Decision Gate 2: Yield Hunter Index ($YHI)

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 a commitment by the Index Coop to launch the Yield Hunter Index ($YHI) in a timely manner.

Work Team Analysis

The Work Team Analysis for Yield Hunter Index ($YHI) has been posted here.

Product Requirements

The PRD document for Yield Hunter Index ($YHI) can be found here

Passing Thresholds:

• 10% or more of circulating supply must participate (2,181,385*0.10 = 218,138.5)
• 60% or more of participating tokens must vote FOR

The full-text Yield Hunter Index ($YHI) 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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Title: Yield Hunter Index (YHI) Status: Proposed Author: @overanalyser Created: 12th October 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 wrapped 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.

Tokens can include DeFi, Metaverse and Infrastructure projects and tokens from centralised 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 25% 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 market.

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 underlying token cap of 25% has been applied to avoid over concentration

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 1.95% 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 net income generation for holders, an income threshold for each component has been set to 2.5%.

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.

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 (e.g. 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.