IIP-185: Launch the High Yield ETH Index (hyETH) Pre-sale

[anthonyb.eth]

IIP: 185
Title: Launch the High Yield ETH Index (hyETH) Pre-sale
Status: Proposed
Authors: @anthonyb.eth
Reviewers: @allan.g @MrMadila @0x_Dev
Created: 28 March 2024

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Elevator Pitch

The Index Coop High Yield ETH Index (hyETH) is designed to track the performance of the largest high-yield opportunities for ETH on Ethereum that meet minimum APY and TVL criteria verified by data from DeFi Llama (more below). The index weights all eligible strategies equally and rebalances monthly to include the most relevant strategies.

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Composition

Strategies	APY	TVL ($M)	Strategy Category	Weight
Pendle eETH PT (2024-06-27)	40.01%	$300	Fixed Rate Liquid Restaking	20%
Pendle rsETH PT (2024-06-27)	37.32%	$154	Fixed Rate Liquid Restaking	20%
Instadapp ETH V2	8.41%	$97	Leveraged Liquid Staking	20%
Pendle rswETH PT (2024-06-27)	57.85%	$55	Fixed Rate Liquid Restaking	20%
Across WETH	12.51%	$53	Cross Chain Liquidity Providing	20%
Index Coop High Yield ETH	31.22%	-		100%

Methodology

HyETH targets ETH yield opportunities greater than 4.00% higher than the staking rate, as defined by 30d APY from dsETH. To be included, strategies must have the following attributes:

• Strategies must be listed on DeFi Llama Yield Rankings denominated in ETH, available on Ethereum, and have the attribute of “no IL.”

• Strategies must have at least 5,000 ETH in TVL.

• Strategies must have a 30d APY at least 400 bp higher than the backward-looking APR of dsETH.

• Strategies must not have locking mechanisms or caps.

• Strategies with fixed terms must mature at least three months from the rebalance date; the initial composition may have a shorter duration due to the timing of the formal product launch.

• Strategies must be compatible with Index Protocol and not require additional engineering work to make it compatible with the SetToken. Index Coop may take on additional engineering work to make a strategy compatible, but it is not obligated to do so.

• Strategies must be separate from aggregators or actively managed.

• No protocol can account for more than three strategies or 60% of the composition.

• Protocols underpinning these strategies must be open-source and have publicised audits.

• All airdrops and rewards will be absorbed into the token and realised as yield by token holders.

• All fixed yield positions will be held to maturity, and yield will be based on the current APY, not the 30-day average APY.

The composition will consist of the top five strategies ordered by TVL that meet these criteria; the included strategies will be weighted equally. A maximum of five strategies will be included at any given time. hyETH will be rebalanced monthly to reflect the most current strategies in the composition. The product will not be rebalanced if there is no necessary recomposition (i.e., added or removed component). If any components are added or removed, the resulting rebalance will be executed via auction. If a component remains in the composition and its weight is between 17.5% and 22.5% of the index, it will not be reweighted.

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Description

Value Proposition

The staking rate for ETH is often called the “risk-free rate” in DeFi, but opportunities often offer higher returns with higher risk, which is appealing to many users. Most of these opportunities exist on Ethereum, and much research and capital are required to diversify and maintain these strategies. A structured product that allocates to the best-performing yield strategies with the highest TVL is valuable because it allows users on Ethereum mainnet and L2s to efficiently access a repricing token via a swap. hyETH will offer diversification, high yield, and low entry/exit costs. As an ERC20 token, it will be composable within DeFi and portable across the L2 ecosystem.

Target Users

Agile Crypto Funds: Input from DeFi fund allocators points to potential enthusiasm for an automatically rebalancing high-yield ETH product. This product can be held for an extended period and will accrue value and rebalance monthly, providing administrative simplicity.

Small To Medium-Sized On-Chain Users: This product is designed for small on-chain users who are long ETH and want to earn yield. Like icETH, which was very popular with modest-size ETH bulls, this product will make the high-yield, gas-intensive strategies accessible to the everyday DeFi user.

Large On-Chain Users (Whales and Treasuries): While some DAO Treasuries hold only USD-denominated assets, many also have ETH and are looking for productive ways to allocate that ETH. Due to the slow governance process, allocating to a single token that provides diversity and monthly rebalancing is easier. A token also allows whales to allocate to multiple strategies via a single token without needing to constantly research and update their positions, which in many cases is gas-intensive even for high net-worth individuals.

Differentiation

Alternative	TVL	APY	Differentiation
Origin Ether	$159m	4.11%	Higher APY, more protocol/strategy diversity
Sommelier ETH vault	$46m	14.44%	Higher APY, more protocol/strategy diversity/more defined rules-based methodology
Yearn yvWETH	$128.8m	7.63%	Higher APY, more protocol/strategy diversity

Distribution

Index Coop App

• Support Flash Mint/Reedem at launch
• Support 0x swaps at launch
• Support cross-chain swaps post-launch

DeFi

• Ethereum Uniswap V3 0.05% pool at launch
• Arbitrum Uniswap V3 0.05% pool at launch

Intermediaries

• Zerion support post-launch

Partnerships

• Engage DAOs and agile funds with pre-sale opportunity

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Operation

hyETH should have flash mint support at launch, enabling seamless issuance and redemption of hyETH in exchange for ETH, WETH, wstETH, and USDC.

Auction rebalancing should occur monthly with decentralised reweighting powered by UMA’s optimistic oracle; however, this may not be in place at launch. In the interim, Index Coop will assume responsibility for reweighting.

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Economics

Streaming Fee (annualised): 0.95%
Issuance Fee: n/a
Redemption Fee: n/a
Operational Gas Costs: covered by Index Coop

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Pre-sale Details

Target Threshold: 500 wstETH
Incentives: 30% of hyETH PRTs (successful pre-sale)
Pre-sale Start Date: 2024-04-10 16:00 UTC
Pre-sale End Date: 2024-05-10 16:00 UTC
Pre-sale Period: 30 days
Pre-launch Period: 30 days
Post-launch Period: 30 days
Pre-launch Withdrawal Penalty: 0%

Once the pre-sale period begins, participants may deposit wstETH into the hyETH pre-sale token. If the target threshold is met, deposits will be rebalanced into the initial composition defined for the product; as a result, pre-sale participants receive early access to the product before the formal launch. The formal product launch will occur 30 days after the pre-sale successfully closes; at this point, anyone can issue, redeem, or swap for the product. After the formal product launch, hyETH PRTs will be distributed to pre-sale participants.

If the target threshold is not met at the end of the pre-sale period, participants will not receive PRTs. Depositors can withdraw at all times during and after the pre-sale period to reclaim their wstETH; however, early withdrawals before the pre-sale ends forfeit PRT rewards. Depositors who sell or redeem their hyETH before the end of the post-launch period will also forfeit their accrued PRT rewards.

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Voting

For: Do move forward with the presale
Against: Do not move forward with the presale

[seb]

Neat to see this @anthonyb.eth . Does the compositon rebalances when the PTs reach maturity?

[allan.g]

hey @seb - yes hyETH will rebalance monthly and roll Pendle positions forward once they reach maturity (or remove a Pendle position altogether in favor of a higher-yielding strategy).

[allan.g]

The snapshot vote for launching the hyETH Pre-sale will open for voting at 12:00 UTC on 4 April 2024!

[mel.eth]

gm @anthonyb.eth - interim voting against only bc i don’t understand the presale threshold or what a PRT is. can you make this human readable for me? i want to support this as is seems to allow for an open and incentivized methodology of achieving a stable launch threshold. where could one get more info on that specifically, and if rewards are being allocated to early adopters, can you identify the source of the funds?

[hansolo]

@anthonyb.eth

Incentives: 30% of hyETH PRTs (successful pre-sale)

I really like the speed by which you are proceeding with testing the PRT idea. Regarding incentives: What do the of 30% hyETH PRTs actually mean? Does this mean that 70% of PRTs are allocated and staked by IndexCoop and the remainder is allocated to the parties involved in the pre-sale. Not sure if I understand this metric.

[mel.eth]

i dyor’d, more thoughts here, but would still like to know the motivation and full spec for the PRT method . . . this seems to be both a product proposal and a novel distro method adding to he complexity of the decision . . .

• Would this this product or PRTs be geofenced?
• Why is INDEX proper not being considered for revenue streaming first?
• Will there be a new UI on the website for this as it seems to create a two token system for this product, perhaps with a new/secondary market for PRTs?
• Why is revenue being given to early LPs in perpetuity (as opposed to time-bound)? This used to be incentivized with INDEX directly and a product had to get legs on its own; what is the plan to sunset this mechanism if it becomes regulatorily incompliant, ineffective or onerous to maintain?
• Have PRTs been used successfully at other protocol? Is there precedent in web3 or tradfi and how did it go?

[anthonyb.eth]

Would this this product or PRTs be geofenced?

• hyETH will be geofenced
• hyETH-PRT will not be geofenced (this seems counter-intuitive, but there is no primary market for hyETH-PRTs; i.e. we won’t be selling PRTs from the app)
• Staking the hyETH-PRT will be geofenced

Why is INDEX proper not being considered for revenue streaming first?

It has been considered, but based on financials there isn’t enough revenue to make for a meaningful distribution. It’s something we will continue working on though. It’s okay to share revenue via PRTs since it will be net new revenue, whereas distributing revenue when you need operating capital still is a different equation.

Will there be a new UI on the website for this as it seems to create a two token system for this product, perhaps with a new/secondary market for PRTs?

Yes, we will add Presale and PRT Staking to the app site. We won’t support secondary market sales of PRTs on the site as of now.

Why is revenue being given to early LPs in perpetuity (as opposed to time-bound)? This used to be incentivized with INDEX directly and a product had to get legs on its own; what is the plan to sunset this mechanism if it becomes regulatorily incompliant, ineffective or onerous to maintain?

We are trying to be nimble and experiment. We are well aware that 30% as long as the product is not deprecated by an INDEX vote is substantial, but we want to test the hypothesis of PRTs and it seems better on the first iteration to overshoot rewards versus undershoot. We won’t sunset the mechanism unless there is deprecation of hyETH the product.

Have PRTs been used successfully at other protocol? Is there precedent in web3 or tradfi and how did it go?

Not as far as I know in web3, but there are some similar things. I view PRTs as governance subDAOs for a specific product that have good tokenomics, so in that way it is similar to some things in web3. Also, in tradfi there are some similar mechansims, but none that I would say are exactly the same. Asset managers will often given rebates on fees for early large users of products, but this is perhaps more interesting as it is a negative rebate in effect.

PRTs are just a way to tokenize a token flow and so I think they are kind of uniquely enabled by blockchains.

[allan.g]

The $INDEX vote has closed in favor of launching the hyETH pre-sale!

The pre-sale for hyETH will be scheduled to begin on 2024-04-10 at 16:00 UTC and will be accessible through the Index Coop App for non-restricted persons.