Let's create the BED Index

Authors: Ryan Sean Adams, David Hoffman

Proposed: 26 February, 2021

Summary

One-Click Exposure. Self-Driving Crypto.

Motivation

The BED index is meant to track crypto’s top 3 investable assets.

The proposed index is a full portfolio solution intended for beginners, or as part of a core-satellite construction for more advanced investors.

It seeks to give safe, passive access to a vehicle which captures equal-weighted upside from the most promising use cases and candidates around the theme of blockchain as a generationally disruptive technology: store of value, programmable money, and decentralized finance.

Bankless brings a strong reputation and expertise to the table and has an audience which represents the core personas this index seeks to serve. We have referred to this construction as the Bankless portfolio in the past.

The BED meme, a theoretical index now potentially brought to life by Index Coop, has captured the hearts of the Ethereum community. BED and Bankless have great brand recognition amongst our target personas and we expect Bankless can use it’s media platform spanning video, podcasts, and articles to educate newcomers on the assets in the BED index.

The composition would be:

  • 33% Bitcoin

  • 33% Ether

  • 33% DPI

  • Rebalanced on a monthly basis

Core value proposition - Customer

  • Set and forget, self-driving crypto exposure

  • Betting on bankless assets

  • Low cost to hold

Core value proposition - Index Coop

  • Extension of DPI

  • Supports DPI AUM

  • Large TAM

  • Built on v2 Set Protocol contracts as a long term passive product

Component justification

$ETH is economic bandwidth and the reserve asset of DeFi, so a heavy focus on ETH makes sense for any initial investment in decentralized finance. This is an investment in ETH is a store-of-value, commodity, and capital asset.

$BTC is the largest cap crypto money and currently a reserve asset of crypto banks. . Some exposure is essential, but too much means an underweight position in DeFi. . Having a portion in BTC with monthly rebalances captures some of the benefit of the volatility vs ETH.

$DPI DeFi is growing and a carefully curated set of DeFi money protocols with massive potential, and use of monthly reblances captures the volatility.

Fees

  • 0.35 % Streaming fee (.175 to Bankless, .175 to Index Coop)

Intrinsic productivity

Flexible. Eventually, Farm ETH/DPI and ETH/BTC Uniswap pools, stETH, etc

Notes on construction

  • A third BTC. A third ETH. A third DeFi. Simple narrative.

  • Decided against stETH for now for flexibility.

Research

Size of opportunity: Ultimately, this index could be the preeminent bundled crypto product. We expect that this portfolio is suitable for the vast majority of crypto participants. Several $billion AUM over the next 5 years is not unreasonable.

Differentiation: Different from any product in the crypto ecosystem. Piedao’s BCP has a similar construction, but has not captured the attention of the market.

Similar construction to CGI with key difference being gold in place of defi. There is potentially slight cannibalization between CGI and BED.

Potentially some competitive crossover with DPI, but ultimately different products (and, of course, BED includes DPI).

On-chain liquidity analysis: All assets are available in DEX’s with deep liquidity.

Methodology: The methodology is fairly rigid. There is scope for substitution or changing the weights but this is expected to be infrequent.

Author background and commitment:

[Ryan Sean Adams] is a crypto investor & co-founder of Bankless. He’s an open finance maximalist who propagates the message of financial sovereignty. His mission is to onboard the first billion people to crypto through memes, media, and education.

[David Hoffman] is the co-founder of Bankless, a content studio with a newsletter, podcast and YouTube channel focused on education on how to live a life without banks.

About Bankless:

Our financial world today is run by analog banks. Crypto money provides an alternative. The option of self-sovereign money & banking. In a world where private keys act as money and code makes that money programmable, the entire money system changes.

So Bankless is about banking less. And less banking. And less dependance on banks.

We are the Bankless Nation. :black_flag:

Newsletter
Twitter

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Excited to see you guys in here! Fully support!

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I liked the idea from the first moment I saw Lemonade Alphas cozy BED on crypto Twitter.

But making it a Coop product, my first thought was: isn’t it to „simple“ to be a product of Index?

But then, I remembered what a good product was all about: Simplicity and easy to understand. And this is what BED is.

PRO

6 Likes

I recently started listening to your shows. Just want to let you guys know I really enjoy them!

I am not against this idea as it seems easy to implement, and I do see it as an easy entry point for newcomers to crypto/defi. However, I will say it’s not something I would buy personally. With only 3 components, it’s easy enough for me to hold and re-balance myself.

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hey guys, welcome to the Coop :wave:

The product makes sense. Successfully promoting it would actually drive more TVL in DPI as some BED investors might not be buying DPI themselves.

I have two questions/concerns.

  • Economics of BED

With DPI making up 25% of the index, we need to pay a 23.75bps fee out of the total BED TVL. With 35bps proposed fee, what we have left is less than 12bps, split between Coop and yourselves. So even at say $500m TVL, this is only $280k in annual revenue for the Coop. And yes, the Coop does still get a share of the DPI fee being paid. But this product has to be huge to make financial sense.

  • Distribution and timing

This is building on the above. For DeFi natives, and correct me if you think I’m wrong, holding BTC, ETH and DPI separately is not a big deal. Most already hold ETH and BTC, so maybe they just need to add DPI. This crowd will probably be somewhat less excited about paying 35bps fee on BED. We can argue that rebalancing is a feature, but we can create a 33% ETH/BTC/DPI Balancer pool with a high swap fee and that’ll rebalance itselft.

This product would be ideal for new entrants into the space, not DeFi natives. The best way to reach these folks, unfortunately, is CEXs. So, in terms of timing, perhaps launching BED once DPI is listed on several CEXs makes some sense? This way we could launch BED and try to get it listed right away.

To sum up, this has to be huge, otherwise contributing resources here doesn’t make too much economic sense. For this to be huge, we need CEX listings. In terms of timing, it might make sense to wait until DPI is listed on several CEXs and we have strong reasons to believe that it can be listed on the major spot exchanges (Coinbase, Binance, etc.).

P.S. I think if we can figure out intrinsic productivity on this, before launch, then the economics make much more sense.

7 Likes

Love BED!!! :slight_smile:

Are you making the assumption here that the DPI streaming fee would be subtracted from the BED streaming fee? I don’t think this would be the case. Instead, there would be a 35bps fee (17.5 to the coop) to hold BED plus the 0.33 * 95bps (65 to the coop) fee for the BED index to hold DPI.

This would mean that for $500m TVL, BED itself would 500,000,000 * 0.00175 = $875,000 for the coop, and the DPI demand generated by BED would yield another 500,000,000 * 0.33 * 0.0065 = $1,072,500, bringing the total yearly earnings for the coop from this set to 1,072,500 + 875,000 = $1,947,500.

Note: in actuality, this is a slight overestimate since the $500,000,000 TVL would be slowly bleed due to the DPI streaming fee, but this should be a negligable difference.

1 Like

I like this! I support it, and I think the marketing value these guys will offer, justifies their fee

BED is practically a crytpo meme and is a favourite with around here. DCInvestor would probably get behind it too. But, I agree with @verto0912 , crypto natives are likely to hold the tokens individually - I would. Only transaction fees, if you’re tightly managing them, might put you off, but L2’s are already making them more accessible to anyone familiar with the space. So, BED without CEX will be less attractive, unless the intrinsic value can be realised and looks good. The new BalancerV2-AAVE announcement looks exciting in that regard.

It’s a loved idea and I’m sure a powerful configuration of boosted returns and easy public access can be found. Should that be built step by step or all in one go? How long will it take to cover the implementation cost for Index Coop? Should other factors such as publicity be considered?

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I think Index Coop should hard pass on this.

Focus should remain on strategies that are hard to replicate by the average joe, have strong methodology and therefore providing value to consumers. The BED index, whilst a good allocation of assets is very low effort, easily reproducable on tokensets.com (has already), and ultimately seems like a overly-complex way into getting bankless to funnel some traffic in. My advice would be to not dilute the high standards of index products with a fluff index and instead just pay for advertising if that’s the only benefit being obtained here.

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I found DPI through Bankless and love your show so huge thanks!

As the strategy is fairly simple and would require little management, I agree that marketing should be paid through other means than the streaming fee or it be greatly reduced. @verto0912’s points on introducing it after CEXes and size/earnings needs working out.

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Welcome @ryanseanadams and congrats on the first post! I’m a big fan of Bankless.

Though I love the BED meme and am a huge fan of this concept, I also wonder if this product makes sense i) without CEX pipes directing $ to $BED and ii) for crypto natives.

Re ii) I think I’d personally prefer to hold the BED assets myself due to allocation % preferences and avoiding the 0.35% fee.

Separately, @Tradespot makes an interesting point that this isn’t hard to replicate for the Average Joe and is already available as a Set - compared to $DPI. But then again, CGI is only 4 assets in the index.

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Thanks Verto, great points.

For the fee portion, my rough understanding is the effective streaming fee with DPI underneath would be somewhere around .65, with .475 going to the Coop. At $500m, that’s $2.3m in streaming fee revenue. I agree that intrinsic productivity could eventually supersede streaming, given the opportunities with BTC and ETH. This could be fleshed out more.

I agree that the biggest blocker for wide adoption is fiat-to-BED or broad CEX listing, and that is especially significant given this is meant to be a passive product for beginners.

Thanks @ncitron… so okay, holders of BED will pay 35bps streaming fee + they’ll bleed another 0.33*95bps? Are we seriously going to charge ~66bps for people to hold this? I think this is sort of against the ethos - BED is meant to be for DeFi beginners and yet, they are going to get charged 66bps for something they could get for free in a Balancer pool.

I would support this product if we practically gave it away and generated income for the Coop through intrinsic productivity.

I also think that if were to launch this then the fee structure needs to be discussed. There’s no methodology here. None. Perhaps management fee is not the best way to compensate for branding and marketing efforts.

@DevOnDeFi CGI is actually 3 assets, not 4 :grinning: The main difference here (beyond anything marketing or financial) is the methodology. CGI is backed by severaI years of academic research and it’s volatility-based rebalancing has strong track record of delivering solid risk-adjusted returns.

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@verto0912 - completely on board with this line of thinking.

From a user experience, once DPI is on CEXs, one could buy all three components for cheaper than interacting with a smart contract on ethereum due to gas. The balancer pool is also a good point, as is the product already setup on SET. BED needs to be cost effective for better user experience.

In my opinion, BED has two, maybe three, primary user groups:

  • New Entrants to crypto space
  • Investors looking for crypto exposure in terms of asset allocation
  • Simple Tax

BED appeals to new entrants seeking a very simple one holding allocation to attain exposure to the broader crypto space. Investors would have a similar use case. This leads me to conclude the market place for this product is the fiat to crypto on ramps. To AG’s point, this product will do better once DPI is on CEX and more fiat on ramps.

Crypto natives usage will be strongly correlated to incentive schemes and any productive yield. Larger holder are further incentives by the use cases of holding the individual components. eg: Having BED on Maker enabling DAI to be minted will take time and creates an opportunity cost for holding BED.

I think rebalancing BED monthly is too soon, maybe every 2nd month or quarterly would be better.

Streaming Fees - I believe this should be near zero to attract users due to the alternative ways to express the same view. Otherwise, how are we going to build a lot of liquidity ? Any larger holders are incentivised to purchase the components and seek yield. So we either make this productive, or BED is going to struggle to be a long term success as it becomes the less effective way to allocate capital.

If BED was productive asset, that generates APY, I would be more of a fan. The yield can be split between IC, methodologist and token holders as then there is more active engagement/input from the stakeholders. This product needs to attract a broad spectrum of users/investors and for that, it needs to be a more compelling investment case.

The methodologist INDEX token payments for a static allocation index seems like a very inefficient use of Index Coop’s capital. If this product was actively managed to generate yield then there is better value for Index Coop.

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3 assets in CGI I mean! :face_with_hand_over_mouth:

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Hi all, I think the streaming fee needs further discussion as some have mentioned it is a little high for a product with comparatively low maintenance. That said the potential for future intrinsic productivity is a promising idea and shouldn’t be overlooked given that brings a stronger product to market.
I think the main take away here is the decision to make over establishing a partnership with another well known and respected brand. Even if BED does not bring in a great deal of income, credibility and exposure through such symbiotic partnerships build trust for both brands overall. Hopefully this results in more users being exposed to the benefits of Index Coop’s product line up over the course of their crypto journey.

I echo the sentiments of @LemonadeAlpha that the risk/reward of this partnership and product are on balance favourable. :+1:

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I am extremely in favor of this proposal because it expands Index Coop’s distribution and brand advantage, further cementing our reputation as the premier decentralized index provider.

Right now, Index Coop’s reach comes primarily from the brand recognition of DeFi Pulse, Coinshares, and the Set Protocol team among cryptoasset investors. Index Coop will compound its distribution and brand advantage further by leveraging Bankless’ reputation and distribution. This seems like a no-brainer to me.

@verto0912, @LemonadeAlpha and others have noted the lack of a broad CEX listing as a huge barrier to adoption of the proposed BED index.

@ryanseanadams I am curious if you and Bankless perceive this to be a big barrier to adoption? How is Bankless planning to go-to-market with the BED index? For instance, are you planning to provide tutorials, how to buy guides, etc. for Bankless’ audience? Are you planning to pursue listings on CEXes?

3 Likes

Curious if you guys see this as an evolving product to support any new entrant’s investing strategy into crypto holistically.

Ex. adding MVI into it, LINK maybe, cross chain protocols, etc.

This would increase the product’s longevity. Risk is that the BED meme disappears in 6 months as crypto becomes more complex.

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Thanks for all the comments here! Excellent discussion!

First, I want to address critiques that BED is too simple and that the methodology is too easy to replicate. Because I think they’re right. BED is easy to replicate right now. But I think that’s exactly why Index should do this! If Index doesn’t, I believe something else will capture the opportunity…because there is demand. An BED-like index is the number #1 ask for new Bankless entrants. We’d love to have an Index Coop product to refer them to.

Second, regarding fees. Yes, an effective fee of .66 seems high. But realize almost half of this fee (.31) comes from the DPI index fee which consumers are happily paying now. To replicate the DPI exposure, they’d need to pay the same fee. When you subtract the DPI fee, what remains is a .35 fee. While we could drop this further, I don’t think a .35 for this index is unreasonable. Especially in the future if we substitute assets like ETH for productive forms of staked ETH. So yes, we could shave another .05 to .10 off, but at the end of the day I don’t think it will make a material impact on demand.

Lastly, I believe the most important thing is that we launch this product and capture the narrative energy now during the bull run. Bankless currently has 30k subscribers to the its newsletter, almost 400k podcast downloads per month, and close to 2m views on our starters guide….we’re currently growing at a rate of over 500% annualized. BED is the start of our work together, but I don’t expect it to end here. Perhaps we add more managed features down the road, a crypto version of Cathie Wood’s Ark Innovation…perhaps some of this is managed by a future Bankless DAO. We’d be excited to see how this relationship evolves after we get started on something. So let’s get started on something. :rocket:

-RSA

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