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).
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.