sDeFi, DPI, DeFi++, PIPT: Which type of index is expected to become the leader of the track? (www.blockcast.cc)
Bitcoin is a re-examination of money, regardless of whether it is the right to terminate money. At least, Bitcoin is trying to redefine finance, and DeFi is also trying to re-deconstruct and reinvent the financial product model. Although DeFi is still spinning in small circles as a whole, the old irons in the encryption circle are the core heavy users. But don’t forget, all new gadgets are just like toys in people’s minds at the beginning .
Although DeFi is far from reaching the goal of inclusive finance, despite the fact that there will inevitably be many waste and defective products in the DeFi field, projects run off, returned to communities, and are trapped by hackers. Many problems will increase in the future. If the bust is out, it will make the whole ecology more robust through falsification.
According to Wikipedia’s explanation, the Lindy effect means that for things that will not die naturally, such as a technology or an idea, every time it survives for a period of time, its remaining life expectancy will increase a little. Bitcoin has been killed more than 300 times, and it is time to witness the Lindy effect. See you, Singapore’s largest commercial bank, DBS Bank, announced the official launch of the digital trading platform DBS Digital Exchange. Starting next week, you can start trading cryptocurrencies with fiat currencies. Singapore Exchange holds 10%.
JPMorgan, who has always been skeptical and even contemptuous of Bitcoin, and the hedge fund Bridgewater Fund Ray Dalio, have recently reached the stage of true fragrance and have begun to compare Bitcoin with gold. In Ray Dalio’s view, Bitcoin and other cryptocurrencies have established themselves in the past decade as “an alternative asset like gold.”
Against this background, we may be more confident to judge that for the entire ecology that can quickly learn and evolve from it, I will become stronger if I am not killed. And as mentioned earlier, all traditional financial product categories, the crypto world will be repeated again.
1. Index funds and crypto asset index funds
Index funds are often one of the best entry-level investment products for new investors. In the past ten years, the market share of index funds has continued to expand. Take BlackRock as an example. This company has jumped up in the past ten years and has become the world’s largest asset management company with more than 100 billion U.S. dollars in assets under management. Among them, index funds contributed a lot to the rise.
In the past ten years, with the emergence and increasing attention of Bitcoin, Grayscale, CoinShares, Bitwise and other companies have begun to try to integrate encrypted assets into the existing financial system by means of trust funds and index funds. Every time grayscale buys and buys, it always triggers a round of heated discussions in the market. Some commentators even call the current market an institutional bull market.
The practice of Grayscale and other institutions and the views of Ray Dalio, JP Morgan and others are that they choose to add crypto assets such as Bitcoin to the vegetable basket, and package or transform crypto assets to provide investors in traditional financial products. Allow investors to buy and hold encrypted assets through IRA, securities agent accounts, and products listed on exchanges.
On the other hand, the rise of DeFi represents another upward attempt. What DeFi does is to create parallel time and space. In this time and space, with the help of the Internet, the financial infrastructure provided by DeFi can be used by everyone without authorization, allowing people to obtain a new financial space outside of the original banks, exchanges, stocks, and funds .
Decentralized exchange DEX, automatic market maker AMM, derivatives, decentralized lending, and many other product models have emerged. In the past year, DeFi has grown by leaps and bounds. According to statistics, it now has a market share of nearly 15 billion U.S. dollars. The best ones include Uniswap, Balancer, AAVE, Synthetix and many other DeFi products.
Naturally, in the wave of DeFi innovation experiments, index funds, an indispensable product in the traditional financial world, have also begun to take shape .
Some entrepreneurial teams began to try to create cryptocurrency index funds, especially DeFi index funds. For example, DPI has reached an asset management scale (AUM) of US$25 million in transactions in just three months.
What are the projects and development of the encrypted index fund created on the DeFi infrastructure? This article discusses together.
2. What problem does the crypto index fund solve?
For many investors, DeFi is one of the must-chosen products in the current crypto asset investment field. The projects that survived the DeFi boom gradually sank and became infrastructure. On top of this, more tricks can be played out. In addition to adding new investment (CHAO ZUO) targets, what can an encrypted asset index fund project based on DeFi provide?
Decentralized index funds are similar to traditional index funds and provide opportunities to passively obtain diversified investments. There is no need to invest in encrypted assets one by one with limited funds and risk not earning the commission. With reliable decentralized index fund products, investors can directly buy a basket of encrypted indexes of encrypted assets, simply hold them, and still enjoy the advantages of decentralization.
However, decentralized index fund products also have unique problems. Entities that are different from traditional fund operators are bound by securities and other laws. It takes more effort for decentralized index funds to prove themselves, and the most important of these is time and consensus .
Suppose a project issued a box token, claiming to contain BTC, Dabao Coin, and Faith Coin. So, is the box token capable of anchoring the value of the corresponding underlying token, is the ratio of the index composition reasonable, and how to solve the risk of fund operators’ decision-making and even running away?
When designing a decentralized index fund, there are many factors that need to be considered, such as the structure of the index fund, management methods, management fees and many other issues.
In the following pages, we will look at the four most representative products on the market one by one: sDeFi, DeFi++, PIPT and DPI .
Three, sDeFi
sDeFi is an index product issued on the derivatives trading platform Synthetix, anchoring a basket of DeFi tokens. However, the derivative method of anchoring price is adopted here, that is, the index is only a benchmark against the corresponding DeFi token price, which can be speculated and cannot be exchanged, and does not have the underlying DeFi token as support .
At the beginning of the launch, sDeFi included eight DeFi tokens. The composition ratio of various tokens and the decision to add new tokens were determined by the community through the governance system of Synthetix. Currently, sDeFi includes 12 types of tokens , including: AAVE, SNX, YFI, REN, BAL, CRV and other assets. The ratio of different token shares is determined by the community, and a fixed ratio is adopted.
However, sDeFi transactions do not include liquidity mining. Users first need to use over-collateralized SNX to generate sUSD, or purchase sUSD from DEX, and then participate in the Synthetix market to trade sDeFi. In the Synthetix market, an automatic trading market mechanism with no slippage is adopted. Every time you buy, the system will cast sDeFi to you; and every time you sell, it will destroy sDeFi and return sUSD to you.
Trading of the sDeFi index does not incur additional fund custody fees, but just like other trading pairs on Synthetix, a 1% transaction fee is charged. In addition to sDeFi, the platform also has a bearish DeFi index: iDeFi. After buying iDeFi, if the DeFi index drops, the price of iDeFi tokens will rise.
However, the current sDeFi market is not large. According to current statistics, the combined 24-hour transaction volume of sDeFi and iDeFi does not exceed US$1.6 million. Due to the use of derivatives instead of physical (real tokens) anchoring, sDeFi is just a price index, which depends on the oracle chosen by Synthetix. Once the oracle fails, or if network congestion causes a delay in quotation, sDeFi’s market transactions will also be affected.
Summarize the advantages and disadvantages of sDeFi:
Advantage
- sDeFi is the oldest DeFi index trading product;
- The Synthetix team has a good reputation in the DeFi ecosystem. The agreement has processed more than 1.5 billion U.S. dollars in transactions, so sDeFi has a robust infrastructure.
insufficient
- With the structure of synthetic derivatives, the anchored assets cannot be redeemed;
- Relying on the oracle system, there is a counterparty risk.
Four, PieDAO
Unlike sDeFi, which uses a derivative structure, only anchors prices, and has no real asset support, the index funds created by the DeFi team PieDao created in March 2020: such as DeFi++, DeFi+L (large market value index) and DeFi+S (small Market value index), etc., adopt an index fund structure backed by real assets .
To put it simply, DeFi++ index funds endorsed by real assets need to buy and hold a basket of DeFi tokens in accordance with a set ratio. The index fund with derivative structure such as sDeFi only anchors the price, does not hold assets, and will not be redeemed. It can be called air currency, and its value is to serve as a price indicator for the corresponding DeFi token basket.
In order to help readers understand more about DeFi index funds, I will spend more space here to introduce PieDAO’s index product structure and operation.
PieDAO index products at a glance
As you can see, the picture shows PieDao’s index products, including seven types, but the larger trading volumes are BCP, DeFi+L, and DeFi+S. Our article focuses on DeFi index, focusing on the three index funds DeFi++, DeFi+L and DeFi+S.
The market value of DeFi+L is US$1.77 million and the price is US$1.3; the market value of DeFi+S is US$988,000, and the current price is US$1.62. The creation date of DeFi+S index products is earlier than DeFi+L and covers six small DeFi tokens with market value, including UMA, REN, LRC, BAL, PNT and MLN.
PieDAO’s DeFi series index products are created on top of Balancer. When users purchase DeFi index tokens, they will buy tokens through Uniswap and other trading tools according to a fixed position ratio, or if users hold enough corresponding tokens, they can also directly join the circulation pool and issue DeFi index tokens .
Due to the fixed ratio method, as the price changes, the funds allocated to different tokens need to be re-allocated on a regular basis, which can be done directly with the help of the external AMM automatic market-making mechanism, compared with the traditional index fund product adjustment needs Manually buying and selling corresponding stocks, bonds, etc., still save a lot of effort.
Take DeFi+L as an example to understand how to issue and redeem
There are two ways to issue DeFi+L: a single currency and multiple asset methods . If you choose a single currency, you need to pay in ETH, and exchange it for the corresponding assets through Swap trading tools such as Uniswap and Balancer. In order to avoid the impact of slippage problems, you need to pay an extra 5% of ETH, and the excess will be returned.
If users choose multiple asset methods, they need to deposit the corresponding assets in proportion to provide liquidity for the DeFi+L fund. The following figure shows the corresponding assets that need to be paid to generate 1 DeFi+L index tokens.
Because PieDAO’s index products adopt a real asset-backed structure, they can redeem and redeem assets in real time, and there is no additional fee for redemption. On the fund page of DeFi+L, click Redeem and select the amount of assets you need to redeem.
Understand the operation and mechanism of DeFi+L, and also understand the other index products of PieDAO, as well as the practice of index products such as PowerIndex with similar structure.
In order to facilitate users who need both DeFi+L large market capitalization funds and DeFi+S small market capitalization funds, PieDAO has recently launched DeFi++ index products to package and trade the two. Among them, the proportions of DeFi+S and DeFi+L are 30% and 70% respectively. The current market value of DeFi++ is $520,000.
PieDAO designed the gameplay of liquid mining. If users provide liquidity in Balancer’s token pool for index products such as DeFi+S and DeFi+L, they can get rewards such as DOUGH and BAL, the native token issued by PieDAO. But it should be reminded that on Balancer, the token pool ratio of DeFi+S/sWETH and DeFi+L/sWETH is set to 7:3. I think it is too high and the current depth is insufficient.
PieDAO’s DeFi series of index products represent a paradigm for building encrypted index funds. Through a design that allows real-time redemption, AMM provides real-time liquidity and convenience for position adjustment. It is expected to be used as an example of many encrypted index products in the future project.
The index covers the underlying assets and proportions, although fixed, they can also be changed through community decisions. The PieDAO community can make follow-up adjustments through a proposal (PIP), including the ratio and the currency of the position .
A similar project is the PIPT index issued by PowerPool, which is also created based on Balancer, and also adopts a fixed ratio model.
Five, INDEX Coop
Index Coop is a decentralized index community launched by the SET protocol (Set Protocol). The governance token is INDEX, which is also used as a liquidity mining reward. The first index product is DeFi Pulse Index (DPI) launched by DeFi Pulse and Index Coop, a one-stop portal for DeFi, with a market value of approximately US$20 million.
DPI aims to track the performance of related tokens in the DeFi industry, and calculate their respective proportions based on the weight of the token’s circulating market value . There is a complete set of criteria for the selection of DPI’s target assets . The main purpose is to select projects that can be developed, maintained and operated for a long time and have a wide audience.
DPI is based on the Set Protocol V2 protocol, adopts a basket of DeFi tokens as the underlying support model, and allocates the corresponding holding ratio according to the market value of the tokens.
DPI can allow users to redeem, which means that users can use DPI tokens at any time to exchange for the corresponding underlying assets. Currently, 10 DeFi tokens are included, as shown in the figure below.
Among them, AAVE has the largest proportion, about 19.4%, and the current proportion of BAL is 2.27%. Different from PieDAO’s DeFi++ and other index products using a fixed ratio method, DPI, a weighted index composition based on the market value of circulation, will often require adjustments and token replacement.
The governance mechanism of the Index Coop community is to introduce the role of index strategy parties , but these index strategy parties are not index managers.
Within two months after the launch, 7.5% of INDEX tokens will be allocated to strategy parties. For example, DeFi Pulse, because they compile indicators, conduct research and provide data, this part of the tokens will be distributed over 18 months. In addition, each Index Coop index (such as DPI) may also be designed with a fee, part of which will also be allocated to the index strategy party.
DPI issuance and redemption
It is worth reminding that the entrance to the issuance and redemption of the DPI index on TokenSets is hidden by default and can only be displayed after clicking.
Unlike PieDAO’s DeFi index, which provides single-asset/multi-asset options, DPI must be transferred to multiple underlying assets when it is issued . Through the tokensets website, DPI tokens can be issued, and all relevant tokens need to be authorized to the contract. Due to the use of real asset support, DPI can also redeem corresponding assets in real time.
DPI liquidity mining
In addition to the increased credibility of DPI due to the participation of DeFi Pulse and the leading market value of DPI in DeFi index products, the liquidity mining mechanism adopted by DPI is also critical.
Users provide liquidity for the ETH/DPI trading pair in Uniswap. Then, they can mine through IndexCoop’s page and get INDEX token rewards. The current price is 4.6 USD and the estimated annualized rate of return is 23%.
DPI index maintenance method
DPI is divided into two stages: the determination stage and the adjustment stage.
In the third week of each month, the modification decision to be made for the next token ratio update will be determined. It will refer to the current number of CoinGecko tokens in circulation and determine the types of tokens to be added and removed from the index. These work will be announced to the community before implementation. After the end of the determination phase, the adjustment, addition and deletion of the constituent tokens in the index will be carried out according to the corresponding instructions, which will be carried out on the first working day of each month.
Taking into account the impact of token allocation on the market, as the amount of index tracking assets expands, the time of the adjustment phase may be adjusted to more than one day to reduce the impact of buying and selling on market prices.
DPI adopts the method of circulating market value weight, and does not require human intervention. Compared with the method of changing the weight by community voting, it is more efficient. In order to facilitate understanding, let’s look at the relevant information of Index Coop’s index asset balance report in November.
This process was carried out through the INDEX improvement proposal of IIP-5.
Before execution, DeFi Pulse, as an index strategy party, announced the new DPI weight and announced it to the community for verification. After confirmation, with the help of IndexCoopManamger’s smart contract, it adopted a multi-signature trustless method, including DeFi Pulse, SetLabs and the IC community completed the DPI adjustment work.
Six, YETI
PowerPool issued PIPT at the end of last month. It was created based on Balancer, and it went online for nine days and locked up more than 9 million US dollars. PIPT is similar to the index fund mechanism created by PieDAO.
On December 4, a user named Ryan Watkins proposed in PowerForum (PowerPool’s governance forum) to create the Year ecological index YETI, focusing on the Year ecology, including: YFI, SUSHI, CREAM, AKRO, COVER, K3PR, CVP, PICKLE 7 Kinds of tokens.
YETI adopts a fixed ratio, real asset-backed issuance method, which means that each YETI is supported by the underlying assets and can be redeemed at any time. There are three options for issuing YETI:
- Transferring into any asset minting such as ETH, USDC, DAI, etc., due to the need to exchange ETH into the corresponding eight kinds of assets, the slippage is high, and the default slippage is 2%;
- With a single underlying asset, users can transfer to one of the eight underlying assets;
- Multiple asset issuance, as shown in the figure below.
YETI liquidity mining
In order to motivate users to participate and improve YETI’s liquidity, a liquidity mining incentive for the first month was created. It consists of two parts: deposit YETI through PowerPool, you can share 200,000 CVP token rewards; provide YETI/ETH liquidity pool (ratio 80:20) through Balancer, and get 250,000 CVP token rewards.
According to the display on the PowerIndex page, the equivalent APR is about 530%-595%, and this part of the income is still considerable. However, the eight tokens covered in the YETI index have high price volatility compared to tokens such as ETH. Please be cautious when participating.
According to PowerPool’s governance method, subsequent changes in the types and proportions of YETI’s tokens should also be carried out through governance improvement agreements, which will take effect after voting.
Seven, summary
The market prospects of index funds are broad. The emergence of several DeFi index fund products in the DeFi field also indicates that the community is unwilling to continue to explore. All products that can be reconstructed with DeFi will be reconstructed by DeFi, but since the crypto market itself is a niche world, I prefer to understand the exploration of DeFi products as the prototype testing stage. Before reaching more audiences, this step is of course indispensable, but you must also know that the road is long and not a day’s work.
Whether it is the derivatives method adopted by Synthetix, or the real asset-backed gameplay adopted by PieDAO, INDEXCoop, and PowerPool, they are all exploring the way for DeFi + index funds. Over time, I believe these accumulations will pave an interesting way for DeFi to get out of the circle. The emergence of YETI is an interesting example. The concept of index products based on the ecological scope can also be extended to the fields of NFT and blockchain games.
DeFi creates a parallel financial time and space to explore the gameplay of various financial products. On the other hand, traditional financial institutions are also approaching the encrypted asset industry in their own way, and the two paths go hand in hand.
This article summarizes four current representative projects and discusses some common models, advantages and disadvantages of DeFi decentralized index funds. Finally, it is worth reminding that although products such as index funds have the intention of trying to reduce investment risks, in view of the fact that various tokens in the current crypto asset market are still highly correlated, they cannot achieve much risk diversification. Therefore, it is necessary to remind readers that the product model is worthy of attention, but to participate in it, you must do your homework and manage risk.
Reference
https://docs.indexcoop.com/products/defi-pulse-index
https://bankless.substack.com/p/the-bull-case-for-decentralized-index
https://bankless.substack.com/p/how-to-mint-dpi-and-earn-index
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