Indexomics and a suggestion for an experiment

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Also known as more rambling from overanalyser… Sorry, I’m on a roll.

They say a week is a long time in crytpto. I’m beginning to know the feeling.

Last weekend, I wrote an online proposal to form an accumulating version of $DPI. I now think this is wrong.

On Tuesday, I wrote the “road to 1%.” which was my view on one way that $DPI AUV could vary over the near future and what we as the INDEXcoop should focus on at each stage.

Following that I was involved in the governance and growth calls and the I’ve been thinking about what we have been discussing in the calls and online. As a result my thoughts are constantly changing.

At the moment (!), my brain is spinning and I realise that I’m spamming the discourse with lengthy rambling posts around different topics as an attempt to get some of it out and to kick start some discussions.

Please forgive me and feel free to discuss and push back, I’m happy to be proven wring.

At the moment my focus for my involvement in INDEXcoop is:

  1. $DPI sustaining 1% AUM compared to the underlying assets without liquidity mining.
  2. Minimising short term commitment to spending $INDEX
  3. Building INDEXcoop treasury
  4. Building INDEXcoop cash flow so we become cash positive (you could say I naturally have short arms and long pockets)
  5. Tying to provoke useful discussions so we can agree a common set of principles and objectives
  6. Trying to build on the fantastic start Set and DeFI Pulse have given us, mainly by not changing the initial external incentives we have (streaming fees, Liquidity mining etc.)

There are lots of other things at are important, but I’m less involved in because, I’m not competent to offer much.

  • Web page design (my one and only webpage was created in notepad…)
  • Building voting structures (again my IT skills are limited to excel)
  • Polishing marketing materials.
  • Getting involved in building bridges with other communities / individuals (unless we want r/etherinvestor…)

And there are a few things that I think are best delayed for the moment:

  • Launching our second index.
  • INDEX governance rewards
  • Rewarding INDEXcoop contributions
  • Supporting other protocols financially (inc gitcoin grants etc – I told you have have long pockets.)
  • Getting involved in other projects governance.

Why I think my accumulating DPIacc suggestion is a bad idea:

I still think that just owning the native tokens leaves too much yield on the table. However, there are multiple problems with the strategy:

  1. Its too complex,
  2. We are restricted to opportunities that only pay in the native token
  3. We go from an automated deposit 11 x ERC20 tokens, that are readily available, to interactions with multiple other protocols (Aave, Compound, yearn, staking contracts and possibly other minting and redemption processes)
  4. Such complexity adds friction to minting and splitting DPI which makes arbitration less efficient. This results in the secondary market being more likely to be off the peg compared to net asset value (NAV). Being off peg means that customers will have less confidence in the index.
  5. In addition, less efficient arb bots make fewer trades. Fewer trades means less volume on the secondary markets. This means less incentive for LPs to hold lots of liquidity in the secondary markets. Small pools for DPI mean that large traders face more slippage on the simplest trade (DPI:ETH pool). So we dis-incentivise large holders by adding liquidity penalties (on top of more difficult direct splitting and trade to ETH).
  6. The native tokens have massive liquidity (a $100,000 sale of DPI via the native tokens would currently give a 0.65% slippage for the worst tokens).
  7. Even if we have a normal functioning market, some of our (Whale) customers need huge liquidity which may not be available.
  8. What if a third party minting / redemption process gets stuck or exploited / or an emergency fix is implemented by others on a contract that we depend on? - our smart contract could fall over or just revert everything, funds will get stuck. Then we can get exposed to all sorts of exploits (what if qXXX becomes worthless and this is exploited by others).
  9. If protocol QQQ implodes and we are holding 100% cQQQ on compound, everyone will borrow the QQQ from compound to short and we won’t be able to remove our QQQ. Even if we we wanted to delist and sell all of our QQQ, we would be stuck with cQQQQ. 200% APY of QQQ is worthless when QQQ is dropping 25% a day.

Basically by moving from holding the native tokens to switching all of a token the hold to a single we add complexity and risk. In addition, we force our partners (arb bots and whales) to interact with the same contracts and take these new risks.

So, I think it’s safe to say I’ve changed my mind. :slight_smile:

So what can we do?

Simple; we use DPI :slight_smile:

But we think about it a different way:

For each token in the DPI smart contract we split the holding into chunks. Just like how an exchange splits tokens between hot and cold wallets. The hot wallet is available for continual addition and withdraws, the cold wallet is locked away. However, we use the cold wallet to farm, safe yields.

So, for example, we currently have have ~$13 M AUV, with 114 $YFI worth $1.6 M.

  • We leave 50% #57 in the current (Hot wallet) – This is 100% available for deposits and withdraws from the pool - Arb bots, whales, and other primary market customers interact with thins using the native token.
  • We put 25% (28.35 YFI) into yYFI fault with Yearn currently earning 10% YFI but variable
  • We put 25% into YFI staking contract currently ~10% but less variable. Paying in yUSD with a lock in period.

On average we could be returning ~5% on the YFI we have in the vault. More if we increase the $ in the cold wallet.

Yeilds vary for different tokens: aSNX is currenlty 3%, cUNI is 15%, COMP is 0, stkAAVE is 7% but requires a lock in, and will eventually have slashing risks.

So, then we capture some of the yield while keeping our outward facing smart contracts as simple swaps for the native tokens which makes it easier for whales and arb bots to interact with us.

We would need to monitor the $DPI AUV, and the health of the 3rd party smart contracts / liquidity and rebalance on a regular basis (x3 weekly ???). We can pre-empt times of major changes / react to market volatility by going higher with the native token.

This approach will introduce some risks compared to holding the native token, but we can balance the risk by limiting the % of each token placed in a particular smart contract / lending platform.

So, we may need to consider backstop in case we screw up and loose DPI holders assets. Treasury, Staking and slashing, or INDEX issuance- Something to discuss.

My target would be to yield an average of 2% on the total AUV over extended periods.

ALL the income would be pulled into INDEX treasury.

1 month of 2% on $13 M is ~ $21 k.

Once we have build up the treasury, and established a track record of cash flow, we can start thinking about how we can spend it.

My current suggestion would be that we allocate it as follows

  • 0.95% as streaming fee subsidy (which means 0.3% to DPI pulse as methodologist, 0.65% to INDEX treasury) so DPI holders pay nothing.
  • 1% as a bonus to DPI holders
  • 0.05% to INDEX treasury (total 0.7%)

I would strongly recommend that we don’t describe the DPI bonus as a share of the yield. It is a fixed 1% bonus for any DPI holders (inc LPs), paid on a continual basis with no action required – 1% additional passive income for all our customers.

We should be clear and consistent in the messaging. If we wish, we could start it as a time limited 1% Bonus, for 12 months, then 0.95% streaming fee to return [Possibly with small print that if market conditions change we may need to remove the bonus, but we’ll give at least 28 (?) days notice].

To me part of the brand identity is that we are boring, deliberate, announce changes in advance and work in everyone interest.

This means that INDEXcoop take all the risk of failing to get 2% average over extended periods. But we get any additional yield we secure.

How easy do yo think it will be to sell $DPI is we guarantee a 1% bonus from 1st Jan to 31st December 2021?

Long term passive investors are very price sensitive, a zero fee + 1% bonus will sell it’s self.

How much AUV do you think we will get?

How many other protocols would want to use DPI as collateral in their protocols?

Sounds good, so whats the experiment?

Well, you know that I want to build a reputation for slow and steady, solid and dependable. Yeh, no, I want to move fast.

Why? Because I’m still working on the assumption that when the DPI liquidity mining $INDEX stops, / ETH2 staking starts / or other yield opportunities appear (UNI have a huge war chest). We may see a significant drop in AUV. We currently have 90% of all DPI in the DPI:ETH vault.

We stand a real possibility that the majority of that DPI liquidity will more to other farms around the 6th December so we end up with the ~$1 M AUM form the current passive holders.

So, the quicker we start farming the DPI vault contents, the quicker we capture some of that potential yield to build our treasury. Then when we look at the numbers in December, we can decide how we spend the treasury to incentivise $DPI holding. At the moment, I think, I’ll be arguing to risk a large chunk as a bonus for $DPI holders for 2021. The risk being that we can’t get the yield form the AUM to make the DPI yield fund the bonus.

The good news is, that the bigger drop in AUM on mid December, the easier it is to start offering a effective 2% subsidy from treasury (0.7% that comes back to us)

There is probably something wrong with this suggestion. Please see if you can find it.

Regards

OA

P.S. Don’t you just love money Lego?

2 Likes
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Hey,

Looks like you want to turn the Index Coop into a Bank Coop :wink: .
We should keep at least X% (let’s say 20%) of liquid capital and leverage the remaining 80% to farm and lend on other protocols. This is what a bank would do in TradFi.

First constraint that I would implement on top of that, is a Y days cooldown period when people redeem DPI, so that we have enough time to get the collateral back.

Second issue to tackle is the potential centralization of this solution - unless we manage to create automated vaults similar to what YEARN is doing. But then, how do we differentiate ourselves ?

Third, doing that kills the narrative our DPI being used as a stable asset in lending protocols, because COMP & MKR holders won’t accept to leverage DPIs where their underlying assets might already be in a VAULT.

To conclude, I think that it is a really good idea. But I would rather implement this in another product than completely reworking the DeFi Pulse Index.

It brings a really interesting question on the table, why limiting ourselves to indices ? :slight_smile: (always dreamt to launch a Bank, let’s go haha)

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@Etienne

Good questions.

The banks have a bad name, I want INDEXcoop to be part of the DeFi infrastructure :slight_smile:

Cool down on splitting DPI screws arbitrators. At the moment they can go ETH --> DPI --> 11 Tokens --> ETH in a few (or even 1) transaction. This means that if someone market sells DPI on DPI:ETH pair, the $DPI price is lower than the underlying assets (net asset value / (NAV). Then the arb bots strike and capture the value difference between DPI and the NAV. This keeps un on peg (and feeds the LPs)

We use the other protocols for yield, not compete with them. YFI have some fantastic developers and strategies. We just park 10% of our YFI in the yYFI vault and let yearn do what they specialise in. Yes we pay yearn the standard fees, but it lets us focus on what we do. In return we ask yearn to create a yDPI vault so they work to increase the attractiveness of DPI (and our AUV).

I can understand why a protocol doesn’t want to use it’s own token as collateral for generating loans, it creates all sorts of complications and feed back looks if they hit volatility. However, DPI currently only contains ~20% of a single token, so AAVE may consider a DPI deposit as equivalent to 80% of a single token. So, aYFI has a maximum Loan to Value of 40%, DPI may only get 32% cap to remove the underlying contribution form AAVE in DPI. Likewise COMP has LTV of 60% on $UNI.

So, yes, using you own token as collateral has impacts for some protocols, but I think some of the lending protocls are considering it. Looking at AAVE, it appears that they allow AAVE deposits but they don’t loan it. So the loaning of DPI may be more problematic for some protocols. Compound allow deposits and lending of COMP.

I want to focus everything on $DPI, we can extract value without changing the brand, nor the external facing smart contracts / incentives (for now).

Cheers

OA

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As a high level remark to focus the discussion, the initial goal (per the secret master plan) is to gain market leadership, as most of the long-term profits will go to the victor. That said, the LM program ending is an issue - but the hope is that the high-retention AUV has grown significantly enough that it can be eventually sustainable. In the interim, it may be more advantageous to focus on 1) increasing user retention (keeping as much capital as possible), 2) increasing the sales / marketing, and 3) getting adoption by improving the product reasonable.

To reiterate some user concerns, users have stressed the following issues:

  • Fees are too high: Some people think 0.95% is too high.
  • The opportunity cost of farming is too high: They can own the underlying and put the capital to better productive use by farming the underlying themselves

The considerations are:

  • Putting the capital to work via staking, farming, etc. can offset the fees and reduce the opportunity cost.
  • The ways capital is put to work varies vastly in terms of yield, risk, time-locked, etc. All productive capital is not equal!
  • Putting capital to work could disqualify DPI from getting added to lending protocols, an important enabler of use cases.

I think the main missing piece of data to help make a judgment call is 1) what factors would absolutely exclude an asset from lending protocol inclusion? 2) how can we quantify the growth / retention opportunity with this opportunity?

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That is something I had not considered. And something we must share with any protocol that is planing to add us as collateral.

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From your original DPIacc post I had assumed we would hold reserves and split tokens between different yield opportunities to mitigate risk. If we stick to core protocol yields e.g. yGov, SNX staking, stkAAVE, etc. then I think we should be good. There is much less risk of losing the tokens than lending and only if the protocol collapses or has a major hack which probably sends the tokens to $0 anyway. For things like stkAAVE with slashing, we should have done the math to ensure positive EV even we have significant slashing.

I like the idea of using yields to rebate fees and provide a bonus. Are you saying we only give a fixed 1% to users and any surplus goes to the treasury?

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Exactly, Users get a (fairly solid) guarantee of 1% growth of the underlying tokens, INDEX treasury gets the rest.