Synthetix wishes to contribute to the Index Coop product offering by proposing the Synthetix Debt Pool Mirror Index (SDI), a market cap-weighted index reflecting the largest synths in Synthetix. SDI would provide SNX stakers with a hedge against market moves that would adversely impact their underlying debt positions.
Business Analysis Team
Marketing Benefit
Score: High
Synthetix is the largest and most well-known derivatives protocol in DeFi, with TVL of $2.3bn as of 4/15/21. The Index Cooperative values partnerships with such recognized entities in DeFi. Furthermore, Synthetix will actively help promote the product with their users.
Partnering with Synthetix on such a relatively unique use case for an index product gives the Coop new marketing opportunities. This product showcases the flexibility of the Index Coop and the desire for top DeFi protocols to partner.
Market Size
Score: High
As always, we start by asking: what problem are we solving for the customer? The use case is applicable to every SNX staker: staking SNX creates a debt in sUSD that can move against holders if not properly managed. SDI would allow for a hedge against this debt via a basket of wETH, wBTC, DAI, DPI, and LINK (which cover the vast majority of synth exposures).
Synthetix has proactively reached out to Index Coop for a solution to this problem - a strong signal that many of its customers find this situation to be a pain point.
If Synthetix incorporates SDI into the staking flow (i.e., a user that stakes SNX and mints sUSD then has the opportunity to add SDI as a hedge), we should see stronger adoption of the product. The market sizing estimate of $50mm-$100mm in AUM represents 6-12% of the stated Synthetix debt pool (~$760mm), which feels achievable.
Adding yet another product with exposure to DPI is also beneficial for Index Coop in that it increases AUM further for our flagship product.
Methodologist Capacity
Score: High
Synthetix is a top-10 DeFi project and has over $2b locked in the protocol. They are some of the most forward thinkers in DeFi. SDI is proof of that. Partnering with Synthetix sends strong signals to the rest of the DeFi ecosystem that the Index Coop is not only open to partnering but also to developing index solutions that match use cases emerging from a partner’s protocol.
Finally, Synthetic is committed to the product’s success. They are seeding the pool with $5M and running an incentive campaign for 8 weeks with 4,000 SNX/week.
Unique
Score: High
While the index itself is not unique - only adding DAI and LINK to what would be the “BED” index - the use case for this index is very unique and promising. Using an index product to provide a hedge for SNX stakers shows the flexibility of Index Coop products & partnerships and expands the design space. Building SDI into the staking flow also makes it highly visible and unique.
Fees Generated
Score: Medium
The streaming fees are 0% to encourage adoption among SNX stakers. The product will instead generate yield through intrinsic productivity with a 70/30 split between Index Coop and Synthetix. The estimated intrinsic productivity revenue is $2-3mm (which, if based on the estimates of $50mm-$100mm in AUM, seems reasonable, given that’s less than 6-12% of Synthetix’s debt pool of ~$760mm, as of March 30, 2021).
Product Development Team
Risk
Score: Medium
The actual pool is relatively plain vanilla. Any risk above our normal products is constrained to the intrinsic productivity measures.
Difficulty
Score: High
This product requires more work than any of our other products to date given there will be a weekly rebalancing of the pool off-chain (at least at first). This work will fall on the Index/Set team. Also, it is likely that SDI will push for intrinsic productivity at launch or soon after launch. This all still has to be scoped out and will be the first product for which the Index Coop builds intrinsic productivity. This adds some difficulty to development, but it should also pay dividends down the road as the Coop develops a playbook for intrinsic productivity.
Special thanks to @jdcook and @puniaviision, who collaborated on this analysis.