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

High energy :muscle:

Lets get some more products out there!

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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:

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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

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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

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@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.

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

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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.

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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:

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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.

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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.

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@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.

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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.

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Sounds to be a good and needed extension of INDEX products. I am certainly helping to spread the word. I am also available for other tasks if needed.

Realised I missed something in my original response that I believe is worth sharing pertaining to the money market aspects within this proposal. From my tradfi days of collateralised securities lending and money markets a typical market dynamic existed thus:

Borrowing costs (/lending fees) would typically rise when the market sentiment was bearish on a particular stock and therefore borrowing to short it. (And/or liquidity was generally tight.)

Conversely, bullish market sentiment means less shorting → meaning less borrow demand → meaning lower borrowing costs → lower lending fees…

These of course will not be the only reasons that affect borrowing demand but they will be one.

Typically in an investment strategy with a long term investment horizon, short term market movements are not a concern and lending out the assets for short term traders to short offers a way of making assets productive and the yield from doing so often contributes to the portfolio’s long term performance.

However, YHI is not a fixed objective, long term investment strategy… The frequent rebalancing into higher returns could theoretically mean continually rotating into assets that are undergoing price suppression. Of course, at this point, this is hypothetical, but I believe there is a potential scenario here where capital is at risk in the hunt for yield leading to an overall negative return.

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Hi @MrMadila

Yeh, I’ve certainly seen some tokens with incomes mainly based on short demand. Those are the ones I’m trying to avoid with my selection criteria.

I’m using two main criteria to try and remove such unwanted behaviours:

  • using a 28 day average yield to try and exclude short term borrowing to short. On the lending platforms there is 28 day historical data int he UI, and I’ll sort dune dashboards to get better data,
  • Understanding where the yield is coming from. I’m seeing three routes:
  1. Protocol liquidity mining, aBAL is earning ~10% in AAVE rewards. These will be sustained for as long as AAVE want to farm them. Similarly cLINK is really just a COMP farm.
  2. Liquid staking rewards from the protocol (e.g. xSUSHI or bBadger).
  3. Long term use cases for tokens. This is typically a protocol token that has staking, but isn’t liquid. So, by lending it, we have liquidity in return for reduced yields.

E.g.

  • BNT staking earns ~ 50%, but pays 4% on Cream.
  • SNX staking has 12 months vesting, but lending captures 3%
  • Lending CRV can earn 10%, which is less than the 4 year lock up benefits.
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