launch the Bankless DeFi Innovation Index | $GMI
Status: Proposed
Author(s): Lucas Campbell, Ben Giove, Peter “Lemonade”
Created: 12/07/2021
Simple Summary
BanklessDAO, in collaboration with Index Coop, seeks to launch the Bankless DeFi Innovation Index (GMI). GMI seeks to capture the performance of emergent DeFi application themes.
By relaxing some considerations for selection into Index Coop’s flagship DeFi Pulse Index, GMI seeks to provide exposure to experimental DeFi project tokens which are further out on the risk curve. Notably, GMI will seek to capture exposure to DeFi upstarts on a rolling basis by establishing a time limit on inclusion and a graduation system.
The utilization of an indexing strategy–and the provided diversification–offsets the risk of any one or small group of assets rugging or otherwise failing. Through this curation, GMI allows passive exposure to this area for those lacking time or expertise.
Abstract
The Bankless DeFi Innovation Index is a simple composite index which will be built on Set Protocol. The index screens for promising early stage DeFi projects which are not yet considered “blue chip” and attempts to produce an optimal weighting via the use of a combination of square-root market cap, relative secondary market liquidity, and relative token dilution/emission scoring.
GMI maintains rolling exposure to early-stage and experimental DeFi upstarts by employing a ‘graduation’ system which retires components after specific term lengths (or if they become part of DPI’s constitution).
Motivation
Customer feedback has indicated that exposure to DeFi assets further down the risk-curve coupled with an indexing strategy would represent a compelling solution for them.
The DeFi landscape moves fast, and while customers are able to capture the appreciation of standard-bearing DeFi protocol assets through DPI, a vehicle taking a more risk-on approach and relaxing some requirements–including time in market, audits, anonymous teams, etc–allows us to capture the aforementioned desire for exposure.
GMI will seek to have no medium-long term crossover with DPI and a component will exit over the course of 2-3 rebalancing cycles should it be selected in. Additionally, assets within GMI which do not graduate to DPI will have a term limit - the idea being that the index should be ever-changing and not contain constituents for too long of a time frame.
The motivation to implement a novel weighting system including relative liquidity and dilution scoring was born of problems with the decay which can be passed on to customers through the rebalancing of illiquid assets – and with the recognition that earlier stage projects not only typically have poorer liquidity conditions, but also have potential for more aggressive dilution via token emission schedules.
In addition, the use of a square-root market cap weighting score allows for an emphasis on asset sizing while also recognizing that too much concentration in any one token creates additional risk. Additionally, the square root weighting mechanism allows for smaller components to enjoy higher relative weightings. To further combat the potential for concentration risk, GMI will apply a 15% single component cap.
Specification
Overview
The Bankless DeFi Innovation Index (GMI will contain a collection of ERC20 tokens curated to capture broad exposure to emergent DeFi application themes, rebalanced monthly.
Differentiation
The product contains no crossover with leading Index Coop products and although it features DeFi assets, we believe this product complements DPI rather than compete with it. We could see a world where the recommended allocation of the DPI/GMI pair (based on total market cap or otherwise) is something like 4:1 for more comprehensive (and moderately more risk-on) DeFi exposure.
Example Composition
Olympus DAO (gOHM) | 15.0%
Fei Protocol (TRIBE) | 11.0%
Tokemak (TOKE) | 10.1%
Alchemix (ALCX) | 9.1%
Dy/Dx (DYDX) | 8.4%
Convex Finance (CVX) | 8.4%
Reflexer Finance (FLX) | 7.9%
Abracadabra Money (SPELL) | 7.7%
Perpetual Protocol (PERP) | 7.0%
Ribbon Finance (RBN) | 6.8%
Dopex (DPX) | 4.3%
Maple Finance (MPL) | 4.2%
Size of opportunity
To date, DeFi and risk products such as FLI have accounted for the vast majority of Index Coop’s AUM and revenue. We believe DeFi index products have immediate marketability and strong potential for PMF with Index Coop’s core personas.
A crude look at Index Coop’s general AUM premium on the leading like products offered by competitors lands at 800-1200% (e.g. DPI over DEFI5 or MVI over PLAY). If we use Indexed Finance’s DEGEN as a proxy for GMI and extrapolate a similar multiple over its AUM figure (~$15m), that would indicate a near-medium term target of at least $120m. We believe that a more conservative multiple estimate would still make this an attractive product for Index Coop financially.
Market & Customer Research
To date, DeFi and risk-on products such as FLI have accounted for the vast majority of Index Coop’s AUM and revenue. We believe further DeFi index products have immediate marketability and strong potential for PMF with our core personas.
$DEGEN by Indexed Finance – perhaps the closest alternative to GMI – is the most successful non-Coop index in the market.
GMI’s intended customer personas are very similar to DPI in that it should have broad appeal between DeFi whales, DeFi dolphins, and DeFi minnows. In addition, we expect that as the user experience for onboarding into Index Coop products improves, crypto-curious personas who are not currently exposed to DeFi would have interest in adding this product, paired with DPI, for comprehensive DeFi exposure.
We believe that institutional interest is unlikely in the near term due to the tradeoffs made in supporting assets that may not be tenable for them to hold. Finally, we believe there could be strong demand from larger and established DAO treasuries if the index can demonstrate a lower correlation to blue chip DeFi.
User stories
“Man, it’s hard to keep track of all of the new projects these days, but I know I would feel much more comfortable if I knew I had a stake in up and coming DeFi projects.”
Methodology
Token inclusion / exclusion criteria
GMI’s initial constitution selection criteria begins with the 367 assets behind Coingecko’s DeFi Filter.
From there several further screens are applied:
- Market Cap: >$30m, <$5b
- ERC20
- Ethereum Prioritized Roadmap
- DeFi Appropriate: Application or protocol facilitates or aids in the facilitation of financial products or services such as exchange, borrow/lend, derivatives, yield, etc. As opposed to application themes that fall outside of DeFi (e.g. keeper bot systems, oracles, staking services, MEV, bridges, etc)
- Compound, Aave, or other money-market interest-bearing collateral tokens
- Assets are not synthetically issued
- noDPI: Assets are not in common with DPI
- Traction: Relative to application category
- Secondary Market Liquidity
Further, if security concerns arise for a given token, GMI reserves the right to remove the component from the index ahead of the regular rebalancing schedule.
Index weight calculation
- 60% Square Root Market Capitalization
- 30% Liquidity Score
- 10% Dilution Score
- (15% single token cap)
Index maintenance
- 18 month asset term limit
- Rebalance frequency: Bimonthly (manual)
Costs
Cost to customer
Implicitly the customer earns the s/gOHM deposit rate while paying DEX fees and slippage on reblances.
In addition a 1.95% streaming fee is extracted from the index’s AUM.
Cost to mint / redeem
N/A
Commercials
Fee split
GMI will have a streaming fee of 1.95% (195 basis points). The revenue generated from the fees and any other rewards, after subtracting gas fees, will be split 40% to BanklessDAO and 60% to Index Coop (with 10% of Index Coop’s share going to Peter/Lemonade for a total of 24 months + a weighted portion (⅕ or 20%) of the product’s earned methodologist rewards).
Rewards
PWG is requesting $400k for incentive spend to help accelerate growth of the product. The strategy for spending is outlined below with the primary purpose of getting eyes on the new product launch. We do not feel that liquidity mining is necessary for this product so we will test a new strategy, single sided staking.
- Single sided staking contract on the website
- Two months with no intent to extend it
- $250k first month, $125k second month
- 100% comes from IC
Meta / intrinsic productivity
Metagovernance for the underlying token projects will be controlled solely by INDEX token holders. There are currently no plans to include intrinsic productivity at launch, however, it is a consideration for the future (presumably for the benefit of some combination of holders, Index Coop, and the methodologists).
In instances where secondary market liquidity is robust or it is otherwise feasible, using the staked version of an asset as index components (e.g. sOHM) will also be heavily considered.
In instances where staking yields are attractive enough, modules also may be built to take advantage of productivity by utilizing a project’s bespoke vault.
Liquidity
We expect to seed liquidity at launch (Most likely GMI:ETH on Uniswap v3) – such that $10,000+ trades can be executed with <1% price dislocation – via a combination of personal funds, BanklessDAO, and Index Coop members. We do not expect to require liquidity mining. Alternatively, we will specify a more efficient reward program recommendation to stimulate unit supply growth at launch.
Author Background
Lucas and Ben, managing editor and DeFi specialist for Bankless LLC, are representing BanklessDAO. GMI would be the 2nd product in collaboration with BanklessDAO. The previously launched Bankless BED Index has amassed ~$6m in AUM since late July (with no incentive programs).
BanklessDAO will provide marketing and BD support – previously demonstrated by driving BED treasury sales to protocols like Visor, Pickle, and UMA.
Peter AKA “Lemonade” has led the growth function at Index Coop since January 2021. In that period, Index Coop’s unincentized AUM has increased from $9m to $440m, and Index Coop’s cumulative net dollar flows, or N$F (a proxy for sales), have grown from $17m to $320m.
Marketing support / distribution / partnerships
BanklessDAO will support the launch of this product through all their channels and are open to joint marketing efforts with the Index Coop.
Revision history
- The product’s title has been changed from “DeFi Growth…” to “DeFi Innovation…”
- Rebalancing cadence has been amended to bimonthly
- Ad hoc security removal added
- Visor ($VISR) has been removed due to security concerns
- Rari Capital ($RGT) has graduated to $DPI
Copyright
Copyright and related rights waived via CC0 3.
Links
-
Product Profitability Model (simulation below)
