IIP: 58
Title: Pulse Aggregate Yield
Status: Proposed
Author: Pulse Inc. & @Matthew_Graham
Created: 28 July 2021
Simple Summary
The Pulse Aggregate Yield (PAY) - Previously SYI - is designed to capture the best risk adjusted yield on USD stable coins within DeFi. PAY aggregates yield across DeFi into a single ERC20 token that can be readily traded.
As part of Index Coop’s DG1 process, this IIP is an opportunity for the Index Coop community to vett the product and signal intent to pursue launching PAY in partnership with the methodologist.
Motivation
PAY appeals to investors seeking to hold a portion of their portfolio in USD stable coins. The PAY product is designed for holders to passively earn and compound stable coin returns. By purchasing PAY, holders eliminate the problem of having to maintain a diversified productive stable coin portfolio. For those of us who typically like the simplicity of holding a single stable coin position, PAY will become the go to tradeable ERC20 token.
By being the aggregator of yield, PAY solves many problems for holders;
- Not enough time to keep up with the fast paced DeFi ecosystem problem
- Ability to comprehend and understand the various risks associated with each product
- What to invest in to maximise returns given the associated risks
For people who would elect to use a single protocol to earn yield, PAY offers the ability to gain access to a diversified productive stable coin portfolio in a single transaction.
DeFi users of all sizes can gain access to a broad diversified portfolio of productive stable coin assets in a gas efficient manner via a DEX. Users who would otherwise construct and manage a portfolio can now purchase a single product. This use case is particularly appealing to DAOs seeking to diversify a portion of their treasury. DAOs gain by saving the time and overhead costs associated with managing a portfolio whilst indirectly gaining access to specialist product managers.
The opportunity is to create a product that continually aggregates the best risk adjusted returns on USD stable coins into a seamless user experience. PAY is the go to money market product of DeFi.
Index Coop - Core Value Proposition
PAY provides a unique opportunity to automated yield aggregation, simplifying user experience just like how FLI revolutionised leverage trading. The vision for PAY is to aggregate the many stable coin yield generating strategies into a single tradeable ERC20 token.
Key reasons for Index Coop to launch PAY:
- Offer a product targeting stable coin market
- Diversify revenue with the inclusion of a market cycle neutral product
- Build integration / deep relationships with DAO treasuries
- Generate a potential significant AUM and revenue for the Index Coop
- Pioneer the first freely, readily tradable yield aggregator token in DeFi
Specification
Size of Opportunity
The market capitalization of stable coins grew at ~940% in the last 12 months alone and is currently worth ~$84.7B. Stable coins make up ~4% of the entire crypto asset class and to give this context, DeFi makes up ~5.88%. PAY enables Index Coop to target this ~$84.7B stable coin market without competing with any of its existing products.
In just two V2 Yearn vaults, USDC & DAI, Yearn has over $750M TVL yielding between 12%-15%. The Idle finance DAI vault which is an automated DAI compounding strategy utilising Aave & Compound with IDLE incentives has over $95M locked in it. If a new start up DAO can bootstrap a product to $95M, just think what the established Index Coop can achieve with the introduction of Liquidity Mining incentives and V3 concentrated liquidity bands. An automated way of depositing capital into a PAY pool on V3 has the potential to be a very lucrative investment.
The most comparable product to PAY, Yearn Lazy Ape Index (YLA) by Powerpool, offers investor access to the Yearn vault strategies and achieved a TVL of $10 million+ within one month of launch. Unlike YLA, PAY has the ability to integrate non Yearn vault strategies to optimise returns. Given Index Coop’s greater size, reputation and market penetration, the introduction of PAY represents a substantial opportunity for Index Coop to further grow AUM.
Looking past what others have achieved, initial feedback from a select few DAOs indicates PAY has significant market appeal. A handful of reputable DAOs that were contacted expressed high interest in using PAY as a diversification tool for their treasuries. The DAO Treasury market size is worth over $8B, if 10% was allocated to stables and 25% of that found its way into PAY that is worth $200M.
Product Differentiation
Within DeFi there are many yield aggregators that offer single stable coins strategies but there is yet to be a product developed that aggregates across the ecosystem holistically. PAY harnesses the most lucrative innovations in DeFi. An asset manager like Yearn can develop a new vault, or Idle Finance / mStable can bootstrap stable coin vaults with their governance token and PAY will harvest these opportunities for investors seamlessly. With Uniswap V3, the opportunity for automated concentrated liquidity for stable coin pairs creates another source of yield that can be utilised by PAY.
There is no product on the market that aggregates yield like PAY does into a single tradable ERC20 token. The same way Metamask & 1inch became go to aggregators for large traders, PAY is the go to productive USD stable coin product. The vision for PAY is to become the USD stable coin allocation in any portfolio.
Liquidity Analysis
Unlike other Index Coop products, PAY is predominantly maintained by either depositing or withdrawing capital from various protocols. There is the option to utilise on-chain liquidity for some products, however others do not trade on secondary markets. aTokens & cTokens representing capital deposited in the respective protocol are available on DEXs like Curve but imUSD is most easily attained by depositing directly into mStables vault. During the initial phase of PAY long life, we have optimised the design to best suit existing Set Labs functionality.
Methodology
Within PAY, capital is deposited across three risk tranches and is further diversified within each risk tranche to create a portfolio that minimises idiosyncratic risk and is optimised for returns. To determine which product is selected within the portfolio; all USD stable coins yield generating assets undergo a risk assessment process and then the risk adjusted score is ranked for each respective risk tranche. The highest scoring assets within each risk tranche are selected.
Prerequisites for undergoing risk assessment:
- Product must be available on the EVM compatible blockchain
- USD nominated
In determining the risk score for each product the following factors are considered:
- Total Value Locked ($M)
- Proven Product (time)
- Risk Protection
- Complexity
- Impermanent Loss
- Audits
The risk score determines which tranche the product fits within. In determining which product is to be included in PAY, the absolute return is calculated and then multiplied by the risk score to rank the products. The highest ranking products within each risk tranche with adapters built on Set Labs are included in PAY.
There are three tranches in PAY and within each risk tranche capital is allocated across multiple products. The number of products at launch is three per tranche. The number of products per tranche can change to facilitate rebalancing and as AUM grows optimising for returns.
Initial Composition
Based on early June 2021 market conditions, the table below shows the composition of PAY and the expected returns generated by each asset within the fund.
Note:
- All Incentivized returns are to be sold on market and redeployed increasing the vaults value
- Current Set Lab Integrations - Aave, Axie Infinity, Compound, Kyber & Yearn
Maintenance
Due to developer resources workload, PAY is to be launched in a developer lite format. This means PAY will periodically rebalance and PAY will be structured in a way that reduces the number of protocols to be integrated with the Set Labs platform. Rebalancing frequency is to be the later of every 2 months or when an allocation within PAY deviates more than 20% of its desired allocation. Of course, if incentives on a particular holding are scaled back, the vault will be rebalanced to maximize returns for PAY holders. This approach is expected to reduce the maintenance efforts of the product during the initial few months post launch.
The other type of rebalancing is when an asset within the fund is replaced by another asset. Depending on the liquidity constraints, positions may be phased in and out over time. This means the portfolio can vary the number of holdings within each risk tranche in order to facilitate reallocating capital. As AUM grows, additional diversification across each risk tranche can be added if this leads to increased overall returns or reduction in specific protocol risk.
When users mint PAY, the capital will be deposited into the underlying assets and wrapped tokens will be held in a Set Labs vault. This functionality is used within the FLI products (which deposit to compound) and differs from those based on liquid tokens (DPI and MVI). However, given the composition of PAY, minting and redeeming functions are expected to be gas heavy compared to trades due to the number of smart contract interactions in depositing capital into the underlying assets. This will be most apparent to small users during the initial launch phase until such time as there is sufficient on-chain liquidity.
Fee Structure
The PAY product will be launch with the following fee structure:
- Mint Fee: 0
- Streaming Fee: 35 Basis Points
- Redeem Fee: 0
- Fee Split: 50% Index Coop and 50% Methodologist
- Revenue Sharing: 50% Index Coop and 50% Methodologist
Revenue sharing includes all revenue streams generated by the PAY product. For example when allocating capital to a particular vault, like Yearn, incentives are provided to the partner for driving TVL to the protocol - these incentives (shared fees) are considered “Revenue Sharing”. The methodologist will pursue these opportunities with risk profiles in mind.
Author Background
Pulse.inc is 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. Providing key insights and educational content to help more newcomers go from zero to DeFi.
Matthew Graham joined Index Coop community in December 2020 and has since become a core contributor leading the Treasury Working Group. The PAY product has been jointly developed by Matthew Graham and Pulse.inc. Both parties are committed to the ongoing success of Index Coop.
