Bankless wishes to contribute to the Index Cooperative product offering by proposing BED, an equal-weighted index to provide holders with exposure to the most popular investment theses in crypto: BTC, ETH, and DeFi (via DPI).
Business Analysis Team
Marketing Benefit
Score: High
The marketing benefit from partnering with Bankless is substantial. Bankless has faithfully promoted DPI and more recently Index Cooperative, so we should have high confidence that, given skin-in-the-game with BED, Bankless will strongly promote the product as a straightforward approach to gain exposure to high conviction crypto themes: BTC, ETH, and DPI. A byproduct of Bankless’s promotion of BED is that it also implicitly grows awareness and AUM of DPI, given DPI’s ⅓ contribution to the BED allocation.
Ultimately, BED is already a strong meme, and combining that with Bankless’ marketing engines can create strong viral loops for the product.
Market Size
Score: Low
As always, we start by asking: what problem are we solving for the customer? BED aims to target an end-user that is a new entrant to crypto markets and is looking for a simple solution to gain market exposure. The closest product in the market to BED aiming to cater to this segment is PieDAO’s BCP product, which launched in November 2020 and only has $4.6mm in AUM (as of 4/27/21). BCP has the exact same target equal-weighted allocation across BTC, ETH, and DeFi.
A likely reason for BCP’s low adoption (which BED may face as well) could be that the envisioned end user isn’t well represented in the current DeFi user base. How many new-to-crypto users exist that do have non-custodial wallets to buy the product but don’t also have their own preferred allocations to BTC and ETH? The type of user that is able to buy ERC-20 tokens off Uniswap may not find this product appealing because they are savvy enough to pair DPI with an ETH and/or BTC allocation of their choosing.
In other words, while there is indeed significant demand for BTC, ETH, and DPI on their own, the sum of the parts may actually be less attractive because BED forces an equal-weighted allocation to tokens that are already easily obtained.
It’s important to note that this market sizing dimension is being graded based on the market today, which is largely a user base of relatively savvy early adopters.
Methodologist Capacity
Score: High
Bankless is one of the most trusted sources of DeFi education, awareness, and insights. They generate consistently strong content via multiple channels (podcasts, Twitter, newsletter, etc.). Bankless is also well-situated to reach this new-to-crypto user segment, given much of their strategy is already focused on such users. They also bring considerable knowledge and connections that would serve the Index Cooperative beyond BED and into other products.
Partnering with Bankless on BED is ultimately a bet on what we believe will be a strong longer-term strategic relationship. This is a key component of the Index Cooperative product strategy.
Unique
Score: Low
BED is very easy to replicate. This exact product exists explicitly in PieDAO’s list of products and implicitly in the wallets of nearly every DPI user. The difference is that each user can adjust up and down their personal BTC and ETH allocations based on their personal preferences.
Fees Generated
Score: Low
There have been strong viewpoints from the community on the proposed fees (35bps, split evenly between Bankless and Index Cooperative).
- One position has been that there should be no streaming fee for BED, given that it is relatively easy to replicate outside of the product.
- An opposing position is that while BED’s asset allocation may be easy to replicate for DeFi natives, for DeFi newbies (the target segment), the service provided of making a single purchase decision has value, and that justifies a fee.
- The issue around any contention around BED is that it is easy for DeFi natives to say that BED doesn’t need to exist, but we aren’t building the product for them. We are trying to forecast how new crypto users will interact with this product as Bankless drives more into DeFi.
What about the size of the fee opportunity? That is a function of 1) AUM and 2) the fee split between Index Coop and the methodologist.
- From an absolute level, while the fees are lower than other Index products, 35bps reflects the relatively plain vanilla management of BED. As such, 35bps feels right.
- Some in the community have argued for incentivizing Bankless in another way, but we would argue that there is no better incentive than an uncapped streaming fee opportunity. This best encourages Bankless to strongly promote the product.
- Some have argued for a fee split that is not 50/50 but rather leans in favor of Index Cooperative (in line with other Index Coop products). This may be a compromise.
- Ultimately, if the market for the envisioned end user is as small as we suspect, the AUM won’t be large enough for these concerns to matter.
Product Development Team
Risk
Score: Low
BED is a plain vanilla index similar to DPI and MVI. Launching such a product doesn’t present any atypical risks.
Difficulty
Score: Low
The product is expected to use Set Protocol’s infrastructure to create the index - a technology we are well familiar with. The construction would be in line with other Index Cooperative products so would not require extra work. Launching this product should require minimal efforts on the engineering front. Rebalancing is also relatively straightforward relative to other products.
Special thanks to @jdcook and @puniaviision, who collaborated on this analysis.