IIP-22 Bankless BED Index

Governance Proposal
1

iip: 22
title: Bankless BED Index
status: Proposed
author: Ryan Sean Adams(@RyanSAdams), David Hoffman(@TrustlessState), LemonadeAlpha (@LemonadeAlpha)
created: 2021-02-26

Summary

Bankless would like to propose that the Index Coop manage a Set based on an index of Crypto’s most investable assets, BTC, ETH, and DPI, in equal weight.

This construction—known as the BED Index or Bankless BED Index—seeks to give safe, passive access to a vehicle which captures equal-weighted upside from the most promising use cases and candidates around the theme of blockchain as a generationally disruptive technology: store of value, programmable money, and decentralized finance.

BED methodology

  1. Scope: The index includes the top 3 investable assets with real usage and large capitalizations around the theme of blockchain: BTC, ETH, DeFi (DPI).

  2. Weighting: Neutral construction, equal weight

  3. Rebalancing: First Friday of every month

Motivation

The BED index is meant to track crypto’s top 3 investable assets.
The proposed index is a full portfolio solution intended for beginners, or as part of a core-satellite construction for more advanced investors.
Bankless brings a strong reputation and expertise to the table and has an audience which represents the core personas this index seeks to serve. We have referred to this construction as the Bankless portfolio in the past.

The BED meme, a theoretical index now potentially brought to life by Index Coop, has captured the hearts of the Ethereum community. BED and Bankless have great brand recognition amongst our target personas and we expect Bankless can use it’s media platform spanning video, podcasts, and articles to educate newcomers on the assets in the BED index.

The composition is:

  • 33.3% Bitcoin
  • 33.3% Ether
  • 33.3% DPI
  • Rebalanced the first Friday of every month

Core value proposition - Customer

  • Set and forget, self-driving crypto exposure
  • Betting on assets that allow for independent banking (bankless assets)
  • Low cost to hold with regular diversification

Core value proposition - Index Coop

  • Supports DPI AUM
  • Large Total Addressable Market (TAM)

Component justification

$ETH (~$200b) is economic bandwidth and the reserve asset of DeFi, so a heavy focus on ETH makes sense for any initial investment in decentralized finance. This is an investment in ETH as a store-of-value, commodity, and capital asset.

$BTC (~$1T) is the largest cap crypto money and currently a reserve asset of crypto banks. Some exposure is essential, but too much means an underweight position in DeFi. Having a portion in BTC with monthly rebalances captures some of the benefit of the volatility vs ETH.

$DPI (Components = ~$30b) DeFi is growing and a carefully curated set of DeFi money protocols with massive potential, and use of monthly reblances captures the volatility.

Research

Size of opportunity:

Ultimately, this index could be the preeminent bundled crypto product. We expect that this portfolio is suitable for the vast majority of crypto participants. Reaching several billion in AUM over the next 5 years is not unreasonable.

Differentiation

BED is different from any product in the crypto ecosystem. Piedao’s BCP has a similar construction (non-DPI DeFi weighting), but has not captured the attention of the market (~$5m AUM).

BED has a similar construction to CGI with key difference being gold in place of defi. There is potentially slight cannibalization between CGI and BED.

Potentially, there is some competitive crossover with DPI, but ultimately, they are different products (and, of course, BED includes DPI).

On-chain liquidity analysis

All assets are available in DEX’s with deep liquidity.

Methodology:

The general goal of an equal weighted index is to represent the performance of its constituents in equal proportion to one another. In comparison, the degree to which the performance of a constituent of a market capitalization weighted index is represented in the index is dependent on the size of the constituent.

For example, a market capitalization weighted index tends to be highly representative of a small number of its largest constituents. The equal representation enabled by an equal weighted index provides wider exposure to the index constituents than its market capitalization weighted alternative.

The underlying index is rebalanced after the close of trading on the first Friday of each calendar month. The Fund is rebalanced in accordance with its Underlying Index.

Market requirements:

  • The components must have a Large cap valuation $25b+ [If an Index, the corresponding token market caps must have a sum of >$25b]
  • The components must show signs of heavy usage either as a network (btc, eth) or smart contract theme (DeFi)
  • The assets must have sufficient liquidity for initial inclusion and rebalances.

Technical requirements:

  • Available on Ethereum blockchain
  • Trust-minimized assets
  • The token must not be considered a security by the corresponding authorities across different jurisdictions.

Safety Requirements:

  • Assets and themes within Bankless BED Index should have vast, well-established safety guarantees.
  • Any network/protocol must have conducted sufficient security audits and/or security professionals must have reviewed the protocol to determine that security best practices have been followed.

Index Maintenance

BED is maintained monthly in two phases:

Determination Phase

The determination phase takes place during the fourth week of the month. It is the phase when the changes needed for the next reconstitution are determined.

Reconstitution Phase

Following publication of the determination phase outcome, the index composition will change to the new weights on the first friday of the following month. I.e components will be added or removed.

Fees

0.25 % Streaming fee (.125 to Bankless, .125 to Index Coop).

Author background and commitment:

Ryan Sean Adams is a crypto investor & co-founder of Bankless. He’s an open finance maximalist who propagates the message of financial sovereignty. His mission is to onboard the first billion people to crypto through memes, media, and education.

David Hoffman is the co-founder of Bankless, a content studio with a newsletter, podcast and YouTube channel focused on education on how to live a life without banks.

About Bankless:

Our financial world today is run by analog banks. Crypto money provides an alternative. The option of self-sovereign money & banking. In a world where private keys act as money and code makes that money programmable, the entire money system changes.
So Bankless is about banking less. And less banking. And less dependance on banks.
We are the Bankless Nation.

Newsletter

Twitter 2

10 Likes
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A 50/50 fee split between Bankless and Index Coop seems generous. I’d like to better understand the reasoning.

7 Likes
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I love this product idea. This is the first all in one style product I’ve seen that I could strongly recommend to non Crypto-native friends looking for exposure to this space. It’s a sensible play, even for someone with long term crypto experience - one purchase for all your crypto needs. Minimising taxable transactions and gas fees along the way.

The key challenge to making this product a success is ensuring that the onboarding process from fiat on-ramps is as painless for the user as can be.

4 Likes
4

This is a very exciting way to experiment in a co-venture with a very strong and impressive media partner.

I think a core consideration is fleshing out expectations for how BED will be marketed on the partner platforms. Will there be a sponsor spot in podcasts and ads on the websites? A specific number of tweets and other social media promos? Or just verbal mentions? It’s generally best practice to set expectations prior to making a final agreement. Ideally, it would be as close to a customary marketing Insertion Order as possible.

2 Likes
5

I’m excited to see this make its way to an IIP. Some have noted here and throughout past discussions that a 50/50 split is a bit high, but we must remember that the revenue that the IC gains from the DPI holdings is 0.65 * 0.33 = 0.216%. This means the actual fee split would be more like 0.39% to the IC, and 0.175% to Bankless.

6 Likes
6

Why wouldnt we pay Bankless in index instead of giving them a huge cut of the streaming fees? Splitting fees seems to needlessly muddle the narrative of IC’s revenue stream and for what exactly? Coming up with the idea BED? Its a good idea but should it result in an endless revenue stream? We should just pay bankless in Index for advertising and let them access the streaming fees from there.

1 Like
7

On the point of streaming fees - my questions would be, to what capacity would bankless be involved in the ongoing maintenance of this product?
If the coop will be doing all the maintenance then I think it would be fair to just have a one-off payment, or set a time limit on bankless’s claim on streaming fees (e.g. they get a cut for the first year, after which all fees go to coop).

1 Like
8

@loc Or you set a yearly / quarterly reduction in % share. As a result Bankless are rewarded highly for promoting early adoption and user growth, but as the product becomes more established and other forms of marketing also promote it their earnings reduce. (Actually their $ earnings will continue to increase as AUM increases, but just less parabolically)

You could operate on a tender based threshold. After x months / years Companies, influencers, marketeers could pitch us their proposal to grow BED and win the branding rights for the product and the associated fee. Similar to how companies sponsor football stadiums etc. This would ensure that we always have a way to choose what’s best for the Index.

This also wouldn’t negatively impact on Bankless, as the incumbent, they would have the highest opportunity to retain the product as they have the expertise, the track record to pitch for.

Absolutely love the product still!

1 Like
9

I don’t support such a high ongoing fee split with Bankless.

Didn’t @LemonadeAlpha come up with the BED index anyway?

4 Likes
10

I agree with you.
We should know what Bankless would do for BED’s growth.

11

I agree with general sentiment of why pay Bankless so much especially when it’s entirely Lemonade’s idea and they memes it into existence.

I think we shouldnt charge any fees for BED at all. If
the intentionn is to have BED be a constant fixed weight index this is actually a good candidate for a balancer pool for a few reasons:

  1. Why pay for methodologist to rebalance when balancer pool automatically rebalances and we earn fees for that instead of paying fees to Bankless
  2. BED takes practically no brain cells to do, it doesn’t change allocation, and it’s only 3 tokens so not the high gas savings you get by buying a broad index token like DPI. We aren’t adding any value, just making distribution easier. We already make fees from DPI component we should treat BED as a “loss leader”
  3. BED doesn’t have the same risks as running DPI on balancer. There is no possibility of a token going to 0 (except DPI but thats on us anyway) and you want “impermanent loss” because that’s what keeps it a fixed weight
  4. This increases liquidity for DPI instead of having it locked in a set contract
  5. Balancer pool is better value for our users! They earn swap fees from dex swaps and they don’t pay fees because smart contracts are automating the methodologist role so we don’t need to pay Bankless at all.

If BED gets passed I think Lemonade should get a fat bonus ($20k?) and Bankless can get INDEX for marketing like any other community contributor. They are providing marketing services, that is all, separate concerns between marketing and methodologist since methodology can be managed autonomously by smart contracts

7 Likes
12

Love the idea of BED (and the Bankless crews’s content) but think the fee is potentially an issue to wide adoption. Happy to be proven wrong here, but I think the fee should be more like 0.15-0.25% Max. here.

When there’s a vote, I’ll vote FOR as this deepens the relationship between Bankless and the Coop, Bankless has great distribution, and on balance seems like a win which can be achieved with little engineering resource. Happy to be shown if I’m wrong on that last point @dylan.

I also think that if Bankless acts as a top of funnel driving buyers to BED, these folks could cross sell into other index products, MVI, SYI, etc.

Look forward to seeing more info re what Bankless will do to promote BED!

Semi-unrelated: If this partnership shows the general Bankless-Coop working relationship works well. I’d be open to a deeper partnership with Bankless - which I’d assume would be more $INDEX skin in the game in return for impressions and referrals.

@ryanseanadams @trustlessState @LemonadeAlpha

1 Like
13

I wanted to offer a quick take on the marketing fee to Bankless.

In TradFi, it is common for some funds to charge what is called a 12b-1 fee. This fee is paid by the fund out of fund assets to cover distribution expenses and shareholder service expenses. Here is a breakdown from a U.S. report on this fee class:

“Distribution fees" include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.

Some 12b-1 plans also authorize and include “shareholder service fees,” which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

I tried to find the industry average of the 12b-1 fee to total fund expense for comparison purposes. I was able to find a Motley Fool report (admittedly not the most academic of sources) that states that of the 1,571 funds that charged a 12b-1, the average 12b-1 fee was 0.31% and the average net expense ratio was 1.45%. Working through the math, that means for funds with a 12b-1, ~21.4% of the expense ratio is dedicated to the marketing fee.

Considering the DPI portion of the underlying BED assets generates revenue for the Coop, the effective streaming fee captured by Bankless is ~23% of the total fee (as identified by @LemonadeAlpha in the community discord). This is a little higher than the industry average, but generally in line. I would like to make sure that the Bankless team adequately markets the index to justify capture of what is essentially a 12b-1 fee. Given their platform reach and focus on investor/newcomer awareness, I fully expect they are capable of justifying the expense if our incentives are properly aligned.

@Kiba brings up a point that I thought of as well. This is essentially a very easy to replicate index. If DPI is successfully onboarded to centralized exchanges, anybody could build this portfolio with minimal costs. Differentiation is going to have to come from branding (which Bankless can help with) or investor benefit (which @Kiba alludes to with the balancer pool swap fee capture). Currently, the biggest benefit is that it is an easy buy-and-hold diversification product for the crypto space. There are plenty of 60/40 equity/fixed income mutual funds that capture AUM without being substantially differentiated from just buying SPY and AGG (passive ETF index funds), so I think it is possible to do this with adequate marketing.

One last thought: the more we could increase its composability throughout DeFi the better, since it would offer a new DeFi user a chance to get a diversified crypto portfolio that could also be used as collateral in DeFi. Partnerships could be important here.

3 Likes
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I think the main question for me is how do we classify Bankless, as a methodologist or a marketing/branding partner?

I view Bankless as a marketing/branding partner. The fee split for that, accounting for DPI fees, is fair. It would be great if we could somehow ensure the continuity of their commitment and support for as long as the fee is accruing to them.

However, Bankless would also receive the methodologist bounty introduced in the original Index Coop launch post. This I don’t agree with, because I don’t view them as a methodologist given the fixed composition of the index and little to no maintenance required.

On the product itself, I think Balancer v2 will also enable earning an income on a portion of assets in the pool? Balancer is a better fit for this product. But I don’t think that aligns with the Index Coop narrative. We have differentiated ourselves partially by avoiding the use of Balancer pools for index construction and instead building on top of the Set Protocol infrastructure. I think we should stick with this for BED as well.

2 Likes
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Can you explain this logic? Coop’s narrative is we have the best products on the market.
Screen Shot 2021-03-29 at 11.27.10 AM

There are very specific reasons why Balancer is a bad option for a product like DPI. I think I addressed all of these issues and why they are in fact advantages for BED.

We haven’t even been fully utilizing the power of Set Protocol as an asset management platform so i don’t know why we would hamstring ourselves to limiting ourselves to their platform if it’s not always the best option and we aren’t even going to use it properly

16

You are right. I suppose in my head that narrative has always been “we have the best products on the market built on top of Set Protocol’s architecture.”

So, with Balancer, it’s obviously a different business model right. First, we get compensated with trading fees, not streaming fee. As a long-term, buy & hold product, I think BED is more aligned with the streaming fee model. It’s not meant to be traded. Imagine BED growing to $1bn and yet our revenue being based simply on trading fees. If there’s no streaming fee so how do we compensate our partners, Bankless in this case, in this scenario? I wonder if INDEX holders would be able to execute meta-governance for DPI held in BED if built on top of Set? I’m sure that’s not possible with Balancer.

Overall, while I think Balancer is a better fit for a fixed weight, 3-asset index, I’m not sure it’s a better fit for Index Coop.

17

DPI tokens are held in the DPI Set contract regardless of where the DPI token itself is. We can vote with all DPI underlying tokens whether people are LPing on uni/sushi/balancer, deposited in cream/aave, or even move DPI to L2 on loopring. DPI is an abstraction layer on top of all the underlying tokens we can do whatever we want with the actual AUM.

By having BED on Balancer that means BED token itself is a representation of an LP position. That doesn’t change whether the BED token is intended to be traded. ETH2x-FLI is intended to be traded yet is built on Set Protocol as an example. We are concerned about asset management of the underlying tokens, whatever does that most effectively for the use case is what we should use. The actual token we issue that represents the underlying assets can be used however the holder wishes and isn’t affected by whats going on behind the senes.

My suggestion is we don’t make any fees at all on BED since it’s dead simple and has no IP as DPI does so will be highly competitive. Using Balancer I’m pretty sure we wouldn’t even be able to charge fees on BED directly, only getting fees from DPI within BED. I can deploy BED to Balancer right now with maybe $200 in gas fees and it would run more efficiently and effectively than paying bankless and IC to do it for me. So for any position >$2,000 the cost to enter an LP position on balancer will always be cheaper than the yearly fees paid on BED. As a user, whats the advantage of going with Coop’s BED for less profit and worse performance? I can get paid for better performance or i can pay for worse performance. Choice is pretty obvious

1 Like
18

These conversations tend to lean towards the technical aspects of launching/maintaining the index product (re the conversation around Balancer vs Set). Its important to keep the target user for this index front and center - it is your friend that just reached out to you on Twitter for the first time in a year and they are interested in crypto and they thought they could ask you because they see all of your crypto tweets… they want to know how to start investing in crypto and they say they have been keeping an eye on XRP because it is still “really cheap”. You don’t want to over-extend and overwhelm them, but you want to help them learn some basics and get some initial exposure. BED.

Best path is a direct Fiat → BED. Next best is Fiat → ETH → DEX → BED. Even the second of these options can be hard for new users. But by building a structured product (however simple it is) and partnering with one of the premier media/content creators for new crypto users we can start to imagine bringing more and more crypto newbies along this path.

If I am not mistaken, even before the BED meme the Bankless go-to-advice for new users was to get small exposure to Bitcoin and Ethereum and then keep researching and getting comfortable. This has been their path for new crypto users all along. A lot of their headspace has gone (and continues to go) to serving this very target user. I am not worried about the fee split with Bankless because, imo, we need them as a partner on this to get the marketing and distribution right - it is likely going to be even harder than DPI because once you are past crypto newbie this index might stop making sense for you… But the TAM is still huge, and creates a top-of-funnel for the rest of our Index products.

12 Likes
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I’m in agreement.

It’s a great product for new customers, and coming from three strong brands in DeFi.

We could use a balancer pools (others already have), but I think a set protocol fund fits our narrative against using AMM based funds and improves composability.

Yes it’s expensive compared to buying the three separately. But people are willing to pay for convenience and outsourcing the portfolio structure.

In short, it’s a good product for some customers.

We could charge less for it, but 0.8% is not bad value.

2 Likes
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I agree distribution is important and distribution is not affected at all by what the underlying management functionality is beneath the hood. BED will always be an ERC20 whether its built on set or balancer and will be listed on uni and purchasable with fiat in consumer apps either way. We aren’t sacrificing anything by choosing the better platform, in fact it has more benefits for everyone since it reduces fees, maintains the fixed weight of the methodology better, and increases DPI liquidity. The end product is exactly the same - an ERC20 that represents BTC/ETH/DPI - except with a balancer pool it actually maintains fixed weights instead of wildly fluctuating between monthly rebalances and pays user to hold it. How is that not a good thing for end user?

Pay Bankless referral fees or whatever incentive program, im not against that. If we really want to claim to be the best index creators then we need to practice that and not be ignorant maxis. All the anti-AMM arguments for DPI don’t apply here as i detailed in my original comment. Utilizing set and adding fees to BED is against being the best index creators.

2 Likes