Programmatic DCA

BACKGROUND

Dollar Cost Averaging (DCA) is a common investment technique, whereby a lump sum is divided into smaller amounts, and invested at regular intervals, over a chosen time horizon. The value of DCA is to mitigate risk and emotional mistakes by spreading investments across a variety of potential market conditions, rather than risking an upfront investment when markets are peaking or volatile. With DCA, investor emotion and psychology (irrational exuberance, fear…) are eliminated, and the process is far less technical and time-consuming than attempting to time the market. Although research shows that deploying a lump sum up-front usually produces greater financial returns than DCA’ing, the psychological and emotional “returns” of DCA present a worthwhile tradeoff, to a more conservative and/or less technical investor.

HYPOTHESIS

Non-native crypto investors, conservative investors, and investors with large lump sums are more likely to enter the volatile and unfamiliar crypto markets using DCA. These are also segments that would likely be attracted to the Coop’s products. The cost of gas, and multi-step swapping process, however, present challenges to DCA into our products. If The Coop could provide a fully automated, gas-efficient DCA feature, we could accelerate both customer adoption and retention.

CURRENT CHALLENGES W/ DCA

Customer Challenges

  • Current gas fees make regular funding events cost-prohibitive for the average investor, accustomed to the low fees charged by traditional index funds. This is a significant deterrent to making regular contributions, especially if the desired frequency is weekly.
  • The process of executing a swap can be cumbersome, confusing, and frustrating for a new investor - initiating the swap, negotiating a rate, and then checking back on status is … not fun.
  • There are currently very limited on-ramp options, to seamlessly contribute directly via fiat.

Coop Challenges

For The Coop to execute a seamless DCA experience, a fiat on-ramp would be required, and ideally set up to manage the DCA schedule on an automated schedule. Currently only one fiat option exists, and is limited to a select few currencies.

PROPOSED SOLUTION

Following is a conceptual proposal for offering DCA “variants”, for any/all Indices.

We’ll use the example of the Smith Family Office. Since “Wacky” Bob Smith sold his pet rock business in the 90’s, The Smith Family maintains an investment portfolio worth $50MM. Over a recent Thanksgiving dinner, “Bad Boy” Bobby Smith Jr. (the cool grandson), placed a few drops of something called “cryptonic” into everyone’s wine, and proceeded to convince the family board members to invest $500K into the DeFi space. The family’s conservative advisory firm initially pushed back, but after a special lunch with Bobby, they too agreed with the plan. Their two conditions were 1) that they invest in the highly regarded Defi Pulse Index as their sole vehicle and 2) they dollar cost average over 26 weeks. Everyone was in agreement, and excited for their new addiction - crypto investing.

The “DCA Variant”

All Index sets/contracts would come in two flavors - Standard and DCA. For the sake of this proposal, we’ll refer to the latter as “ $DPI-A “. $DPI-A will be a “Set within a Set”, designed to programmatically spread a lump-sum, single-interaction investment, over a predefined period (ex. 26 weeks). For The Smith’s, this offers a turn-key solution to deploying their $500K investment, over 26 x $19,200 weekly purchases of $DPI.

Hypothetical Mechanics

  • In the example, The Smith’s would purchase $500K worth of $DPI-A, directly from indexcoop.com, via exchange issuance UI. (Custom issuance options could be offered, such as DCA cadence, optional insurance, etc…)

Note: This was the first and last manual transaction in the process, until redemption. The rest is automated…

  • Upon execution, the contract would use $19,200 worth of ETH to purchase $DPI, while the remaining $480,800 would be used to purchase a yield-producing stablecoin which, in this example we’ll assume is DAI. These two assets are now part of a “Set within a Set”
  • Each week, the $DPI-A contract would redeem 19,200 DAI, and swap them for the next round of $DPI, according to the 26-week schedule, until 100% of the initial $500K has been shifted to $DPI. (See illustration below)

In summary, the process adds another layer of rebalancing - from the stablecoin to the index. Notably, investors would only have to perform one transaction, after which the process occurs behind the scenes, with no manual effort required.

Issuance & Fees

  1. Issuance: The initial assumption is that the DCA variant would be Issued via exchange issuance only, as liquidity may be challenging/expensive for a smaller use case. We may suggest/enforce a minimum investment for the DCA variant, based on a sensible transaction-to-fee ratio. For further discussion.
  2. Gas Fees: With the potential for weekly DCA events, how might we explore a gas optimization process, in which the DCA is triggered only if/when gas fees fall below a certain threshold? For instance, if the DCA is set to occur weekly, we might set a 24 hour window in which to monitor gas fees, and trigger the DCA when optimal. For further discussion.
  3. Coop Fees: An incremental “DCA Fee” would be incurred, above and beyond the fees of the parent variant (ex. $DPI Standard). For discussion purposes, an incremental fee of .2% for DCA could be considered. Given the intrinsic productivity of the stablecoin, the DCA fee may be reduced to 0%, while increasing Coop income. Win win!

BENEFITS TO THE COOP

  • Increase share of non-native, conservative, and high-net worth investors.
  • Increase the average investment size, as customers feel safer entering the market with larger lump sums, in a single purchase event.
  • DCA variants come with Unit Retention baked in, as new units of DPI are purchased automatically each period, by the contract itself.
  • Yield generated by the stablecoin offsets incremental fees - a strong selling point.
  • Competitive differentiation.
  • Potential to attract larger accounts.

NEXT STEPS

  1. Your feedback, questions and creative input please.
  2. If the sentiment is leaning positive, I will move forward with more detailed discussions, and development of a formal proposal.
  3. If you have more than my one month of DeFi/Crypto experience, and would like to assist with the finer details of this feature, I would love to hear from you over DM on discord.

Thanks for reading!

2 Likes

My first thought was that 0x allows gas-free limit orders. So really, the DCA could be facilitated by their market makers gas free. Likely a bit of arb profit for them, but if it’s in size it could be worth

1 Like

Interesting, and thanks for the vote of confidence! I will definitely put 0x on the list of considerations, and need to dive into how it works. I’m also curious to know your thoughts on your choices for a yield-bearing stablecoin? Given how much time the funds will spend in the stable portion (possibly up to 52 weeks if the customer wants to play it really safe), it’s ripe for offsetting fees and intrinsic productivity.

For a yield bearing stablecoin, the simplest that springs to mind is the OSD from Origin. They had a problem when first launched but they have come back and are likely much stronger as a result.

Likewise, there’s mStable’s mUSD, that also earns interest. It can now earn even more when locked into their Save V2 contracts as imUSD.

Both OUSD and mUSD generate yield by investing a mixture of other stablecoins.

My main hesitation is that the target is conservative investors and that they would need to take on new risks which may also discourage them. Mainly, stablecoins come with risks: DAI can lose it’s peg, USDC, is subject to US laws, Tether is opaque and has a documented high-risk history, while other coins are largely too new and unproven - though many are promising. Yield bearing coins, that I know of, pool those risks together and subject them to the risks of investment contracts.

It’s a cool idea but may need some energy to bring to fruition. Darn, that seems negative. Just conversational points, that’s all.

Could some of the yield be used on insurance? Enough to take away the worry without eating into the investment.

Hi @J.Z. This is a really interesting, creative and innovative idea. And potentially a really useful tool to the subscribers of the time in the market > timing the market mantra! I’m just a little unsure of you you see this being deployed? Given the 26 week example for DPI-A for instance. Does everyone have to enter the position from week 1? Once the token is launched and freely trading is someone buying in at week 13 buying into a 50/50 basket etc? Or do you see each new user generating their own token that kicks off a unique DCA product given you mentioned the theory of tailoring periods etc to each user? How would you see this being tracked by Index? Thanks and once again really interesting idea!

Thanks @mrvls_brkfst for the stablecoin ideas. I agree that, given the audience, there should be the least risk possible. That said, if they’re buying an INDEX there is inherent risks, in several areas, as we outline for people getting into $DPI or other Sets. I think the approach here would be to include a stablecoin that is less risky, or on par with, the existing $DPI risks, without adding to the risk profile.

With that, what we get is a little yield that can either go toward offsetting fees, or as @MrMadila suggested (which i thought was an excellent idea) could go toward covering insurance. I think every DeFi product should have an insurance option anyway, and we could blaze a trail in that regard.

Regarding your question @MrMadila, surrounding deployment, timing ,etc… I tried to articulate this in the writeup, but maybe i need to make it more clear: $DPI-A is really not much different from $DPI in terms of the way it is purchased, and operates. Think of them as only being different in terms of:

  1. Assets: $DPI-A is a set that includes $DPI itself, plus a stablecoin.
  1. Rebalancing: $DPI-A is rebalanced weekly (in this example), while $DPI is rebalanced monthly. Here’s how it would work: A) Each week, $DPI-A swaps 1/26 (in this example) of the stablecoin, for the market value of $DPI. Once per month though, there are two rebalances that would occur, the swapping of the stablecoin for $DPI as mentioned, in addition to the standard rebalancing of $DPI.

In terms of the way it is tracked by Index, nothing would really change. $DPI-A is a different product, that comes with $DPI packaged inside of it. That’s what I mean by “A set within a set”. Like, McDonalds sells 12,000 Cheeseburgers per day. 10,000 are sold ala carte, and 2,000 are sold as part of a Happy Meal. DCA variants are Happy Meals! With each weekly re-allocation from $Stablecoin to $DPI-A, we would consider that to be a topping up by an existing $DPI holder. Fair question though, as analytics would have to be considered in more detail as we get into the weeds of execution.

Hope this makes sense. :wink:

Hi J.Z> Nice idea and well explained. I like the idea of DCA’ing into a product (I’m currently using a similar inverse.fiance vault which uses DAI interest to buy ETH). and I think it’s great for smaller holders.

However, I’m not sure the coop is the best people to deliver such a product. I think it can sit much better within a CEX (coinbase) or a L2 solution (Loopring) as they can do the same structure without L1 gas costs.

I’ve thought about on-chain DCA vaults that multiple people can use, but I’m not convinced it’s as easy as I want it to be (unless you have a fixed start and end date…).