IIP: 58
Title: Pulse INTerest (PINT) & Pulse Aggregate Yield (PAY) Indices DG2
Status: Proposed
Author(s): Pulse Inc & Matthew Graham
Created: 01-04-2021
Simple Summary
The initially proposed Pulse Aggregate Yield Index (PAY) – previously Stable Yield Index (SYI) – was a yield index comprising three risk tranches on Ethereum Mainnet. Realizing that too broad of a composite index may run the risk of not addressing a clear target audience it was decided to separate out these three tranches into their own indices. Doing so will enable users to create a portfolio according to their unique risk tolerance and yield demand. The low-risk and medium-risk tranches are now PINT (Pulse INTerest Index) and PAY (Pulse Aggregate Yield Index) respectively.
All Pulse Yield products follow the same core design elements to capture the best risk adjusted yield on USD stablecoins within DeFi. Yield is aggregated across DeFi into a single ERC20 token that can be easily traded. As yield accumulates, the price of the PINT and PAY token steadily increases.
Motivation
Yield indices appeal to investors seeking to hold a portion of their portfolio in USD stablecoins. PINT is designed for investors who seek as part of their asset allocation a yield aggregating product that only uses the safest yield sources in DeFi – whether based on risk management or liquidity considerations. PAY on the other hand is more suited to investors who are comfortable with additional protocol risk in order to achieve double-digit annual yields using stablecoins. The potential to create and maintain a third index with significantly higher yield, risk, and turnover is left for future development, as well as variations on other networks.
Pulse Yield products are designed for holders to passively earn and compound stablecoin yields. By buying the respective token, holders eliminate the problem of having to maintain a diversified productive stablecoin portfolio that includes costly rebalancing and reinvesting of non-stablecoin incentives. For those of us who like the simplicity of holding a single position, PINT and PAY will become the go to ERC20 token.
By being a basket index of selected yield opportunities, PINT and PAY solve many problems for yield seeking investors:
- Not enough time to keep up with the fast paced DeFi ecosystem
- Difficulty to accurately comprehend and understand the various risks associated with each product
- Which yield opportunities to invest in to maximise returns given the associated risks
For DAO treasuries, fund managers, and retail investors alike, the Pulse Yield product offering allows them to gain access to a diversified productive stablecoin portfolio in a single transaction.
The launch of products with distinct risk profiles allows investors to create custom portfolios based on their own risk budget by combining PINT and PAY. This use case is particularly appealing to DAOs seeking to diversify a portion of their treasury and that may have liabilities with different durations. DAOs do not have to spend time and effort on the yield opportunity selection process and can instead focus on larger asset allocation decisions.
It is worth noting that even the yields expected from the low-risk PINT product are higher by an order of magnitude compared to US TradFi yield products such as CDs or savings accounts.
Index Coop - Core Value Proposition
Pulse Yield products provide a unique opportunity to introduce tokenized yield aggregation by simplifying the user experience – just like FLIs did for leverage products.
Key reasons for Index Coop to launch PINT and PAY:
- Offer a product targeting the fast growing stablecoin market
- Diversify revenue with the inclusion of a market cycle neutral product
- Build integrations / relationships with DAO treasuries
- Address a new user base of yield focused investors
- Pioneer the first tokenized yield aggregator in DeFi
- Offer a compelling product for yield starved TradFi investors
Specification
Size of Opportunity
The size of the stablecoin market is over $166 billion according to Coingecko, outsizing DeFi’s $151 billion market cap. Providing yield to investors has led to Yearn amassing over $5.5 billion in Total Value Locked (TVL). A single Yearn vault, the DAI v2 vault, has over $550 million and currently nets a 2.52% yield. This is more than Index Coop’s TVL and is exactly why Index Coop should be expanding into this segment of the market.
Market & Customer Research / Product Differentiation
Within DeFi there are many yield aggregators that offer single stablecoin strategies but there is yet to be a product developed that aggregates across the ecosystem holistically solely based on risk and yield. Pulse Yield products simplify the user experience and by creating a tradeable ERC20 token, unlock an entire new frontier of use cases and extrinsic productivity opportunities.
The vision for the Pulse Yield products is to become the USD stablecoin allocation in any portfolio for DAO treasuries and retail investors alike. An early allocation by the Index Coop treasury would be a strong signal to other DAOs as a proof of concept in business development discussions.
Methodology
PINT
Selection: The selection universe of yield opportunities are USD stablecoin deposits in interest generating DeFi protocols on Ethereum.
In order to qualify for selection yield opportunities have to pass the following criteria:
- Deposited asset is a USD-pegged stablecoin
- The interest generating DeFi service is considered a low risk DeFi primitive (currently only overcollateralized lending protocols)
- The yield opportunity’s protocol has had at least $500M in deposits for at least 6 months
- The protocol has been audited and is considered safe by security professionals
Eligible yield opportunities are ranked by their expected total yield and a maximum of 6 opportunities are selected.
Weighting: Constituents are weighted to maintain a diversified portfolio while maximising yield. Weights are assigned based on the constituents’ expected total yield in descending order: 30%, 20%, 15%, 15%, 10%, 10%. If less than 6 constituents pass the selection screen weights are scaled up proportionally.
Rebalancing: The list of eligible yield opportunities is updated on a quarterly basis. If the active share between the current and new implied composition is greater than 20 percentage points the index is rebalanced.
Ongoing maintenance: Accrued non-stablecoin earnings are claimed and reinvested in the respective yield opportunity on a monthly/quarterly basis.
Initial Composition: Based on early January 2022 market conditions, the table below shows the composition of PINT in addition to its yields based on current values.
| Allocation | Product | Non Incentivized Return (vAPR) | Incentivized Return (vAPR) | Total Return (vAPY) | Return Contribution (vAPY) |
|---|---|---|---|---|---|
| 30% | cUSDC (Compound) | 3.10% (cUSDC) | 1.21% (COMP) | 4.31% | 1.29% |
| 20% | cDAI (Compound) | 2.97% (cDAI) | 1.03% (COMP) | 4.00% | 0.80% |
| 15% | aUSDC (Aave v2) | 3.27% (aUSDC) | 0.60% (stkAAVE) | 3.87% | 0.58% |
| 15% | cUSDT (Compound) | 3.20% (cUSDT) | 0.61% (COMP) | 3.81% | 0.57% |
| 10% | aUSDT (Aave v2) | 2.83% (aUSDT) | 0.62% (stkAAVE) | 3.45% | 0.35% |
| 10% | aDAI (Aave v2) | 2.82% (aDAI) | 0.50% (stkAAVE) | 3.32% | 0.33% |
| Total | 3.92% |
PINT is intended to be a very infrequently rebalanced product. Farmed incentives like stkAAVE and COMP will need to be sold for stablecoins and deposited into the underlying strategies. The constituents within PINT are not expected to change unless there are increasing regulatory concerns or smart contract security risks that warrants action. All in all, PINT is expected to be a very low maintenance product.
PAY
Selection: The selection universe of yield opportunities are USD-pegged stablecoin vaults or other medium risk strategies.
In order to qualify for selection yield opportunities have to pass the following criteria:
- The vault or strategy puts the principal only to USD stablecoin risk exposure
- The protocol has been audited and is considered safe by security professionals
- The yield opportunity’s expected total yield is greater than PINT’s yield
The following parameters are taken into consideration when selecting from constituents that meet the above criteria:
- Total Value Locked (TVL): A higher value typically indicates a more robust yield level and higher capacity of the strategy
- Proven Product: time in the market of the strategy, stable yields in the past
- Risk Protection: No hidden features that put the principal at risk
Eligible yield opportunities are ranked by their expected total yield and a minimum of 4 opportunities are selected.
Weighting: Constituents are weighted to maintain a diversified portfolio. The highest ranked constituent is receiving a target allocation of 30%, the next highest ranked 5 percentage points less down to the lowest ranked. If weights don’t sum to 100%, they are proportionally scaled.
Rebalancing: The list of eligible index opportunities is updated on a monthly/quarterly basis. If the active share between the current and new implied composition is greater than 20 percentage points the index is rebalanced. Rebalancing may happen as a phase-in/out if market conditions require.
Ongoing maintenance: Accrued non-stablecoin earnings are claimed and reinvested in the respective yield opportunity on a monthly/quarterly basis.
Initial Composition: Based on early January 2022 market conditions, the table below shows the composition of PAY in addition to their expected return as shown on their respective website.
| Allocation | Product | Non Incentivized Return (vAPR) | Incentivized Return (vAPR) | Total Return (vAPY) | Return Contribution (vAPY) |
|---|---|---|---|---|---|
| 30% | imUSD (mStable) | 13.85% (mUSD) | - | 13.85% | 4.16% |
| 25% | bb-a-USD (Balancer Boosted Pool) | 2.29% (USDC / DAI / USDT) | 11.95% (BAL) | 14.24% | 3.56% |
| 20% | yvUSDT (Yearn USDT Vault) | 11.78% (USDT) | - | 11.78% | 2.35% |
| 15% | vaDAI (Vesper DAI Aggressive Vault) | 8.30% (DAI) | 1.33% (VSP) | 9.63% | 1.44% |
| 10% | fUSDC (Harvest USDC Vault) | 6.97% (USDC) | 0.65% (FARM) | 7.62% | 0.76% |
| Total | 12.28% |
PAY may periodically rebalance when additional TokenSet contract integrations become available. The initial universe of yield opportunities is limited to protocols that are either already integrated by Set or that can be integrated without large effort before launch. As the yields within PAY are double digit and don’t yet include Yearn’s Curve vaults, the yields and hence PAY’s performance may be more volatile at launch. This may require rebalancing due to unanticipated changes in market conditions or incentivized yields. Yearn’s Curve vaults are expected to be included once integrated by Set. This will also lead to a new revenue stream through the Yearn Affiliates incentive program. As assets grow, capacity may become a problem and additional constituents can be added, ensuring that overall returns do not suffer while diversification benefits outweigh additional protocol risk.
Costs
Cost to customer
PINT: 0.35% streaming fee
PAY: 0.95% streaming fee
Cost to mint / redeem
Both products will be launched without a mint or redeem fee.
Fee split
The revenue generated from the streaming fees or any other means, after subtracting gas fees, will be split 40% to DeFi Pulse and 60% to Index Coop on a monthly basis. Seed liquidity contribution provided by the Index Coop and/or organized by DeFi Pulse will be split evenly.
Liquidity Analysis
Unlike other Index Coop products, PINT & PAY are predominantly maintained by either depositing or withdrawing capital from various protocols. There is the option to utilise on-chain liquidity for some products, however some do not trade on secondary markets. aTokens and cTokens representing capital deposited in the respective protocol are available on DEXs, like Curve, but imUSD is most easily obtained by depositing directly into mStable’s vault. During the initial phase of both products, we have optimized the design to enable the product to come to market sooner.
Author Background
DeFi Pulse and the Pulse Inc brand are committed to maintaining and creating indices as well as driving the continued growth of the Index Coop.
DeFi Pulse is the leading website for the latest analytics and rankings of DeFi protocols. DeFi Pulse’s rankings track the total value locked into the smart contracts of popular DeFi applications and protocols and provides key insights and educational content to help more newcomers go from zero to DeFi.
Matthew Graham joined the Index Coop community in December 2020 and has since become a core contributor at Index Coop. Matthew has experience consulting DAO treasuries with respect to their investment strategies. Matthew receives benefits defined by a private non-disclosable agreement with DeFi Pulse. As a result, when Pulse yield products are discussed within Index Coop, Matthew will not actively participate in that segment of the discussion.
Marketing support / distribution / partnerships
DeFi Pulse and Pulse Inc will support the launch of this product through all their channels (websites, blog, twitter) and are open to joint marketing efforts with the Index Coop.
Revision history
Copyright
Copyright and related rights waived via CC0.
