IIP-78: Launch The Yield Hunter Index ($YHI)

IIP: 78
Title: Yield Hunter Index (YHI)
Status: Proposed
Author(s): @Overanalyser
Created: 12 August 2021

Simple Summary

To create a diversified crypto fund of ERC20 tokens that have the opportunity to capture yield in addition to the underlying token price exposure. Stable coins and L1 tokens are excluded.

Abstract

To create a diversified fund using income generating ERC20 tokens on Ethereum main net which allow income generation to the benefit of the holders. The product will be built using Set protocol with liquid tokens purchased on DEX and wrapped tokens.

The use of productive tokens allows projects with inflationary tokenomics to be held without disadvantage to the passive holder. Tokens can include DeFi, Metaverse and Infrastructure projects. However, the methodology excludes ETH, (ERC20) BTC and stable coins.

The v0.1 proposal is intended to be a Minimal Viable Product (MVP) to allow rapid launch and future upgrades to capture higher yields. The structure will be a simple Market cap (capped at 20% for any component) with a simple streaming fee for holders. Income generation will be limited to the use of AAVE, Compound and Cream and DEX liquidity.

This will be an INDEXcoop methodology maintained by contributors.

Motivation

‌Some protocols are already generating income for holders via staking, or by issuing ongoing reward tokens. However, it requires time and attention to manage such positions to ensure balanced exposure and ongoing income capture. Many potential users of our products have stated that lack of income generation is a negative when considering a purchase.

In addition, some protocol tokenomics are such that the passive holder is at a disadvantage compared to those who are able to stake/lock up tokens or wait for vested returns. While some of the tokenomic designs are unfavorable for direct inclusion of staked tokens within an index due to redemption issues, they do encourage borrow demand. This means that some income can be captured by being a lender on a liquid money markets.

With the creation of Set protocol adaptors for Compound and AAVE there is an opportunity to build products that capture some income from a wide range of tokens. By forking the current adaptors for different tokens, and developing wrap adaptors for the Cream protocol, we now have the opportunity to quickly launch a product that captures yield for our users.

‌Rationale

‌The key considerations in designing this methodology are:

  • Quality and security of the underlying projects
  • Net positive income for holders at all times.
  • Accessible income generation which allows unrestricted issue and redemption.
  • Minimal development work to allow launch.
  • Community methodology to empower INDEXcoop contributors and remove friction from the launch and maintenance process.

The product is intended to be used by people wanting both price exposure and income generation from a passive product that can be used within a wider (user defined) income generation strategy including ETH, BTC and stable coins.

A protocol cap of 20% has been applied to avoid over concentration (example portfolio without cap would contain 35% of a single token).

A free floating market cap design was also considered as it would reduce the size of monthly rebalancing. However, the overconcentration is considered a larger challenge to holders.

Alternative income generation using yield generation protocols (e.g. Yearn and xtoken) would unlock significant additional yield in the future, but is not considered necessary for product launch.

While a management fee taking a share of the income might better align the interests of holders and INDEXcoop, a simple streaming fee of 1.25% is proposed for this product launch to minimize engineering work. Likewise, a mint and redeem fee has been discounted from the v0.1 methodology. In order to ensure new income generation for holders, an income threshold for each component has been set to 1.25%.

Products with built-in burn mechanisms to improve underlying token price (e.g. MKR) are included in the methodology when they meet the other criteria.

This proposal is intended to provide INDEXcoop with an easy-to-understand product to allow initial review and DG1 vote. It is expected that if it passes the DG1 vote, a small work team will form to review the methodology prior to the formal work team assessment and DG2 vote.

Specification

Overview

‌This product will be built on Set protocol contracts and the v0.1 specification will use a combination of:

  • DEX liquidity.
  • Compound, AAVE and Cream wrap adaptors.

Future iterations may include wrap adaptors for token staking contracts, additional money markets (Fuse), and yield protocols (e.g Yearn and xtoken).

Rebalances will be calculated by the methodologist (Coop contributor work team) and will be monthly.

Token selection will not be restricted to individual sectors but will exclude ETH (ERC20) BTC and stable coins.

Differentiation

Unlike Sector-based products (DPI, MVI, and BED) and the DATA proposal, the availability of income is a key selection criteria. In addition, the methodology does not limit itself to a single category.

Unlike leveraged products, this does not use any leverage or borrowing.

Compared to the PAY proposal, this product captures the underlying token price fluctuations. In addition, token weights are based on circulating market cap and not on yield or protocol risk tranching.

Compared to the LDI proposal, this product targets yield generation for all components. In addition, this product is intended to be part of a larger portfolio where the holder can complement it with exposure to ETH, BTC and stable coins based on their preference.

Competitor products, $DeFi+L and $DBI use income-generating tokens. However, they do not use income generation as a selection criteria, contain non productive components, and are restricted to DeFi.

Example composition

The launch composition will be limited to three money markets (AAVE, Compound and Cream). Based on a snapshot of AUM and Yields, an example composition would be:
image

Note: The weighted income calculation omits the effect of MKR burn.

This would result in the following locations for assets:

% of AUM
Native token / xSushi 21%
AAVE 11%
Compound 58%
Cream 9%

Future revisions of the methodology could allow use of different money markets (e.g. Fuse), or yield aggregators (Yearn or xtoken). Adding the yield aggregators results in additional income (at the cost of further Dev work):

image

Note: Development to allow ySNX and xBNT in the product would add 5.3% to the holders income.

The final allocation of assets would be:

% of AUM
Native token / xSushi 21%
AAVE 4%
Compound 8%
Cream 3%
xToken 4%
Yearn 60%

Size of opportunity

As the use of income-generating tokens makes listing on money markets or CEX exchanges more difficult, this product may have a restricted growth profile compared to $DPI due to reduced extrinsic productivity use cases/composability.

However, the capture of income for benefit will attract the attention of many more sophisticated/crypto-native traders. In addition, the inclusion of tokens not in our current products (LINK, CRV, BNT, BAT, 1Inch) will attract members of those protocols communities.

Two DeFi centric products have income-generating components:

  • $DBI with $14.5 M AUM, benefits from liquidity marketing with 41% in incentivized pools. $BDI claims a 4% income (due mainly to ySNX).
  • $DeFi+L has $3.6 AUM and captures ~ 0.6% income for holders.

The current AUM for the example portfolio yield generating tokens in the lending markets (excluding xSushi and MKR) is currently $630 M. This indicates that there is a clear demand to borrow the tokens in the proposed fund and if we capture 5% of the supply we will have > $30 M AUM.

Lending markets for tokens in example portfolio

Token Market Market size ($ M) Borrowed ($ M) Utilisation Current borrow cost
Link Compound 116.6 16.0 14% -4.8%
AAVE Compound 8.3 1.4 17% 6.8%
Compound Compound 270.3 39.7 15% -8.9%
SNX AAVE 15.4 9.0 58% 11.3%
BAT Compound 97.7 15.9 16% -2.8%
BNT Cream 0.06 0.03 48% 10.3%
0x Compound 112.8 19.0 17% -1.2%
CRV Cream 0.58 0.34 59% 12.3%
OMG Cream 0.06 0.03 50% 6.7%
1inch Cream 0.5 0.4 79% 15.0%
Balancer AAVE 7.50 3.40 45% 10.3%
Total 629.7 105.1

Initial estimates for AUM

  • 6 Months $ 10 M with $2 M in incentivised liquidity
  • 12 months $ 30 M with $2 M in incentivised liquidity
  • 24 Months $ 90 M with no incentives

User Stories

“I want to take a step back from daily transactions to manage my portfolio. Having $YHI allows me to be exposed to safe income generation on top of exposure to overall price action. $YHI in combination with Staked ETH, BTC on Celsius and yUSD allows me to balance my risk profile and generate income”.

“Our DAO treasury has significant ETH and Stable coin diversification with both generating income. We need something we can buy and forget that gives us broader exposure to the Ethereum ecosystem while avoiding dilution. Being able to generate yield means it’s paying for itself.”

“I want broad exposure that I can forget about. Generating income without needing to manage borrowings suits my risk profile”

“Holding income-generating tokens within single wrapper makes my tax reporting so much easier”

Methodology

Token inclusion / exclusion criteria

Tokens will be selected with the following criteria:

  1. ERC 20 on Ethereum main chain
  2. Not a stable coin
  3. Not ETH or ERC20 BTC
  4. Not a security
  5. Over 6 months project life
  6. Top 200 by market cap of all tokens on Coingecko ( > $250 M circulating MCap)
  7. Income must be over 1.25%
  8. Income generating token available by:
  • DEX liquidity
  • AAVE, Compound or Cream vaults

Criteria may be adjusted to produce a product containing 10 to 20 tokens.

Index weight calculation

Components will be selected on the basis of circulating market cap with a per token limit of 20% of the total portfolio value.

Technical on-chain specification

Technical complexity

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 multi-sig transactions by devs. However, we do avoid trade size/price impact issues.

In addition for some tokens, the best liquidity is on protocols not currently supported:

  • Balancer (AAVE and BAL)
  • Bancor (Link and BNT)

Note, many of these challenges are also present in the PAY proposal.

Costs

Cost to customer

For the v0.1 methodology, a 1.25% streaming fee will be charged.

Reward tokens available to casual users (AAVE, COMP, etc) will be captured for the benefit of holders (and are included in the income calculations above)

Cost to mint / redeem

For a 12 component fund split between the money markets and DEX swaps from ETH:

Protocol # Gas Total
AAVE 3 195 k 585 k
Compound 3 220 k 660 k
Cream 3 185 k 555 k
DEX trade 12 110 k 1,320 k
Issue 1 170 k 170 k
Total 3,290 k

At a gas price of 50 gwei 3,290 k would cost 0.165 ETH ($411 @ $2,500 ETH)

Notes:

  • 12 approvals would add a further 600 k ($75 at 50 gwei and $2,500 USD)
  • MVI exchange issuance for 15 tokens uses ~ 2,500 k gas.

Rebalance frequency:
Monthly following methodologist instruction.

Manual Rebalance magnitude:

Income redistribution between the underlying tokens is expected to be 1 to 2 % per month.

Rebalancing due to underlying token issuance is expected to be 1 to 2%

Having a 20% cap may introduce additional rebalancing when the capped token under/overperformed the average. This is estimated at 5%. [Note DPI with a 25% cap on UNI has UNI rebalances of 1.55%, 5.53%, 4.55%, and 2.53% since April 2021 ].

Token addition or removal is expected every few months and may be up to 20%.

An average of 5% to 10% is expected each month.

Fee split

All streaming fees will go to INDEXcoop. All methodologist bonus rewards will go to INDEXcoop.

Methodologists will be paid by INDEX coop contributor rewards/working group rewards.

Meta / intrinsic productivity

If available, metagovernance rights will be held by INDEX holders.

Reward tokens available to casual users (AAVE, COMP) will be captured for the benefit of holders.

Protocol level rewards (e.g Yearn Affiliate rewards) will be captured by INDEX coop.

Liquidity

An $YHI:$ETH pair is proposed as default as YHI is expected to be volatile vs stable coins.

A xy = k pool or a concentrated liquidity pool may be considered.

Underlying liquidity
Looking at the 1% price impact data for the individual components, a $120,000 issuance would cause 1 pool (ZRX) to have >1% price impact.

When the pool LP fees and price impacts are weighted by the fund composition, a $1,000,000 issuance would result in 0.25% fees and an average price impact of 0.62%.

Composition Liquidity fee $1,000,000 issue price impact on pool
Link 20% 0.30% 0.30%
AAVE 20% 0.10% 0.11%
Maker 13% 0.30% 0.76%
Compound 11% 0.30% 0.95%
xSushi 9% 0.30% 0.43%
SNX 7% 0.30% 0.95%
BAT 4% 0.30% 1.28%
BNT 4% 0.10% 0.02%
ZRX 3% 0.30% 3.70%
CRV 3% 0.30% 0.00%
OMG 3% 0.30% 1.60%
1inch 2% 0.30% 0.32%
Balancer 1% 0.11% 0.02%
Weighted average 0.25% 0.62%

Market support

Seed liquidity and any liquidity mining incentives would need to be provided by INDEXcoop.

‌Author Background

I (@overanalyser) have been an active member of the INDEXcoop since its launch in October 2020. I have a keen interest in on-chain index products and liquidity and I have been the joint Product working Group lead (with Punia) since it was created in April 2021.

It is my intention that if successful in passing DG1, I will form a small work team (myself with 2 or 3 others) to revise the methodology prior to DG2 and then provide ongoing maintenance following launch. This team would be managed by the PWG and be paid via the PWG contributor budget.

Marketing support / distribution / partners.

All marketing would need to be provided by INDEXcoop.

Revision history

The initial proposal for discussion - 12 August 2021.
Typo fixes for IIP vote - 20 August 2021

Copyright

‌Copyright and related rights waived via CC0.

16 Likes

Let’s launch products!

6 Likes

with simple indexes unblocked, let’s launch some awesome products! FOR.

5 Likes

High energy :muscle:

Lets get some more products out there!

4 Likes

Wow… wow and wow!!! I’m strongly FOR this!!

Can’t wait to go YIELD HUNTING… with YHI!! (Is it pronounced as “Yeet”?, with the “t” is silent.) :sweat_smile:

2 Likes

Add DPI and deposit on Iron Bank for +5% APY? Would increase TVL and volume of DPI a la BED

Screen Shot 2021-08-16 at 1.56.44 PM

7 Likes

As per the INDEXcoop shared calendar (and announced in the weekly planning meeting) there is a community call planned for friday 20th at 16:00 UTC

YHI community call
Friday, August 20 · 16:00 UTC
Google Meet joining info
Video call link: https://meet.google.com/kcf-ehji-vab

4 Likes

@Pepperoni_Joe

Can this Proposal be scheduled for DG1 vote on the 23rd to 26th August?

Thanks
OA

P.S. Let me know if it needs edited, I can move some of the details into a reply.

3 Likes

Hey, OA. I will start queuing the proposal for vote on that date. Best of luck and look forward to the community call.

4 Likes

How would the yield income be treated?

I think it could be created 2 versions of this product almost for the price of one:

  • the first one where the set distributes yield income to investing addresses
  • the other where the set capitalizes the yield income authomaticaly by reinvesting it and buying more tokens.

My instinct would be to capture all the income and build AUM.

Some tokens generate income in their native token (e.g. xSushi). Others will generate reward tokens (cLINK gets COMP). I would expect that we would be selling the reward tokens (every rebalance ???) and use them to grow AUM.

Creating a second (dividend paying) product is an idea for the future, but dual product at launch means we need twice the liquidity to launch and so makes the launch more expensive.

4 Likes

The latter option sounds better from a tax perspective.

Hi @overanalyser,

This is definitely an interesting proposal. Thank you for sharing it with the community.

Can you please provide some back testing to show the performance of YHI by itself and then in comparison to DPI. I am particularly keen to learn how YHI performs relative to other products.

Perhaps @Ahuja who has already modelled out DPI and MVI can run the simulations and we can see what the relative performance looks like. I think this comparison data will be really helpful for future conversation.

Thats a good idea.

We will need to look at the average returns for each component as part of the token selection (native yield should be direct, reward tokens will likely need some assumptions).

My instinct is that the returns will be dominated by the underlying token price action, so I would include the none yielding tokens in the comparison.

Recording has been processed by google and is here:

https://drive.google.com/file/d/1wij4EDxmoNXiX5CNmzlJTY3dZ80dMo63/view

Presentation is here:

2 Likes

Hello and thank you @overanalyser for working on this proposal.

It is great that the Coop is looking at intrinsic productivity within Indices, we agree that this is a feature that will make all Coop products much more attractive to a certain niche of users focused on incrementing gains. And Defi Pulse is eager to cooperate with the Coop & other methodologists to advance this feature not only for DPI & PAY, but for DATA & LDI as well.

There have been numerous proposals & ideas before on Intrinsic Productivity whether within a single product or a dual product system:

Notable are these 2 posts (1 & 2) by @overanalyser from January which provide a great path as well as insights on the benefits & challenges of intrinsic productivity.

@Kiba also proposed a simple intrinsic productivity back in April, and here one of the main blockers seems to have been on the Engineering side as mentioned by @dylan at the time.

DG1 for Intrinsic productivity was positively voted on by the community, but was not followed through, we assume for those same technical reasons.

One main point that pops up when looking at the Index Composition. Based on the presentation given to the community, and regardless of the methodology, this product at launch seems to significantly overlap with both DPI at 60% & DATA at 24% (Both LINK & BAT are arguably the DATA tokens with some of the largest communities in the space).

In addition, we also see even more possibilities for overlap on a cursory evaluation of the tokens that make up the difference:

BNT: Low liquidity on DEXes supported currently by Set infrastructure. (Probably the main reason why it’s not on DPI now).
0x: Low liquidity on DEXes supported by Set infrastructure.
Some other tokens that make up the difference seem to have liquidity issues, past a certain scale, which won’t allow this index to scale or will need to be removed.

Based on all the above, it seems that the main questions to ask here, considering the costs involved in launching & maintaining a new index:

Does it make good use of coop ressources to create a new product that has a very similar composition to DPI + DATA?
Don’t you think that we should strengthen our existing (leading) indices by implementing a generalised solution, and activate intrinsic productivity across all Coop products?

@overanalyser You’ve always been the one pushing for intrinsic productivity on DPI - let’s continue what you started and benefit from it across all Coop products.

4 Likes

Just adding context, there were also very strong legal concerns on what the addition of intrinsic productivity would mean for the status of DPI and other products as securities.

4 Likes

@overanalyser Here are my initial thoughts and questions about the product proposal:

Do these adaptors exist today? Would launching this product be as straightforward as launching a simple index product or would it require additional EWG and/or Set Labs resources?

Does this make sense given the variable APY? It has been only 2 weeks since you posted this proposal and LINK (the token with the largest weight in the index) no longer meets this hurdle as it has ~0.01% APY on Aave (0.67% if including stAAVE rewards) and 0.47% APY on Compound.

In addition, Aave, Maker, Compound, BAT, and 0x all fall below the 1.25% APY threshold. Please correct me if I am misunderstanding, but if this product existed and rebalancing were being executed today, would we not be potentially selling ~63% of the index?

I completely agree with this - it is one of the key reasons I was so excited about @Kiba 's Activate DPI Intrinsic Productivity proposal and why Titans of Data is so keen on intrinsic productivity for DATA.

I think it’s worth noting that launching a new product focused solely on generating yield does not solve this problem for our current users who want to invest in the growth of a particular sector (i.e. DPI, DATA, MVI, etc.) AND capture income from the underlying tokens.

As an investor, I hold DPI and plan to hold DATA post-launch, but would strongly prefer to hold intrinsically productive versions of these products. I personally would not hold YHI in the current iteration largely because of (1) the overlap with existing index products, and (2) instability in portfolio composition due to variable APYs of the underlying tokens (i.e. I’m going to have LINK exposure in some months and not in other months).

I’m not sure how the product being a community methodology removes friction from the launch and maintenance process? If anything, this highlights to me that Index Coop needs better processes for working with methodologists regardless if they are “community” or “external” methodologists (@DarkForestCapital’s comment largely mirrors my own thinking on this subject). Index Coop should be launching the most compelling methodologies/products regardless of whether they originate from the IC community or not.

I think these are very important questions to answer, especially given that 84% of the weights in the initial proposal are covered by existing products (i.e. DPI, DATA), and that this would be even higher if MVI tokens like MANA or ENJ, both listed on Aave, were included.

2 Likes

Hi @Thomas_Hepner

You raise some good points and I have been thinking about them for some time.

Overlap is a concern and if we pass DG1, then we’ll be looking at how we can improve the methodology to make it more attractive to holders and to reduce overlap. For example ILV offers 40% liquid staking, but there is a vesting period. If a money market was available, then I would expect >2% income for people leding ILV.

For Variable rates vs rebalancing churn. The methodology review will consider the long term historical income, and what factors will modify it over time (expected end of incentives). This needs to consider both the native yield (0.47% for LINK in compound) and the rewards tokens (a further 0.9%).

image

We do not currently have the smart contracts to launch a complete structured product with intrinsic productivity (wrapped tokens + Rebalancing + Exchange issuance). The creation of the contracts required will require R&D, most likely from SET labs Engineers. However, most of the contracts needed for YHI, are also required for LDI and /or PAY. The only new feature in the current YHI spec is the addition of Cream tokens. As Cream is a Compound fork, I hope that the additional work will be minimal.

Regards

OA

Definitely agree with this approach first. To me, our base layer products are easy to understand and have demonstrated pmf. Making productive versions of them means little to no additional user/market education in turn lowering the potential adoption hurdle. (Note I am NOT suggesting tampering with the original assets that risk CEX listings and legal ambiguity etc)

I am agnostic on how this would be achieved, be it a dual product lineup or by utilising vault mechanisms (I believe indexed recently set up vaults for their products so we are potentially already behind here at least from an innovation perspective)

I will admit my biases here. I have nothing against YHI and think it is a really innovative and creative idea (would never expect anything less from @overanalyser!), but, personally, I would not see myself investing in this way as it is difficult to forecast what the underlying portfolio would consist of despite the offer of yield. I would much prefer a productive, predictable and easy to understand product such as an x/i/pDPI/MVI/DATA /BED that gives me the freedom to choose my level of exposure to each sector in a simple format.

Lastly, I know the subject of cannibalization of dual product lineups has arisen in the past but at the end of the day total TVL is total TVL and individual product liquidity difficulties are thankfully reducing with time.

4 Likes