This is the first of two votes required for a new product to be onboarded to the Index Coop.

A passing vote here signals the Index Coop's intent to further research LDI feasibility resulting in a product prioritization score.

• FOR - Pass LDI through Decision Gate 1. Begin work to research & assign LDI a product prioritization score.
• AGAINST - Do not pass LDI through Decision Gate 1. DG1 is a signalling step to gauge community sentiment. It is NOT subject to quorum requirements.

The full text LDI proposal exceeds Snapshot’s character count limit. Below is an abbreviated proposal. Check out this forum post to read the full proposal.

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Status: DG1 Author: Llama Created: 6th July 2021 Requires: IIP-58: Launching Pulse Aggregate Yield (PAY)

Simple Summary

Llama would like to partner with Index Coop (IC) to co-manage the Llama Diversified Index strategy. The Llama Diversified Index (LDI) is a productive and diversified crypto index that optimizes returns relative to risk across various sub-asset classes within the crypto ecosystem.

LDI has already secured approximately $3.5M of external funding. Llama is acutely aware of limited dev resourcing within DeFi and is willing to share the dev workload associated with developing and maintaining LDI. Llama would also like to highlight the 15% allocation to the Pulse Aggregate Yield index (PAY) within LDI.

Llama is truly excited by the prospect of partnering with Index Coop and looks forward to developing a long-term prosperous relationship.

Motivation

This new set has been developed to provide holders a diversified portfolio of productive assets wherever possible to maximise returns. By providing holders with an automated diversified asset allocation solution, LDI enables passive investment in a diversified set that provides access to the main thematic investment sectors on the Ethereum network. The diversified portfolio construction has already proven to have strong product market fit as Gitcoin has expressed interest in becoming an early investor in the product.

In time, LDI will be integrated across DeFi, allowing for extrinsically productivite opportunities to be generated on top of a balanced index, further enhancing the appeal of holding a diversified portfolio. Llama has built an extensive network across DeFi and is able to accelerate LDI integrations across the ecosystem. At the time of writing, Llama has approximately 25 contributors that are also members of other DeFi communities.

LDI has several key advantages over traditional diversified portfolios:

• Utilization of productive assets where possible.
• A more sophisticated asset allocation methodology that optimizes for Sharpe ratio while integrating appropriate constraints to ensure diversification among established crypto sub-asset classes.
• Low vol USD yield aggregation (PAY)
• Access to a liquid secondary DEX market
• LDI productive use cases

Llama has already received expressions of interest from various parties regarding this particular product and intends to create complementary products as part of our overall treasury management strategy solutions.

Size of Opportunity

DeFi treasuries have amassed a total AUM of over $6B. As DAOs seek to diversify their treasuries, passive and diversified portfolio solutions will enable simplified management. The total addressable market for a diversified Ethereum-focused crypto portfolio is tremendous. Capturing a small portion of this overall market means generating significant AUM for Index Coop. A diversified crypto index product currently does not exist within DeFi and therefore represents a unique opportunity for Index Coop to partner with a Treasury Management specialist in Llama.

Llama’s network includes university endowment funds which Llama believes will find LDI attractive. Llama has already discussed the LDI with a number of DAOs and found strong support for the product which can be used as an allocation within a broader treasury management strategy.

Product Differentiation

There are currently no diversified portfolio offerings available as crypto-native structured products that optimize for returns relative to standard deviations among various sub-asset classes. Indices like BED offer simplified solutions for the risk assets within a portfolio, but they do not allocate to stablecoins (an essential component of a diversified crypto strategy). In addition, the methodology of BED equal-weights the sub-asset classes (e.g. Bitcoin, ETH, and DeFi) rather than optimizes risk/reward between them. While there is definitely a market for equal-weighted indices like this, the LDI intends to offer a more sophisticated portfolio management solution.

The introduction of a stablecoin allocation will lead to automatic rebalancing toward risk-on assets during periods of market stress and toward risk-off assets during periods of market euphoria. This diversified approach ensures contrarianism and is a key component of a portfolio management mindset.

Finally, a bias toward productive assets addresses a key treasury diversification goal. For example, Nexus Mutual recently invested a large amount into stETH and Fei Protocol recently approved purchasing stETH. Since this product attempts to create a diversified allocation while also ensuring productivity where possible, there is no need for a DAO treasury seeking a simple, passive solution to do more with their investment assets outside of holding LDI.

Liquidity Analysis

The underlying assets within LDI are all readily available within DeFi as ERC20 tokens. Most tokens can be purchased via Sushiswap, Uniswap, Curve by depositing capital into the respective protocol. For tokens traded via DEXs, there is ample liquidity to facilitate rebalancing when compared to some of the more illiquid components in DPI.

The only token with underlying liquidity concerns is the productive iteration of AAVE. stkAAVE has a lock up period and xToken products like xAAVEa & xAAVEb also rely on AAVE being unstaked periodically to provide unwrapping liquidity. Llama expects at the time of launch xToken will have launched AAVE-xAAVEa & AAVE-xAAVEb pools on Uniswap V3 which are expected to provide sufficient rebalancing liquidity. These contracts are currently being audited.

Methodology

LDI is intended to provide a diversified portfolio of crypto assets across a variety of sub-asset classes. The Index strives to provide an effective portfolio solution for DAO treasuries and individuals alike.

The allocation will initially be divided among 6 sub-asset classes: Stablecoins, Bitcoin, ETH, DeFi, Metaverse, and Web3 Infrastructure. These sub-asset classes were determined by analyzing the current crypto market to identify key themes and differentiated asset types. Sub-asset classes could change over time as new themes and asset types emerge. The reasoning for the current sub-asset class elections are as follows:

• Stablecoins (Target: 15%) - Stablecoins are largely uncorrelated to the broader crypto ecosystem. The stability inherent in stablecoins make them essentially a cash equivalent while offering returns comparable to traditional equities when deployed productively. Having a sizable stablecoin allocation allows for a contrarian investment approach during the rebalancing process: risky assets are trimmed during periods of strong performance and are added to during drawdowns. This rebalancing approach has been shown to outperform the classic buy-and-hold strategy over multiple market cycles.
• Bitcoin (Target: 15%) - Bitcoin has the lowest volatility of the other risky asset types included in the index, serving to bring down total portfolio volatility without sacrificing too much upside. Its fixed supply and position as the largest high-quality crypto asset makes it a kind of safe-haven asset during periods of market instability while displaying characteristics reminiscent of traditional real assets like gold.
• Ether (Target: 35%) - Ether is the life-blood of the Ethereum economy and the main asset used to conduct operations by DAOs outside of their native governance tokens. Since ETH is essentially the money of the ecosystem, it is a primary asset for DAO and individual portfolios. Investing in ETH provides exposure to a variety of crypto themes while also providing a remarkable risk/reward profile versus other crypto assets including Bitcoin.
• DeFi (Target: 20%) - DeFi has emerged as one of the largest opportunities within crypto, and is arguably one of the first killer applications of blockchain technology. There is strong demand for DeFi assets as evidenced by new centralized offerings (e.g., the Bitwise DeFi Index), the success of DPI, and the inclusion of DeFi in the BED meme. In addition, many DAO treasuries have shown interest in acquiring the assets of other DeFi protocols.
• Metaverse (Target: 10%) - The Metaverse is quickly emerging as one of the key themes of the 21st century as we spend an increasingly larger amount of time in digital spaces. The theme has been highlighted in traditional finance, specifically around the Roblox IPO, but NFTs, blockchain gaming, and crypto in general provides a better platform for some of the core tenets of the theme.
• Web3 Infrastructure (Target: 5%) - Web3 Infrastructure, including oracles and sub-graphs, have enabled DeFi to flourish. As a sub-asset class, it is expected that middleware remains less correlated to other sub-asset classes like DeFi and the Metaverse as it is more directly tied to the growth of on-chain data.

Copyright

Copyright and related rights waived via CC0 4.