Decision Gate 2: Synthetix Debt Pool Mirror Index (SMI)
Decision Gate 2 is the final vote for onboarding products to the Index Coop. A full overview of the product onboarding process can be found here.
A passing vote here signals commitment by the Index Coop to launch the Synthetix Debt Pool Mirror Index in a timely manner.
Work Team Analysis
The Work Team Analysis for SMI has been posted here.
Passing Thresholds:
- 15% or more of circulating supply must participate
- 60% or more of participating tokens must vote FOR
Voting
- FOR - Accept SMI into the Index Coop.
- AGAINST - Do not accept SMI into the Index Coop.
The full text SMI 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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iip: 25 title: Synthetix Debt Mirror Index ($SMI) status: Proposed author: David Goldberg and Andrew Trudel, Synthetix, overanalyser (@overanalyser), INDEXcoop created: 2021-03-30
Simple Summary
When staking Synthetix, the user takes on a share of the synthetic debt pool. This is comprised of all the circulating synths at their relative market capitalisations. As the majority of the synths have free-floating prices, the user is exposed to a future debt liability that is unknown. In order to hedge this market risk, users purchase equivalent assets so that they can enjoy staking rewards with some protection. The proposed index fund is intended to mimic the composition of the debt pool using 100% collateralised assets and so allow simple and robust hedging.
Abstract
A five-component index (wBTC, wETH, DAI, DPI, and LINK) will be created to mimic the composition of the debt pool* (less 10% in USD). The fund will be based on the Set Protocol V2 contracts (market cap structure) with weekly rebalances to follow the debt pool. The fund will be maintained by INDEXcoop with support from Synthetix.
The fund will be designed to be low cost for users and will incorporate intrinsic productivity to capture underlying yield for the benefit of Synthetix and INDEXcoop.
*The mirror fund will actually follow a modified debt pool; 10% of the total balance of the pool (as sUSD) will be removed before calculating the fund weights. This allows stakers to hedge their position by using only 90% of their minted sUSD to purchase SMI, enabling them to retain 10% of their minted sUSD for personal use.
Motivation
Synthetix has a desire to create an easy flow for SNX stakers to hedge their exposure to market moves. The index needs to contain non-synths because otherwise the problem of the underlying debt would not be fixed and the debt risk would be taken on by just another staker.
For Index Coop the proposed fund delivers a number of benefits:
- Substantial Increase in AUV and associated income.
- synthetixDAO would support liquidity mining and seed funding.
- Initial proof of concept for intrinsic productivity with a fund aimed at DeFi natives.
- Builds INDEXcoop reputation as a partner for other protocols.
Synthetix approached Index Coop as a partner to launch this product as they saw a need in offering a collateralised hedge for SNX stakers. They would like to integrate the buying of $SMI into the staking flow on synthetix.io and allow all Synthetix users to access this index fund for hedging
Size of opportunity
The total value of all synths is currently $760M. SynthetixDAO estimate market size for $SMI to be between $50M and $100M AUV. This is just a rough estimate and proven reliability of the index mechanism would make this much higher.
Liquidity commitment
As the intention is to build the acquisition of SMI into the SNX staking flow, reliance on issue/redemption contracts and/or exchange issuance is not considered practicable. As a result, the creation of a sizable secondary market (Uniswap or Sushiswap) is anticipated.
The size requirements and any liquidity mining for this secondary market will be agreed with the INDEXcoop work groups between DG1 and DG2.
Differentiation
The proposed fund comprising ETH, BTC, USD and DeFi tokens has some overlap with existing funds on the market (BCP from PieDAO https://pools.piedao.org/#/pie/0xe4f726adc8e89c6a6017f01eada77865db22da14 ) and funds proposed by members of INDEXcoop for future products (ICP https://gov.indexcoop.com/t/product-proposal-index-crypto-portfolio-icp/775 and BED https://gov.indexcoop.com/t/iip-22-bankless-bed-index/1076 ). So there will need to be some differentiation between this product and others / potential others.
However, the use of the Synthetix debt pool as the benchmark index is unique and it is unlikely that the market will create a suitable hedging fund without it being a specific target.
Fee and Split
Fee: 0% Streaming Fee
Synthetix has requested that there be no streaming fee to optimize the $SMI for the use case of being a long-term debt hedge for SNX stakers against the Synthetix debt pool's performance. Any costs associated with managing the $SMI will instead be covered through intrinsic productivity.
Intrinsic Productivity Fee Split: 70% INDEXcoop and 30% Synthetix
The Synthetix Core Contributors estimate that the revenue generated from the first year of intrinsic productivity could be within the range of 2-3 million USD. Since INDEXcoop is responsible for the implementation and management of intrinsic productivity, as well as the management and gas costs associated with rebalancing the $SMI, they will receive 70% of revenue generated from intrinsic productivity while Synthetix will receive the remaining 30% as a reward for incentivizing SNX stakers to manage their capital with $SMI.
There will be no issue and redemption fees for $SMI
Methodologist bonus
Methodologist Program: 100% Synthetix
The INDEXcoop has recommended that 100% of the methodologist program fee be given to the SynthetixDAO to secure the SynthetixDAO as a stakeholder invested in the INDEXcoop's success.
Methodology
The methodology is to use the 5 components to follow the debt pool composition (less 10% fiat). This would require a utility contract from Synthetix. Components may be added or removed as part of the rebalancing.
The fund would be built using Set Protocol contracts which work on a market cap basis.
Rebalancing schedule
Rebalancing would be done on a weekly schedule. It is expected that the v1 methodology will use off-chain monitoring and management by Set Labs / INDEXcoop. This is the current process for $DPI and other funds with monthly rebalancing schedules.
However, the rebalancing may move to a market-driven technique based on changes to the debt pool composition.
Index Calculation
The value of $SMI will be calculated as the sum of the individual components and the weights at the last rebalance.
Intrinsic productivity
As a product intended for DeFi natives, inclusion of intrinsic productivity for the benefit of all (INDEXcoop, SMI holders and Synthetix) is planned for activation after launch. Details of the yield generation methods (Compound, AAVE) and destination of the yield will be agreed between INDEXcoop and Synthetix before implementation.
Methodologist commitments
INDEXcoop
- Smart contracts and rebalancing of fund
- Exchange issue contract for $SMI https://gov.indexcoop.com/t/exchange-issuance-bounty-december-2020-in-progress/631
- Managing Intrinsic productivity - once agreed
- Backstop for Intrinsic productivity
SynthetixDAO
- Provide utility contract on debt pool
- Seed investment for SMI:sUSD pool and / or Liquidity rewards
Author background and commitment
Synthetix is a decentralized derivatives liquidity protocol that enables the issuance of synthetic assets on the Ethereum blockchain. Synthetix supports synthetic commodities, cryptocurrencies, equities, indices, and fiat currencies.
INDEXcoop is a decentralised organisation focused on the creation of structured products on the Ethereum block chain. This includes sector specific index funds (DPI, MVI), volatility adjusted sound money funds (CGI), and on chain Leveraged funds (FLI)
References
Off-Chain Vote
FOR
264.27K 100%
AGAINST
0 0%
Timeline
Apr 21, 2021Proposal created
Apr 21, 2021Proposal vote started
Apr 24, 2021Proposal vote ended
Oct 26, 2023Proposal updated