Why should I hold $DPI?

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OK, I’m afraid that this is another brain dump from me.

I’ve tried to build a summary of the reasons to buy / use DPI. However, I’ve certainly gone off on a few tangents and the tone is wrong for sharing as a public facing blog. Still, it’s a starting point and should provoke some interesting discussions.

First an introduction
We are INDEXcoop a decentralised organisation launched by Set Labs and DeFi pulse as a community group to bring professionally managed indexes to the Decentralised Financ. We aim to become the “Blackrock of crypto” by creating and maintaining the worlds best crypto index projects. $DPI is our first index project which focuses on mature DeFi protocols.

$DPI currently has over $13 million assets under vault (AUV) from 11 DeFi projects based on their current circulating market cap. Further index funds are in the pipeline.

Why should I hold $DPI?

The simple answer is because it gives you something you value for an acceptable cost.

$DPI gives the holder a share in a number of DeFI projects. The long term aim is that, on average, the projects become more valuable and so your DPI becomes more valuable. So it’s basically an investment in DeFi.

For most people this will be a long term investment, so short term volatility is replaced by long-term gains. Obviously any investment is risky, and crypto is more risky than most. This is NOT investment advice.

“Diversification is the only free lunch in investing” [Harry Markowitz] can be taken to refer to diversification between asset classes in a portfolio (Stock, bond, gold, crypto) or within a class. By investing in multiple projects, you reduce the risk of all your investment under performing significantly. By spreading your investment between multiple projects you lock in average performance. Remember that on average the TradFi markets active investors under perform the index. So many people recommend to just buy the index and relax: “Just pick a broad index like the S&P 500. Don’t put your money in all at once; do it over a period of time.” [Warren Buffet – who dislikes crypto…]. While crypto is obviously much more risky than TradFi the benefits of diversification still hold.

DPI has the advantage that our friends at DeFi pulse have looked at the many DeFi projects available and selected a few for inclusion into the DeFi Pulse Index. INDEXcoop have taken over ownership of the onchain fund $DPI (build by Set Labs) that is designed to mimic the composition of the index. Note such a structure is common in TradFi e.g. Vanguard create a fund that matches the FTSE 100 INDEX. FTSE are an independent corganisationwith no involvement in asset management.

So DPI allows you to own a group of projects that have already been assessed by DeFI experts.

In addition, if you are a long term holder, you can relax knowing that as the DeFi space changes, the components of $DPI will be adjusted to add projects that are growing (and removing some of those that are under performing).

This means that you can select a single crypto investment (DPI) and gain broard exposure to the DeFi ecosystem without needing to pay it constant attention.

Ok, what does it cost?

Purchase fees are the same as any other ERC20 token on Ethereum (so about $3 at 50 gwei gas cost), The main market is on Uniswap with a direct trade for ETH. You can also create DPI from all 11 current project tokens by using a single Ethereum smart contract to Mint $DPI. TokenSets.com have a user interface for the both approaches.

Ongoing costs are 0.95% per year which goes to the INDEXcoop community, DeFi Pulse and TokenSets

In return you get a managed diversified portfolio designed to invest in DeFi on Ethereum.

But what about the 100% + DeFi yields everyone talks about?

DeFi recent highs have been build on yields. Using your assets to earn different rewards that can be traded for more assets you want to own long term. The majority of these yield farms have been profitable for the users. However, some have been disasters. In addition, capturing these yields often requires weekly (or even daily) activity and results in significant costs. Paying $24 for a single swap is not fun. These costs can easily outweigh the gains for any single investment less than $10,000. Note that many of the projects included in $DPI allow safe (but lower) yield capture, but some requite constant attention (and gas).

So, by holding the token without participating in yield farming, you are absolutely leaving something on the table. However, you are also saving time, attention, gas and the possibility of making a bad call that impacts you overall position.

Note that some DeFi projects will allow you to deposit tokens into their vaults to receive passive (i.e. attention and gas free to hold) income. However, this is likely to be less than 5% over the long run and the best yield for a particular token changes (which does require attention and gas). One project within the DPI ($YFI / yearn) is more active in pooling assets and seeking the best yield on a constant basis by changing active strategies as the market changes. However, there are primarily aimed at ETH, BTC and stable coin (USD) investments, so you loose the opportunity to own the underlying DeFi projects offered within DPI.

Finally, holding DPI compared to 11 individual tokens can make your tax form significantly less complicated.

So hopefully, this is a completing case for the smaller long term holder who wants exposure to the potential gains from DeFi project market caps. What about other investors?

The case for DeFi whales owning $DPI:

By DeFi whales I’m meaning individuals / organisations with significant assets (> $100 k USD / 250 ETH). It is assumed that these would be capable of actively holding and farming their assets, and gas costs on regular trades would be less significant.

So, given the 0.95% pa streaming fee, and lack of yield farming, what can $DPI offer a DeFi whale?

Firstly, time / attention savings. The holder can relax knowing that INDEXcoop are advising the composition of the yield and monitoring the DeFi space for opportunities and threats.

Owning the index allows larger players to take strategic play to Long (or short) the DeFi market at any time. This can be done as a single trade / series of trades on a single token ($DPI) with the direct sale to / purchase from ETH available from a single contract interacting with the underlying smart projects liquidity pools. DPI is currently anchored to eleven diversified DeFi projects with a combined market cap of $4 Billion. Based on current Uniswap liquidity, A direct trade of $100 k via splitting DPI and then changing the 11 tokens to ETH would consume a maximum of 0.65% of any single pool, and result in ~0.65% price impact. Given the current (liquidity mining stimulated) liquidity of the DPR:ETH pair, A direct $100 k DPI:ETH trade would only be 0.4% of the liquidity pool.

Note, all of these are relatively low cost transactions, at 50 gwei gas price, a single swap would be ~$3, minting DPI would be ~£18, and a complete trade from DPI to ETH via the 11 tokens would be ~$50.

Another advantage of DPI is that working with a single token results in significant simplification of tax reporting.

Finally, use of DPI has inbuilt credible neutrality. This means that the manager of the funds can be confident that they are “buying the index” and not picking individual projects for success / shorting. While this may not seem an important consideration for many people. Some organisations (DeFi DAOs / project treasuries / foundations / VC funds) may value the ability to be neutral on individual projects. Particularly when trades are visible on the public block chain.

OK, I think that’s enough from me on this topic

Some questions for the rest of the coop:

  • What do you think are the compelling reasons for different people to hold $DPI?
  • What have I got wrong?
  • What can be removed to make a simpler (long form) message?

Regards

OA

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Great Post. I guess the main reasons to hold DPI are

  • exposure to the ethereum DeFi-space (hold and forget)
  • saving time, attention, which is a killer advantage to me

The main trade-off are oppertunity costs compared to yieldfarming.

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As I have thought about holding DPI for the long run, here is my reasoning.

Pro:

  • easy: one buy, one sell.
  • adapting: you are exposed to whatever the index methodology is without having to follow the market too much.
  • DeFi lego: not true yet, but I think DPI can become a collateral in many platform while having less volatility than the underlying tokens (therefore better term to borrow for instance).
  • tax treatment: forgot about this one because it doesn’t apply in my country, but this could be a game changer for investors.

Cons:

  • garbage tokens: Maybe a bit strong but many times there is one or two stocks you sure don’t wanna own in a ETF/funds. But overall, it’s not significant so you don’t care. 11 tokens is probably too few, but the space will grow so it’s not a big issue.
  • momentum factor: market cap weighted index are long momentum. You are more exposed to what is expensive than what is cheap (see the graph below). It’s an issue while the space is young and prone to mispricing but should not be a big on a long run.
  • price: the 0.95% is the thing that will make me sell DPI after the reward (interestingly the previous two come way after that because they don’t have numbers attached). Market valuation are already high, so I expect something like 7% risk adjusted rewards. 0.95% is 14% of my expected returns. 0.3% would makes me change my mind.
  • lack of farming: again not a big deal in the future as yields will fall or the index will take use of them.

Therefore, I will most likely invest directly in the underlying tokens (there are not so many) and adjust twice a year (5 minutes work).

Comparison between the market cap version of the S&P500 and the equals weight index.
image

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Thank you @Sebastien, I don’t think in terms of momentum so that’s certainly a blind spot for me.

I appreciate the simplicity of straight market cap weighing. For me equal weighing (and capped ?)are harder to sell, particularly if(!) they loose out to a market cap weighed fund if one member moons (any anything is possible in crypto).

Fees and incentives is where I’m becoming more focused because I think that is the key to getting 1% AUV

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Equals weighted indexes doesn’t exists much in TradFi because it’s too costly (trading + funds are smaller therefore more expensive). It’s better in theory but doesn’t really work in real life. Unsure how that would be in DeFi. I expect a Uniswap pool (for 2 tokens) or the Balancer generalization would work very well (getting fees from the arbitrage). Maybe an equal weight is better as there is more trading fees.

But the weight method doesn’t care much (too complex to be used in marketing). If you have the best brand and the best liquidity, that’s more important (again taking from TradFi).

I added tax treatment as a pro in the post. That might work to balance the fees in some countries (like the US).

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I think Balancer pools have the weakness that if a single collateral drops to zero, people can just dump it into the pool and pull the other tokens out. Maybe you can build circuit breakers into a balancer, I don’t understand them well enough. Balancer pools, do effectively give there own liquidity pool, and you can can capture the fees on every trade.

Liquidity on a single fund is my focus.

I really don’t see how any tax regime can do anything other than treat liquidity pools as value in vs value on exit. Taxing the profit every 12 second block on the changes would be insane…

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I quite like the idea of market weight indexes. I hold them in my tradFi portfolio.

I like the idea being applied to crypto. I think $DPI also has the unique position where there’s no impermanent loss (since it’s market weight and not equal weight). If you want equal weight, there’s already a ton of options with Balancer pools.

I also think $DPI is an interesting tool if used on lending platforms, used for shorting, used as a building block for Balancer pools.

Also, currently DPI isn’t farming for yields but it seems possible in the near future.

I already held the top 5 holdings, so it was cool to get market weighted exposure to some of the smaller index constituents.

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@jiecut I think I’m in a similar position to you, Indices are a way to make my crypto portfolio easier to manage (something I did with my TradFi investments 4 years ago).

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Got something else that we should highlight in our future website/medium posts. As a long term holder, you want your DPIs to be stored on a Hardware wallet that you won’t touch for security purpose. Holding DPI (and any other indice) allows you to to safely get exposed to DeFi And change the components of your portfolio, without accessing your hardware wallet, since the reallocation of your portfolio is done via a DAO.
This is a killer feature for risk adverse people.

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I like that one. Fewer trades it more secure.

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Some really great answers in here from others so I’ll keep mine simple :slight_smile:

  • What do you think are the compelling reasons for different people to hold $DPI?
    I actually think the most compelling reason to hold $DPI instead of the underlying tokens is to protect against downside risk as many of the tokens in the $DPI are tied to early-stage projects and for this reason the tokens are extremely volatile.
  • What have I got wrong?
    Nothing that I can see!
  • What can be removed to make a simpler (long form) message?
    I think the crux of your message is that $DPI is a simple, profitable and tax-friendly way for people to get exposure to DeFi (whether they are smaller fish or whales). The simple messaging should be framed around that imo.
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Makes sense.

You may have noticed that I don’t do simple (well not in the first draft…)

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As part of the proposal I’m putting together for CREAM to add DPI I wrote about how you can get triple yields with DPI when deposited on a money market:

By letting users use DPI on CREAM, they can earn triple rewards - CREAM rewards, DPI yields, and whatever returns from their DPI loans. DPI yield is earned like this: DPI is redeemable for the underlying tokens, which are stored in a separate contract. This means you can get a loan against your DPI in CREAM while the Index Coop earns (very, very) safe yield on your underlying tokens. We only do the most basic things like staking YFI in yGov, lending aAAVE, etc.

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Getting added as collateral to Cream would be good.

I would be wary of prominsing yeild from passive DPI holding. It’s certainly something that I (and others) would like to be able to deliver. But I would not base our marketing on this until we have have a track history.

Once we have demonstrated that we can capture yield, and decided where we want to allocate that income stream, then we can use it to promote DPI holdings.

So I think @sassal 's comments capture the current value proposition for DPI.

Edit: for me indexes should try and generate a reputation of security and stability. So delivering what we promise is key. Not promising too much is a good start on over delivery (which is always appreciated by our holders).

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