IIP - 175: Launch the Money Market Index ($MMI)
Title: Launch the Money Market Index ($MMI)
Author(s): @allan.g , @MrMadila
Reviewers(s): @dev , @anthonyb.eth , @jordan.t
Created: 9 March 2023
The Product team proposes that the Index Coop launch the Money Market Index ($MMI), a stablecoin-denominated yield product with the objective of providing diversified exposure to the top money market yields in DeFi. Underlying stablecoins will be distributed across variable-rate, peer-to-peer, and fixed-rate lending positions on Ethereum main net. $MMI will be built on Index Protocol with initial integrations to Morpho-Aave, Morpho-Compound, and Notional.
2.0 Market information
2.1 Target customer segments & user stories
- As a token holder, I want easy access to an aggregate stablecoin APY so that I don’t have to manage positions across protocols myself
- As a token holder, I want to distribute my stablecoins across multiple protocols so that I am not at risk of losing everything in one exploit
- As a token holder, I want to hold multiple stablecoins so that I am not overexposed to a de-peg or regulatory risks
- As a token holder, I want to access the most battle-tested stablecoin yields so that I can survive a bear market
- As a token holder, I want stablecoin positions in the most established protocols to be rebalanced for me so that I can focus on bespoke strategies and yield opportunities
2.2 Market research
Aside from providing liquidity, lending is the largest stablecoin yield category in DeFi as well as one of the most established. The following protocols represent the five largest lending markets in terms of TVL on Ethereum main net for the stablecoins that meet all inclusion criteria for $MMI:
Source: DeFi Llama
These money market protocols provide critical liquidity for DeFi and also enable lower risk returns relative to the rest of the opportunities in the on-chain ecosystem. In order to protect lenders, borrowers must be overcollateralized in these protocols, and efficient liquidation mechanisms ensure that bad debt is highly improbable.
Market research has identified several customer types for $MMI:
- DAO Treasuries: a survey of 12+ DAO Treasuries with an average size of $80m revealed strong preferences for low-risk, diversified stablecoin strategies offering a set-and-forget experience; pain points such as multi-sig coordination and continuous position maintenance motivated passive product requests.
- Wallet Providers: multiple Wallet Providers have expressed a need for transparent stablecoin yield offerings that are accessible to their users; diversification in particular (of stablecoins, protocols, and strategies) offers a unique value proposition for new users that are less familiar with DeFi.
- Agile Funds: 10+ on-chain Funds have validated that a single access point for general money market yields would be useful for idle capital as well as for sweep accounts; parking unused capital in a productive asset also allows Funds to focus on bespoke strategies and yield opportunities away from the most established protocols.
- On-chain Retail: feedback from hundreds of individuals and existing users has been collected over time regarding stablecoin yield products and strategies; in general, On-chain Retail is more interested in higher risk, higher return opportunities, but many acknowledged the usefulness of a low-risk, low-return products, especially in bear market conditions.
2.3 Size of opportunity
The following products or services offer similar value propositions as $MMI to users:
$MMI is differentiated from these alternatives in that the low, flat streaming fee of 0.15% results in a competitive Net APR and the lowest effective fee on the market.
Stablecoin diversification and yield optimization via Morpho set $MMI apart from several alternatives. Protocol Owned Liquidity (POL) will be deployed for $MMI on DEXs, making it accessible to anyone with a simple swap through the DEX aggregator of their choice.
2.5 Marketing support / distribution / partnerships
At launch, $MMI will be accessible through:
- the Index Coop App
- Decentralized Exchanges (DEXs) via Protocol Owned Liquidity (POL)
- DEX Aggregators (CoW Swap, Matcha, 1inch)
- Argent | zkSync
Additional distribution partners may be onboarded before and after launch. Flash Mint support will be enabled through the Index Coop App and also made available through the Flash Mint SDK for external integrations.
$MMI should not be held by restricted persons according to this disclaimer.
2.6 Marketing risks and weaknesses
- Higher risk-adjusted returns are available outside of DeFi
- Returns may be compressed at higher TVLs, especially Notional positions
- Broad stablecoin exposure may not be desirable for all users
- Broad protocol exposure may not be desirable for all users
- An additional layer of smart contract risk may not be desirable for some users
$MMI will have an annualized streaming fee of 0.15% or 15 bps. There will be no mint or redemption fee.
Any protocol incentives that may accrue to underlying positions will be claimed by the Index Coop.
3.2 Fee splits
The streaming fee will go 100% to Index Coop.
3.3 Product economics
Based on the financial forecast below, average monthly revenue for the first 12 months is expected to be $1,229 with a TVL of $12m at the end of year one. Costs associated with quarterly rebalancing are expected to be less significant than traditional composite products because ERC-4626 interactions do not have the same slippage concerns as DEX trades; more cost details will be provided as they become available.
3.4 Financial forecast
Financial forecast of monthly streaming fee revenue assuming $25M max NAV, 24 months to half max NAV, 1.0 growth coefficient, 0.15% streaming fee, and no underlying appreciation. Gas costs associated with rebalancing will be paid for by the Index Coop, and no liquidity mining rewards are planned for $MMI.
4.1 Product design
Stablecoins that pass the inclusion criteria will be equally weighted within the index; inclusion criteria are that stablecoins must be available on Ethereum main net, have a minimum market cap of $100m, and have an Overall Score of 2 or less according to the product indicative risk framework. As a result, $MMI’s stablecoin exposure at launch is expected to be 33.34% USDC / 33.33% USDT / 33.33% DAI.
Strategy and Protocol distribution is determined by comparing Base APYs using a 180d Moving Average; this measurement excludes incentives or non-stablecoin rewards in order to determine “real yield” per position. At launch, each stablecoin allocation will be split evenly between the two highest-yielding positions and must be distributed across two distinct protocols; this results in the following composition:
Based on this composition and 180 days of historical interest rate data, $MMI would have a Gross APY of 3.07%. It is worth noting that interest rate volatility for USDT positions is especially pronounced and that Notional positions are subject to interest rate slippage at scale, so an overall Net APY of 2-4% should be expected.
For context, Morpho attempts to match lending deposits with borrowers in a peer-to-peer (P2P) fashion, resulting in a higher lending rate for the depositor and a lower borrowing rate for the debtor relative to the underlying money market (i.e. Compound v2 or Aave v2). If a P2P borrower cannot be found for a given deposit, that deposit will “fall through” to the underlying money market protocol and earn the associated variable lending rate. In terms of matching lending deposits with P2P borrowers, Morpho has a success rate of 65.96% across Morpho-Compound and Morpho-Aave, so it is reasonable to assume that some portion of Morpho positions in $MMI will be earning variable rates derived from the underlying money market protocols. As a result, $MMI holders will effectively have exposure to three strategies: Fixed Lending, P2P Lending, and Variable Lending.
- Overall stablecoin exposure cannot exceed 50% for a single stablecoin at each rebalance
- Overall protocol exposure cannot exceed 50% for a single protocol at each rebalance
- Protocols must have a minimum of 180 days APY data in order to be considered
Token inclusion/exclusion criteria [if applicable]
stablecoins must be available on Ethereum main net
stablecoins must have a minimum market cap of $100 million
stablecoins must have an overall score of 2 or less according to the Product Indicitave Risk Framework
underlying protocols must have a minimum of $25 million in TVL
Underlying protocols must have an overall score of 1 or less according to the Product Indicitave Risk Framework
underlying protocols must be audited and reviewed by security professionals to determine that security best practices have been followed
underlying protocols must also be in operation for a minimum of six months in order for the decentralized finance community to arrive at a consensus regarding its safety
underlying protocols must be open source
underlying protocols must have a bug bounty program
At time of writing, Index Protocol integrations with Notional, Compound v2, Morpho-Compound, and Morpho-Aave have been developed, tested, and audited as needed; ERC-4626 integrations will also be used for the first time in an Index Coop product. Additional development is required for several rebalancing-related peripheral contracts, and existing flash mint contracts may also need to be revised.
Deployments and bridges
$MMI and its components will be deployed on Ethereum main net. There is no intrinsic dependency on cross-chain assets or bridging.
Index weight calculation
Stablecoins that pass the inclusion criteria will be equally weighted within the index. Protocol and Strategy distribution is determined by comparing Base APYs using a 180d Moving Average; this measurement excludes incentives or non-stablecoin rewards in order to determine “real yield” per position. Each stablecoin will be split evenly between the two highest-yielding positions.
$MMI will be rebalanced on a quarterly basis, or every three months. The exact interval will align with Notional fCash maturity dates so that expired positions can be rolled forward into new positions.
Because Notional fCash positions expire upon maturity, they will need to be rolled forward into new fCash positions on a quarterly basis (or rebalanced into other non-Notional positions per the methodology). This process technically constitutes a recomposition since one token will be replaced by an entirely different token.
The $MMI Methodology as detailed above most be voted on and approved by $INDEX token holders before launch. Post-launch, the methodology will be maintained by the Internal Methodologist Committee (IMC); any material changes to the methodology will be communicated externally and subject to an $INDEX token vote.
4.2 On-Chain liquidity analysis of underlying tokens
Generally, $MMI will not be dependent on secondary market liquidity for the underlying positions because of the direct deposit and redemption model in place for ERC-4626 vaults. However, the size of each stablecoin market per protocol is relevant because lenders’ ability to withdraw funds is dependent upon supply and borrowing demand.
However, Notional fCash assets are subject to liquidity conditions within the Notional AMM. In addition to the methodology, liquidity conditions for fCash assets will be evaluated at launch and at each rebalance to minimize interest rate slippage.
5.0 Product liquidity
Protocol Owned Liquidity (POL) will be deployed on Uniswap v3 by the Index Coop to provide an easy access point for small-to-medium sized trades.
Additional details regarding harmonic liquidity, L2 distribution, and seed capital requirements will be provided here before the product is launched.
6.0 Author Background
The Product team is responsible for designing, developing, and deploying products for the Index Coop, as well as managing and maintaining products post-launch.
Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice. Each purchaser of an Index Coop product should consult with his or her own investment, legal and tax adviser/s before purchasing.
Disclaimer: Index Coop token products are not marketed or offered to persons or entities who: are citizens of, reside in, are located in, are incorporated in, or operate a registered office in the United States of America (collectively defined as ‘U.S. persons’). If you are a U.S. person, do not use Index Coop token products. Our website restricts trading of these tokens by U.S. persons. All website users, including U.S. Persons, must read our Terms of Service and List of Restricted Tokens. U.S. person(s) must comply with our Terms of Service and not use Index Coop tokens.
- added diversification requirement that one stablecoin must be allocated across two protocols and adjusted proposed composition and returns accordingly
- updated financial forecast using a higher growth coefficient
- added liquidity dependencies for Notional fCash positions
Copyright and related rights waived via CC0.