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 the YHI feasibility resulting in a product prioritization score.

FOR - Pass YHI through Decision Gate 1. Begin work to research & assign YHI a product prioritization score.

AGAINST - Do not pass YHI through Decision Gate 1.

DG1 is a signaling step to gauge community sentiment. It is NOT subject to quorum requirements. The full-text YHI proposal exceeds Snapshot’s character count limit. Below is an abbreviated proposal. Check out this forum post to read the full proposal.

================================================ Status: DG1 Author(s): @Overanalyser Created: 12 August 2021

Simple Summary

To create a diversified crypto fund of ERC20 tokens that have the opportunity to capture yield in addition to the underlying token price exposure. Stable coins and L1 tokens are excluded.

Abstract

To create a diversified fund using income generating ERC20 tokens on Ethereum main net which allow income generation to the benefit of the holders. The product will be built using Set protocol with liquid tokens purchased on DEX and wrapped tokens.

The use of productive tokens allows projects with inflationary tokenomics to be held without disadvantage to the passive holder. Tokens can include DeFi, Metaverse and Infrastructure projects. However, the methodology excludes ETH, (ERC20) BTC and stable coins.

The v0.1 proposal is intended to be a Minimal Viable Product (MVP) to allow rapid launch and future upgrades to capture higher yields. The structure will be a simple Market cap (capped at 20% for any component) with a simple streaming fee for holders. Income generation will be limited to the use of AAVE, Compound and Cream and DEX liquidity.

This will be an INDEXcoop methodology maintained by contributors.

Motivation

‌Some protocols are already generating income for holders via staking, or by issuing ongoing reward tokens. However, it requires time and attention to manage such positions to ensure balanced exposure and ongoing income capture. Many potential users of our products have stated that lack of income generation is a negative when considering a purchase.

In addition, some protocol tokenomics are such that the passive holder is at a disadvantage compared to those who are able to stake/lock up tokens or wait for vested returns. While some of the tokenomic designs are unfavorable for direct inclusion of staked tokens within an index due to redemption issues, they do encourage borrow demand. This means that some income can be captured by being a lender on a liquid money markets.

With the creation of Set protocol adaptors for Compound and AAVE there is an opportunity to build products that capture some income from a wide range of tokens. By forking the current adaptors for different tokens, and developing wrap adaptors for the Cream protocol, we now have the opportunity to quickly launch a product that captures yield for our users.

‌Rationale

‌The key considerations in designing this methodology are:

• Quality and security of the underlying projects
• Net positive income for holders at all times.
• Accessible income generation which allows unrestricted issue and redemption.
• Minimal development work to allow launch.
• Community methodology to empower INDEXcoop contributors and remove friction from the launch and maintenance process.

The product is intended to be used by people wanting both price exposure and income generation from a passive product that can be used within a wider (user defined) income generation strategy including ETH, BTC and stable coins.

A protocol cap of 20% has been applied to avoid over concentration (example portfolio without cap would contain 35% of a single token).

A free floating market cap design was also considered as it would reduce the size of monthly rebalancing. However, the overconcentration is considered a larger challenge to holders.

Alternative income generation using yield generation protocols (e.g. Yearn and xtoken) would unlock significant additional yield in the future, but is not considered necessary for product launch.

While a management fee taking a share of the income might better align the interests of holders and INDEXcoop, a simple streaming fee of 1.25% is proposed for this product launch to minimize engineering work. Likewise, a mint and redeem fee has been discounted from the v0.1 methodology. In order to ensure new income generation for holders, an income threshold for each component has been set to 1.25%.

Products with built-in burn mechanisms to improve underlying token price (e.g. MKR) are included in the methodology when they meet the other criteria.

This proposal is intended to provide INDEXcoop with an easy-to-understand product to allow initial review and DG1 vote. It is expected that if it passes the DG1 vote, a small work team will form to review the methodology prior to the formal work team assessment and DG2 vote.

Specification

Overview

‌This product will be built on Set protocol contracts and the v0.1 specification will use a combination of:

• DEX liquidity.
• Compound, AAVE and Cream wrap adaptors.

Future iterations may include wrap adaptors for token staking contracts, additional money markets (Fuse), and yield protocols (e.g Yearn and xtoken).

Rebalances will be calculated by the methodologist (Coop contributor work team) and will be monthly.

Token selection will not be restricted to individual sectors but will exclude ETH (ERC20) BTC and stable coins.

Differentiation

Unlike Sector-based products (DPI, MVI, and BED) and the DATA proposal, the availability of income is a key selection criteria. In addition, the methodology does not limit itself to a single category.

Unlike leveraged products, this does not use any leverage or borrowing.

Compared to the PAY proposal, this product captures the underlying token price fluctuations. In addition, token weights are based on circulating market cap and not on yield or protocol risk tranching.

Compared to the LDI proposal, this product targets yield generation for all components. In addition, this product is intended to be part of a larger portfolio where the holder can complement it with exposure to ETH, BTC and stable coins based on their preference.

Competitor products, $DeFi+L and $DBI use income-generating tokens. However, they do not use income generation as a selection criteria, contain non productive components, and are restricted to DeFi.

Example composition

The launch composition will be limited to three money markets (AAVE, Compound and Cream). Based on a snapshot of AUM and Yields, an example composition would be:

Note: The weighted income calculation omits the effect of MKR burn.

This would result in the following locations for assets:

	% of AUM
Native token / xSushi	21%
AAVE	11%
Compound	58%
Cream	9%

Future revisions of the methodology could allow use of different money markets (e.g. Fuse), or yield aggregators (Yearn or xtoken). Adding the yield aggregators results in additional income (at the cost of further Dev work):

Note: Development to allow ySNX and xBNT in the product would add 5.3% to the holders income.

The final allocation of assets would be:

	% of AUM
Native token / xSushi	21%
AAVE	4%
Compound	8%
Cream	3%
xToken	4%
Yearn	60%

Size of opportunity

As the use of income-generating tokens makes listing on money markets or CEX exchanges more difficult, this product may have a restricted growth profile compared to $DPI due to reduced extrinsic productivity use cases/composability.

However, the capture of income for benefit will attract the attention of many more sophisticated/crypto-native traders. In addition, the inclusion of tokens not in our current products (LINK, CRV, BNT, BAT, 1Inch) will attract members of those protocols communities.

Two DeFi centric products have income-generating components:

• $DBI with $14.5 M AUM, benefits from liquidity marketing with 41% in incentivized pools. $BDI claims a 4% income (due mainly to ySNX).
• $DeFi+L has $3.6 AUM and captures ~ 0.6% income for holders.

The current AUM for the example portfolio yield generating tokens in the lending markets (excluding xSushi and MKR) is currently $630 M. This indicates that there is a clear demand to borrow the tokens in the proposed fund and if we capture 5% of the supply we will have > $30 M AUM.

Lending markets for tokens in example portfolio

Token	Market	Market size ($ M)	Borrowed ($ M)	Utilisation	Current borrow cost
Link	Compound	116.6	16.0	14%	-4.8%
AAVE	Compound	8.3	1.4	17%	6.8%
Compound	Compound	270.3	39.7	15%	-8.9%
SNX	AAVE	15.4	9.0	58%	11.3%
BAT	Compound	97.7	15.9	16%	-2.8%
BNT	Cream	0.06	0.03	48%	10.3%
0x	Compound	112.8	19.0	17%	-1.2%
CRV	Cream	0.58	0.34	59%	12.3%
OMG	Cream	0.06	0.03	50%	6.7%
1inch	Cream	0.5	0.4	79%	15.0%
Balancer	AAVE	7.50	3.40	45%	10.3%
	Total	629.7	105.1

Initial estimates for AUM

• 6 Months $ 10 M with $2 M in incentivised liquidity
• 12 months $ 30 M with $2 M in incentivised liquidity
• 24 Months $ 90 M with no incentives