Title: Stable Yield Index
Author: Matthew Graham
Created: 25th March 2021
Stable Yield Index (SYI) - is a diversified index made up of stable productive assets that compounds over time into a single asset price.
There is a minimum level of capital to diversify risk across various DEXs, Lending and Asset Manager platforms, and small accounts are simply priced out. Small accounts are more worried about gas costs, added complexity and the time needed to manage such products. As a result, most small account managers place concentrated bets and hope nothing goes wrong.
SYI a low risk diversified fund money market like product, that offers the unique ability to distribute funds across the DeFi ecosystem without taking on a lot of idiosyncratic risk in search for yield. With UniSwap V3 launch in May 2021, and BarnBridge’s fixed interest sBONDs product on the market, there is the possibility to include both NFTs and ERC-20 in this index.
SYI allows all investors to invest in the market the same way money managers do in TradFi. Idiosyncratic risk is diversified away across a fleet of products. In its purest form, a static risk allocation is enhanced by tactical diversification. Meaning various productive assets are grouped together based on their risk and investments are made across risk tranches.
There is certain level of capital required to diversify risk across various DEXs, Lending and Asset Manager platforms, and small accounts are simply priced out. Small accounts are more worried about gas costs, added complexity and the time needed to manage such products. Small accounts place concentrated bets and hope that nothing goes wrong with that particular product. SYI changes this, the cost of purchasing SYI on a secondary market would be less than depositing into a mStable, Yearn or Rari Capital. This product also enables a simple passive hold strategy, which is a dream come tax time. All the interest is compounded and reflected in the token price.
There is further upside - the ability to invest in a product that holds the new V3 Uniswap NFT LP tokens and traditional ERC20 LP token. NFT LP tokens are coming and with that Curve’s moat is starting to eroded. SYI captures these market changes and progressively reallocates capital, this is the tactical element, and the results is to reduce idiosyncratic risk. This is just a right now example of how Index Coop can deliver peak user experience.
Upside - we are now starting to see treasuries across the space diversify away from their native token into more stable assets. Productive stable coins are a big part of this diversification strategy. As TradFi talent comes to DeFi the approach to managing treasury capital will become more like TradFi. We are seeing the early stages of this in-house at Index Coop and other DAOs are already further along. SYI becomes a very easy choice as a pillar of any diversified treasury. SYI enables teams to simplify their treasury and have a specialised resource managing their cash equivalent products for them.
Initially over collateralised USD themed products only, until the market matures and other products meet the inclusion criteria.
An easy way to think of this is all USDC Lender tokens across various lenders, these have similar risk profiles. Currently, DAI-USDC LP tokens on DEX are comparable assets with similar risk profiles. There are others examples but this is just a flavour.
This visual shows a concept, a high level illustration of what SYI could look like highlighting how idiosyncratic risk is managed. There is a qualitative aspect to determine eligibility (like DPI & MVI), then there is the practical quantitative considerations like liquidity to consider. Battle tested products are less risky than newly launched products. Therefore, within a risk tranche, some products are less risky that others. Ultimately, once static allocations to each asset within a risk tranche is defined, it then becomes about identifying the right asset to hold. Part of this exercise is identifying common nodes of failure and assessing the impact.
** Note: Add together all the portfolio allocations within the matrix and its totals 100%. The math is a 1x4 matrix multiplied by a 4x1 matrix to give a 4x4 matrix.
This can be expanded upon over time as AUM and products available in the market grows over time.
Risk Tranche Score Methodology
This section has been added 27.03.2021 to provide some colour around the process for assessing the risk of assets to be included in the index.
Money Markets & Fixed Income funds are huge in TradFi and DeFi is heading much the same. The volume of stable coins in DeFi is massive compared to other assets.
After SYI has sufficient trading history, it would be a very worthy product to use as collateral. A number go up stable coin backed asset, is fantastic collateral. Especially, on Aave that enables paying off loans by selling some of the deposited funds. SYI becomes collateral you can always borrow more against over time. Imagine the flexibility this gives those treasuries and opportunities it creates.
Below is a link to site showing the size of the fixed income ETF, SYI is not the exact some product, but it gives some colour.
Index Coop contributor Matthew Graham aka Fire on discord. The idea is up for discussion and to see where conversation goes. Ultimately, this would become a Community Methodologist product.
I am already discussing this idea with a few DAOs, it has been favourably received and there is the potential to launch with pre-commitments from Treasuries seeking such a product. Badger already has a proposal discussing a variation of the idea detailed above.
- Yes - Lets explore this further
- No - Lets park it here