Hi Index Coop,
Thank you for your feedback. It seems the biggest concerns are the following:
- Off-chain cannibalization.
“Releasing an index if there is an off-chain version of that same index being sold to institutions.”
- DPI on-chain competition.
“Market size is the biggest concern for me, as I see this fund trapped between DPI (particularly when we introduce income on DPI) and the off-chain version of the same fund. I don’t see how the on-chain fund has the space to grow.”
I’d like to address those issues and see if that improves the proposal.
- Off-chain cannibalization
This data was pulled from the Dune Analytics suggested by @verto0912. The main premise is that an off-chain version of the fund will hurt the AUM of the on-chain version. I view the Bitwise DeFi Index as the off-chain version of DPI since they have similar methodologies.
a. Off-chain funds do not cannibalize their on-chain counterparts
The following graph shows that the AUM and rate of AUM growth for $DPI was not negatively impacted by the launch of the Bitwise DeFi Index in February 2021.
Figure 1. DPI AUM per address.
b. The customer base of $DPI is different than the Bitwise DeFi Index customer
Bitwise requires accredited investors to invest a minimum of $25,000. From the SEC filing March 3, 2021, Bitwise took in $32mm in AUM from 262 investors or roughly $124,261 per investor. Compare that the current DPI mean AUM per wallet address of $8,496 and the max of $16,068.
| AUM per wallet | Median | Mean | Min | Max |
|---|---|---|---|---|
| $DPI | $8,881 | $8,496 | $1,291 | $16,068 |
Table 1. $DPI AUM per wallet from 9/14/20 to 5/17/21.
The Uphold DeFi Index Fund is open only to Qualified Institutional Purchasers (QIPs) which requires a higher hurdle of having $5mm in investable assets versus the lower hurdle for accredited investors.
Bitwise DeFi Index was able to raise $100mm in 3 months per Matt Hougan, CIO at Bitwise. The fact that Bitwise DeFi Index was able to raise this without DPI dropping in AUM further confirms that there are different buyers of on-chain vs off-chain index products. Traditional finance investors will invest via the traditional off-chain fund route while newer, crypto-savvy investors will prefer the liquidity of the on-chain route.
- DPI on-chain competition
There seems to be an appetite for more funds as seen by the growth of BasketDAO’s BDPI to $35mm in AUM as of 5/17/21 after launching in early April 2021. Even with liquidity incentives, BDPI’s launch did not detract from DPI’s growth.
Figure 2. DPI vs BDPI AUM.
Having two similar products could potentially further increase DPI’s AUM and daily volume as trading firms would be able to arbitrage price discrepancies between the two products. A real-world example of this is Singapore Exchange’s launch of the Nikkei 225 mini and CSI-300 futures. The majority of volume for these products comes from trading firms capitalizing on arbitrage opportunities.
Index Coop would be able to control the uptake in AUM in a new fund via liquidity mining incentives. If they feel that the growth rate was too slow, a liquidity mining program would attract farmers and attention to the new product without a detrimental effect to DPI or their current stable of tokens.
Conclusion
Any new index fund that launches on-chain will be in competition with the Index Coop. The question is whether or not Index Coop benefits from that token’s AUM and trading volume. This is compounded by the fact that there is a low barrier to entry in terms of protocol code. A more strategic approach to the on-chain battle would be for the Index Coop community to concentrate on launching as many quality indices as possible and marketing those to the ever-growing crypto community.