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:
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):
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:
- ERC 20 on Ethereum main chain
- Not a stable coin
- Not ETH or ERC20 BTC
- Not a security
- Over 6 months project life
- Top 200 by market cap of all tokens on Coingecko ( > $250 M circulating MCap)
- Income must be over 1.25%
- 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.
