IIP-60: DG2 - Llama Diversified Index $LDI

Title: DG2 - Llama Diversified Index $LDI
Status: Proposed
Author: @llama with support of PWG
Created: 13-12-2021

Simple Summary

The Llama Diversified Index (LDI) seeks to offer a productive diversified crypto index that is optimised for volatility based performance. By allocating fixed portions of LDI to key themes, holders will always have exposure to the most consistent winners within each key sector across the ecosystem.

Utilising volatility adjusted returns intends to allocate more capital to winning tokens, whilst rotating out of outperforming sectors. By maintaining a cash allocation, LDI buys the dip and rotates towards cash when higher vol assets outperform. LDI is intended to be a truly set and forget productive, diversified portfolio. The interest from DAO treasuries is a testament to the set and forget design features.

Llama is truly excited by the prospect of partnering with Index Coop and looks forward to developing a long-term prosperous relationship. LDI = Let’s Do It!

Abstract

The LDI is a productive and diversified crypto index that optimises returns relative to risk across various sub-asset classes within the crypto ecosystem built on Set Protocol. The allocation will initially be divided among 6 sub-asset classes: Stablecoins, Bitcoin, ETH, DeFi, Metaverse, and Web3 Infrastructure.

Through this curation, LDI optimises for intrinsic productive and volatility adjusted returns whilst providing holders passive exposure to broad market segments, targeting those lacking time or expertise. The cash allocation ensures passive strategies like buying the dip and rotating gains into stables is a passive feature. LDI is a product to recommend to DAO treasuries and those new to crypto who want a true set and forget product.

Motivation

This new set has been developed to provide holders a diversified portfolio of productive assets wherever possible to maximise returns. By providing holders with an automated diversified asset allocation solution, LDI enables passive investment in a diversified set that provides access to the main thematic investment sectors on the Ethereum network. The diversified portfolio construction has already proven to have strong product market fit as Gitcoin has expressed interest in becoming an early investor in the product.

In time, LDI will be integrated across DeFi, allowing for extrinsically productivite opportunities to be generated on top of a balanced index, further enhancing the appeal of holding a diversified portfolio. Llama has built an extensive network across DeFi and is able to accelerate LDI integrations across the ecosystem. At the time of writing, Llama has approximately 25 contributors that are also members of other DeFi communities.

LDI has several key advantages over traditional diversified portfolios:

  • Utilisation of productive assets where possible
  • A more sophisticated asset allocation methodology that optimises for Sharpe ratio while integrating appropriate constraints to ensure diversification among established crypto sub-asset classes
  • Low vol USD yield aggregation (PAY or higher yielding versions)
  • Access to a liquid secondary DEX market
  • LDI productive use cases

Llama has already received expressions of interest from various parties regarding this particular product and intends to create complementary products as part of our overall treasury management strategy solutions.

Why Llama Community and LDI

The Llama Community provides treasury management to a number of DeFi’s largest treasuries and is also an influential metagovernance delegate. The LDI product concept was born whilst constructing a balanced portfolio for a valued community partner. This partner is willing to invest around $2M in LDI after the product has been launched. The best indication of product market fit is when a product is born to solve a problem.

In the past, Llama has recommended Index Coop products to a number of its partners and sees the relationship between the two communities being complementary, allowing a positive sum relationship to be developed.

Specification

Size of Opportunity

DeFi treasuries have amassed a total AUM of over $6B. As DAOs seek to diversify their treasuries, passive and diversified portfolio solutions will enable simplified management. The total addressable market for a diversified Ethereum-focused crypto portfolio is tremendous. Capturing a small portion of this overall market means generating significant AUM for Index Coop. A diversified crypto index product currently does not exist within DeFi and therefore represents a unique opportunity for Index Coop to partner with a Treasury Management specialist in Llama.

Llama’s network includes university endowment funds which Llama believes will find LDI attractive. Llama has already discussed the LDI with a number of DAOs and found strong support for the product which can be used as an allocation within a broader treasury management strategy.

Product Differentiation

There are currently no diversified portfolio offerings available as crypto-native structured products that optimize for returns relative to standard deviations among various sub-asset classes. Indices like BED offer simplified solutions for the risk assets within a portfolio, but they do not allocate to stablecoins (an essential component of a diversified crypto strategy). In addition, the methodology of BED equal-weights the sub-asset classes (e.g. Bitcoin, ETH, and DeFi) rather than optimises risk/reward between them. While there is definitely a market for equal-weighted indices like this, the LDI intends to offer a more sophisticated portfolio management solution.

The introduction of a stablecoin allocation will lead to automatic rebalancing toward risk-on assets during periods of market stress and toward risk-off assets during periods of market euphoria. This diversified approach ensures contrarianism and is a key component of a portfolio management mindset.

Finally, a bias toward productive assets addresses a key treasury diversification goal. For example, Nexus Mutual recently invested a large amount into stETH and Fei Protocol recently approved purchasing stETH. Since this product attempts to create a diversified allocation while also ensuring productivity where possible, there is no need for a DAO treasury seeking a simple, passive solution to do more with their investment assets outside of holding LDI.

Methodology

A detailed explanation of the methodology can be found in the DG1 proposal, linked here.

Liquidity Analysis

A detailed liquidity analysis breakdown can be found here and here. Thank you very much @overanalyser.

Initial Composition

The initial composition of LDI can be found here dated 16th July.

Come Late-November, the composition of LDI has been kept largely the same. The most up to date version is shown below.

Note: Llama will confirm composition closer to launch. Using the DG2 composition to progress through the governance process. Not major changes are expected at the time of writing.

Maintenance

Llama will periodically provide Index Coop with an updated LDI composition.

Llama seeks the ability for DAO treasuries to deposit large sums of capital into a contract that acquires the underlying assets gradually over time to minimise slippage. Llama would also like the same functionality built into the redeem function to allow large positions to be unwound over time.

Technical On-Chain Specification

Use of money market wrappers adds complexity in a number of areas:

  • Issue and redeem requires interaction with different protocols
  • Exchange issuance becomes more complex and is not currently implemented for any sets.
  • Likewise, arbitrage issue and redemption contracts are more complex than DEX based products (but likely outsourced (e.g. flashbots))
  • Calculation of NAV for deposit tokens is more complex and is not currently implemented
  • Reblances for wrapped tokens are not currently automated and so will require multisig transactions by devs. However, we do avoid trade size/price impact issues

The above challenges are known, are not unique to LDI and are being worked on.

Rebalance Frequency

Initial rebalancing frequency is expected to be quarterly or depending on how various token allocations perform over time, it could be longer. All rebalancing costs are incurred pre-revenue split. Ideally, when LDI is suitably large in size, we intend to shift rebalancing costs onto LDI holders. This can either directly or indirectly via the streaming fee to offset gas costs. Index Coop and Llama Community can revise the fee structure to ensure LDI is fairly priced for all market participants. Llama Community seeks to proactively optimise the product for primarily holders and supporting communities.

Meta / intrinsic productivity

Metagovernance rights will be held by INDEX holders as per DPI, MVI, DATA etc… Llama is a delegate voter with proposal power amongst some of the largest DeFi names and wherever possible would like to actively collaborate for the great good of defi.

Seed Liquidity

Llama Community will supply $600K to $700K of seed liquidity to a Gnosis Safe multisig that will have both Index Coop and Llama Community signers. The multisig shall have a 3 of 4 signer requirement, that is 2 Index Coop and 2 Llama Community representatives. This capital will be made available for a minimum of 6 months and will be deployed into concentrated liquidity pool/s. An automated liquidity manager product will be used and Index Coop is more than welcome to contribute capital to the pool.

At this point in time, Llama is favouring Gelato G-Uni pools due to the composability of the G-Uni pool token. Llama reserves the final decision on where and how liquidity provided by Llama is managed. There exists the ability to add the G-Uni token to Index Coop’s Fuse pool and provided there is a safe oracle feed, to draw a loan for the purpose of increasing liquidity. Given the Gelato and Llama Community relationship with Aave, listing the G-Uni pool token, ERC20, on Aave’s AMM is a desirable outcome. Any INDEX tokens attained from providing on-chain liquidity through the joint signer Gnosis Safe will be returned to Index Coop.

Go To Market Strategy

The Go-To-Market (GTM) strategy for LDI is an exciting new concept. With Llama Community providing seed liquidity, we do not intend to incentivise liquidity at launch. We instead propose creating a LDI staking contract that will receive rewards. The LDI staking contract is more capital efficient compared to say a LDI:ETH LP token staking contract used on MVI as 100% of the deposited capital is contributing to generating revenue. The staking contract is expected to last for an initial 2 months, max 3 months if Index Coop wishes to extend the runway.

A tentative proposal is presented below to give a flavour of what is being considered for those that stake LDI:

Month 1: $250K in INDEX

  • Scenarios:
    • At $5M AUM staked = 60% APR
    • At $10M AUM staked = 30% APR
    • At $20M AUM staked = 15% APR

Month 2: $125K

  • Scenarios:
    • At $5M AUM stkaed = 30% APR
    • At $10M AUM staked = 15% APR
    • At $20M AUM staked = 7.5% APR

The total spend detailed above is $375K. This is 100% from Index Coop’s $400K preliminary budget.

The balance is reserved for spending at a later date, similar to what is detailed in the GMI DG2 post.

In phasing out the staking contract, incentives will be offered to encourage LDI and ETH holders to provide liquidity via an automated/managed liquidity pool strategy offered by either Gelato or Visor. These incentives are intended to grow TVL in the concentrated liquidity pool. During this time a second liquidity pool will be deployed so that the seed capital continues to provide liquidity but does not receive incentives. This will enable the INDEX incentives to flow to the newly attracted liquidity providers.

A tentative proposal is presented below to give a flavour of what is being considered for those that deposit capital into the Visor or Gelato concentrated liquidity LDI:ETH pool.

Month 3: $75K over 1 month duration

  • Scenarios:
    • At 5M TVL deposited = 18%
    • At 10M TVL deposited = 9%

The total spend is now $400K (Index Coop) + $75K (Llama) = $475K.

The $75K is Llama’s preliminary budget.

If gas costs are to be reimbursed for those that withdraw LDI from the staking contract and deposit LDI and ETH into the automated liquidity manager pool, then this would also need to be included. A similar type of expense is being proposed for MVI is detailed here. Gas cost reimbursement would be in addition to the funds detailed above.

Whilst the automated liquidity incentives are ongoing we hope to be announcing, or are soon to announce, the first extrinsic use cases for LDI beyond the Rari Fuse pool. Llama will be supporting treasury sales throughout this entire process in effort to grow LDI AUM. Note, treasury sales becomes easier with more time in the market and the ability to utilise Exchange Issuance (ETH to LDI).

Beyond the initial seed liquidity phase, 6 months, Llama is open to continually providing liquidity all be it in the most productive way. This may include providing liquidity on networks other than Ethereum. As this is some time post launch, exact details are yet to be determined, however noting here Llama is willing to discuss ongoing liquidity provisions via the joint gnosis safe. Further to this, Llama is willing to invest capital in growing LDI beyond what is mentioned above and will be working with Index Coop to maximise the growth potential of LDI.

The above is presented based upon the information on hand at the time of writing. Pending the success of GMI’s launch, LDI seeks to incorporate learning and execute the best possible GTM strategy.

LDI = Let’s Do It!

Fee Structure

The LDI product will be launch with the following fee structure:

Mint Fee: 0
Streaming Fee: 135 Basis Points
Redeem Fee: 0

Fee Split 60% Index Coop and 40% Llama Community
Revenue Sharing 60% Index Coop and 40% Llama Community

The economic construct of LDI can be revisited at a later date and changes can be implemented when both communities agree to the terms. Note: The inclusion of any future Index Coop products like PAY may trigger such discussion and also if Llama emerges to take on the majority of the on-chain measurable product spend.

Revenue Sharing

Revenue sharing includes all revenue streams generated from the constituents of the LDI 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 stkAAVE received for depositing assets into Aave, intrinsic productivity, this not Revenue Sharing and this goes 100% to LDI holders. Revenue sharing is defined here only in anticipation that such a discussion could arise in the future.

Author Background

Llama is building economic infrastructure for DAOs. Llama is working with Aave, Gitcoin, Fei Protocol, Radicle, ARCx, Harvest, and has other top tier DeFi integrations in the pipeline. Llama aims to set the gold standard for DAO treasury management and create category defining templates that apply across DAOs.

We would like to highlight there are several Index Coop contributors who are also active within the Llama community. No Llama contributor has a direct financial relationship with LDI. Anyone from Llama who contributes towards LDI’s methodology maintenance is remunerated in a similar way as to how Index Coop rewards Product Working Group. Llama is pre-token and like other communities (including Index Coop) early contributors are anticipating being rewarded for their efforts in helping grow the Llama Community. LDI and the Index Coop relationship is a feature in that growth trajectory.

Copyright

Copyright and related rights waived via CC0 4.

10 Likes

Hi @mel.eth and @Mringz can we please get a DG2 snapshot for December 20th .

4 Likes

PRD for reference

@Mringz The WTA will be posted shortly. Can we still plan for snapshot to start today?

3 Likes

Hi Everyone, I wanted to clarify a point above that was brought to my attention. The fee split will be 60/40 IC/Llama post gas cost.

1 Like

Time to go vote people :white_check_mark:

5 Likes

Hey - I think this is an exciting product and a great collaboration between Llama and Index.

@Llama , have you explored diversifying the ETH staking component with multiple providers rather than going all in on Lido? There are some other great platforms out there, for example Stakewise has unique tokenomics which provides the highest staking yields and they have been the gold standard in terms of staking security (even helping Lido with an exploit a few months back). Lido is just the first name everyone thinks of when it comes to ETH staking, but it doesn’t mean they are the best/you should stake 100% of your ETH there. Full disclosure, I do have an affiliation with the platform, but happy to discuss this further if you are interested?