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?