Index Coop’s Exchange Traded Product Business

The goal of this post is to provide clarity of the business of Index Coop and what it takes specifically to succeed. Hopefully in this post, the community understands how their individual contributions lead to success and the community knows what is valued and what working groups need to be created.

The Exchange Traded Product Opportunity is Huge

Within DeFi, investors and traders are taking increasingly sophisticated market positions - making sector bets in DeFi / NFTs and taking leverage long and short positions on common tokens. For the individual investor, these positions are difficult and expensive to set up. They require significant knowledge of asset selection criteria / underlying lending protocols and significant time / effort / gas to maintain positions.

Exchange traded products (“ETPs”) simplify the experience for investors by offering a pre-packaged product that can be acquired or disposed of on a secondary market or exchange. Products such as market weighted indices and leverage / inverse TPs are very popular and represent some of the highest volume products on traditional and CeFi crypto exchanges. For example, crypto exchanges such as Binance / FTX / Matrixport offer indices, leverage, and other structured products and make significant amounts of money through these structured products.

ETPs monetize in a variety of ways:

  • Management Fees: Fees charged annually over time (also called expense ratio).
  • Securities Lending: Blackrock / Vanguard will lend out the underlying securities to hedge funds for interest.
  • Creation / Redemption Fees: Whenever ETP units are created or redeemed, there is typically a service charge from the ETP sponsor

For indices, they typically monetize via a management fee and from securities lending. For trader-focused products (e.g. leverage / volatility indices), fees are made on the streaming in addition to creation/redemption. Thus, the leverage products monetize based on volume regardless of whichever exchange it is listed / trading on.

In DeFi, the decentralized exchange and liquidity infrastructure exists (e.g. AMMs, LPs, and market makers) but the exchange traded products do not. This gaping hole is a huge opportunity for Index Coop.

Index Coop is the First Mover in DeFi ETPs

Index Coop’s aims to be crypto’s Blackrock, offering the most widely adopted and liquid structured products in the market. Leveraging the power of the community and its ecosystem, Index Coop has seen strong initial success within this market. Both the DeFi Pulse Index (going from $1M to $130M TVL in 6 months + one of the most liquid products on Uniswap) and the Eth 2X Flexible Leverage Index (already the easiest way to get leverage exposure to ETH) are first of their kind products with massive adoption.

Investor vs Trader ETPs

To frame the conversation properly, we need to delineate between products for investors and products for traders:

  • Products for Investors are meant to be held for long periods of time (e.g. 6 months+) by retail and institutional investors. These include market-weighted indices such as the DeFi Pulse Index, the Coinshares Gold Index, and the Metaverse Index. Success of these products is primarily based on the product’s TVL, user retention rate, and the number of unique holders. As a business, Index Coop will succeed based on its ability to monetize this holding period through streaming fees and intrinsic productivity. Essentially, the more the TVL the Index Coop is able to garner for longer periods of time, the more successful investor products are.
  • Products for Traders are meant to be held by traders who are seeking a specific type of exposure for short periods of time - typically less than 3 months. These include leverage indices, volatility indices, and other derivative-based structured products. Success of these products is primarily based on their exchange activity and secondarily their TVL (as these products are not typically meant to be held). Index Coop succeeds when there is high exchange volume, as there will be significant quantities of creation / redemption arbitrages - in which creation / redemption fees are captured.
Investor Products Trader Products
Products Market weighted indices, smart beta, equal weighted indices, bond ETPs Leverage / inverse tokens, volatility indices, structured products
Users Retail Investors; DAOs; Institutions Traders
Holding Length > 3 months < 3 months
Primary Growth Metric Total Value Locked (“TVL”), user retention, unique holders Exchange Volume
Secondary Growth Metric Exchange Volume TVL
Predominant Fee Model Streaming Fees, Intrinsic Productivity Creation / Redemption Volume, Streaming Fees

What It Requires to Succeed

Index Coop’s goal is to be the leading provider of exchange traded products. To do so, we need to have deep competency in:

  • Launching Desirable Products: Firstly, we need to launch products that 1) solve a deep market pain point for investors / traders and 2) can be high TVL or high volume. This requires competency in understanding market needs, products that serve those needs, and an idea of what the market will want in terms of liquidity provisioning (which pairs will have the most volume). To achieve this, we must generate and launch ideas in partnership with the best methodologists and come up with products internally.
    Going forward, we should be aware of what the biggest trends in DeFi are and what exchange traded products are ready for mass user adoption. Today it is indices to simplify asset selection and the easiest way to get leverage. In the future, it can be options-based products such as volatility indices, structured products, Bond ETPs, and other liquidity-provisioning index strategies.
  • Building Product Liquidity: With ETPs, the winner is often the one that has the best brand and the most liquidity. The one with the most liquidity is the one with the most volume and the one that most people prefer to trade the most. With products for traders, the TVL can be lower, but the preferred product will be the one in which they can get in and out easily and be the highest volume.
    Thus, we need to have market leading competency in identifying which liquidity pools to support and which would be desirable for market makers. Typically, the Index Coop and its affiliates will need to seed the pool itself in the beginning to provide liquidity. Eventually, these pools must be self-sufficient without subsidy or seeding by the Index Coop and/or its affiliates.
  • Marketing and Distributing Products: The ETP business is all about marketing, branding, and distribution. All-things-equal, the one who has their products in most wallets/exchanges, has the most recognizable brand, and has the best marketing is likely to command the largest market share.
    Thus, we need strong competency in helping new users to understand its products, why they should use it, and provide updates on historical product status. In addition, the index coop must make these products accessible to users via wallets, exchanges, and other user entry points. And the Index Coop needs to help make these products desirable to hold by making them yield generating and integrated into other protocols.
  • Build and Maintain Safety / Trust: Finally, the Index Coop’s must be most trusted and safe. Trust is something that takes inordinate amounts of time to build and can be lost quickly. Thus, Index Coop’s products must be resilient to hacks, security vulnerabilities, and be risk minimized. In particular, products that utilize leverage must have significant risk management to prevent products from blowing up (not uncommon in the traditional financial world).

Going Forward

Today, the Index Coop has built incredible competency in growth, BD, and analytics led by folks including @LemonadeAlpha , @BigSky7 , @jdcook . We have informal disciplines in product liquidity and safety / trust, largely with the role by the Set team.

To take us to the next level, it’d be great to see us develop our domain expertise and form working groups around them to push on product (@overanalyser ), liquidity provisioning, risk management / trust across an increasing number of products with increasing complexity.

That said, I’ve been so impressed by the strength of the community so far and I’m more excited than ever about where we are going together.

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A great post. Thank you @setoshi

A couple of thoughts that I keep coming back to:

  • On chain fund products like ours have a different relationship to liquidity to that required for a governance token. How often do you see communities celebrating the fact that tokens are being locked up “liquidity shock”?
  • liquidity is an essential part of the user experience and so an essential facet of the product. So different funds will need different liquidity in different places.
  • Sometimes the LP token can be a better product than the fund. (Now I’ve seen it in action, I can see people may be happy to sit ETH2-FLI:ETH for a long duration and enjoy being long ETH).
  • Some LP tokens may be un-inviting, but the product is good for our customers (and profitable for the coop), so we may have to maintain liquidity incentives long term.

This is lots to learn, but I’m amazed at the constant influx of talent we have in the coop and I have no doubt that we are in best in the sector.

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This is an emerging theme that I see across several products. The LP token for some pairs becomes a better product than some pairs. I believe that $FLI was a watershed moment for this. We saw many LPs recognize that they could achieve better exposure to leveraged ETH through the FLI<>ETH pool than simply from holding the underlying token (i.e. 1.5x leverage + fees being more appealing and sustainable than just 2x leverage).

This is great point as well. I LPed in the Hashmask <> ETH pool on Sushi for a while and that was my exact experience. Some pairs (i.e. highly volatile low liquidity) are super unappealing for liquidity providers even if they like holding the underlying token.

I see this capability as become a core skillset within this community. A great example is @Matthew_Graham and the Stable Yield Index. That arose specifically to resolve the pain points he identified through talking to a number of DAO treasuries. This also ties deeply into BD - the work @Mringz is doing with Partnerships and @Metfanmike and @fallow8 are doing with Institutional Sales which helps the Coop develop a deep understanding of the market place and the concerns driving investors. This creates a great feedback loop where these contributors can bring the pain-points they see back to the community for further development.

Our views on this have evolved tremendously over the past few months. The long term winner in the ETP / Index space will be the protocol that builds the deepest long-term liquidity in the most cost efficient way possible. By having a highly focused liquidity strategy for each product we will be able to scale far more quickly and effectively than our competitors.

@setoshi great post! We are only starting to scratch the surface of here - excited to watch this strategy evolve.

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Thanks for posting @setoshi - I think every community member should read this through a couple of times. It provides clear direction and should help focus each contributor and working group.

Hopefully in this post, the community understands how their individual contributions lead to success and the community knows what is valued and what working groups need to be created.

This comment led me to read through with the goal of identifying how the Analytics Working Group (AWG) can do its part to help the Coop succeed. Some thoughts:

we need to delineate between products for investors and products for traders

This is a strong point and has been on my mind as I have built out KPI dashboards for our products. The AWG will ensure that we always are focused on the right KPIs for the right products given the sometimes nuanced nature of an ETP.

Launching Desirable Products

I think it would be great if a specific working group was spun up to explore and generate new product ideas. If not a new working group, a chartered subset of the product working group. Either way, the AWG will look to partner closely with this working group to bring objectivity and insight to this process. We can build tools to help us monitor trends or uncover opportunities.

Building Product Liquidity

I am working currently on building deeper views to understand our liquidity mining programs. We have the benefit of learning from each iteration of building product liquidity. For example, as we launch a new investor product (MVI) we can learn from our experience with DPI. When we go to launch a new trader product (***-FLI), we will have a base of learnings from ETH2x-FLI.

Marketing and Distributing Products

In the past few months I have created two separate twitter threads highlighting analytics insights around DPI and the Coop. These threads have garnered a combined ~130k impressions (from my personal account which doesn’t have great reach on its own). The crypto community really values data driven narratives - the AWG will continue to partner with the Growth working group to create analytical content to communicate our products and the Coop to the world.

Looking forward to partnering with all of you on building this future! Couldn’t be more excited about the opportunity we have ahead of us.

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