IIP-102 Launch the Bankless DeFi Growth Index ($GMI)

IIP: 102
Title: Launch the Bankless DeFi Growth Index
Status: Proposed
Author(s): Lucas Campbell, Ben Giove, Peter AKA “Lemonade”
Created: 10/26/2021

Simple Summary

The Bankless DeFi Growth Index (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.

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 Growth 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 Growth 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 (OHM) | 15.0%
Abracadabra Money (SPELL) | 13.1%
Dy/Dx (DYDX) | 10.4%
Perpetual Protocol (PERP) | 9.8%
Convex Finance (CVX) | 9.6%
Rari Capital (RGT) | 6.7%
Fei Protocol (TRIBE) | 6.5%
Tokemak (TOKE) | 6.5%
Alchemix (ALCX) | 6.2%
Dopex (DPX) | 5.0%
Ribbon Finance (RBN) | 3.3%
Maple Finance (MPL) | 2.8%
Visor Finance (VSR) | 2.6%
Reflexer Finance (FLX) | 2.6%

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

“Jawz and the Ohmies are giving me Fohmo on Twitter, but I’ve also heard that Spell thing is cool. How old are those Rari bois again? Idk 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

Index weight calculation

The calculations used to calculate the token composition should be presented and justified.

  • 60% Square Root Market Capitalization
  • 30% Liquidity Score
  • 10% Dilution Score
  • (15% single token cap)

Index maintenance

  • 18 month asset term limit
  • Rebalance frequency: Monthly (manual)

Costs

Streaming Fee: 1.95%

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.

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 and 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.

Revision history

Describe any modifications to this proposal since the original post on the forum

Copyright

‌Copyright and related rights waived via CC0.

36 Likes

Would buy. Very into this. Thoughts on giving a small fraction of streaming fees to the BanklessDAO?

5 Likes

excited to see this one work out, felt this was a missing puzzle piece for us for a long time

6 Likes

This is sick! I’m definitely in full support of this.

Most likely will need more active methodologists staying on top of the different projects in the ecosystem.

A couple questions I do have:

  1. why not include INDEX in this type of index? I feel like this would probably be the first one that it would align well with. It would probably work within all of the required criteria as well.

  2. With this index token, what would the process be if one of these tokens moves out of the required criteria? For example, if it goes over $5B in mkt cap, or drops down under $30M mktcap? Would all the assets be sold/removed from the index? Or would some exposure still be given there?

7 Likes

Also, a cool thing to happen would be a project being grandfathered from GMI → DPI after showing substantial growth :eyes:

Will the methodologists battle over inclusion of these assets in the future assuming they meet criteria for DPI?

3 Likes

Recommend replacing OHM with wsOHM, otherwise that will be a drag on returns due to the rebasing.

4 Likes

Thanks!

DPI is Index Coop’s flagship product and we believe it holds precedent to some extent and would not want to create an adversarial relationship. We see GMI as symbiotic with DPI.

So we would commit to cede and retire any asset that DPI selects over several rebalances (to prevent big price impacts down the index)

3 Likes

This Index needs to include the INDEX token!

4 Likes

Would buy too! Like the proposal to use sPell and sOHM

2 Likes

As someone who has been disappointed by DPI not accruing the value generated by “defi 2.0” protocols/tokens, this is a great idea. Necessary if you want to be able to get broad exposure to the ethereum ecosystem through index coop products

Only thing I may not agree with is the 18 month asset term limit. Don’t see you why we need term limits if the index composition is being manually rebalanced anyway.

2 Likes

Why is the fee quite high for something that’s attainable in a ~$26/month newsletter? Would recommend alternative fee, unless there’s active management. I already have this list, and have investments in all already. Definitely easier to use an index, but not enough management to justify 2%.

3 Likes

Awesome, appreciate that clarification. And I think that’s the best route moving forward.

As more indices get launched, it will be important to have those types of symbiotic relationships, and not to cross over anyone else’s toes- no need for drama, we’re a cooperative for a reason :smiley:

1 Like

I’d definitely buy this as well.

One question from a newbie. If one of these riskier projects were to rug, is there a way to sell out of the position faster than having to wait until the next rebalancing at which point the token may have gone to zero? Not sure if it is possible to introduce a panic button of sorts.

4 Likes

Could not be more excited about this. Indexes like this that help people passively capture value from new and emerging defi products feels like a massive win.

Love the concept of potentially making assets like OHM productive by staking and delivering those returns to back to holders of the asset. Could even be an interesting potential approach to deliver that value back to metagovernance delegates for effectively managing the risk of these assets (though I know paying delegates is a much more complex conversation, but this feels like an avenue that could be incentive aligned).

5 Likes

Would definitely buy this. Its has a lot of Defi 2.0 protocols. These are growing really fast in terms of TVL and so there is a time-to-market element in order to capture the growth phase.

3 Likes

Please explain the 2% fee

2 Likes

Excited to see this launched. Believe active mgmt to justify fees required. Being able to diversify the rug pull risk across a portfolio of these makes total sense. I’m in about 1/3 now and was eying others so this provides a great one stop shop. Somewhere between monthly and quarterly rebalancing needed IMHO.

2 Likes

Gas costs to maintain and rebalance a portfolio like this would likely cost a bit more than $26/month

An index product can socialise such costs and typically pass on the savings to all users.

9 Likes

In addition to gas efficiency, it’s also worth mentioning the tax efficiency of a single token you can HODL that will rebalance for you to track a fast-moving sector.

5 Likes

FLX is the lowest weighted on on the list. TracerDAO meets the requirements also. It also should rank higher than FLX and kick it off the list.

FLX market cap 55m
TCR market cap 75m :green_circle:

FLX diluted market cap 383m
TCR diluted market cap 586m :green_circle:

FLX volume 381m
TCR volume 583m :green_circle:

FLX circulating 14%
TCR circulating 13% :red_circle: ?

“promising early stage DeFi projects which are not yet considered blue chip” – This is how Ryan Sean Adams would describe Tracer and is a big supporter of TracerDAO.

60% Square Root Market Capitalization
30% Liquidity Score
10% Dilution Score (is less circulating better or worse? The proposal doesnt make it clear)
(15% single token cap) (not sure what this means)

2 Likes