INDEX COOPERATIVE — A PRODUCT-ORIENTED PLATFORM
What is Index Cooperative?
Index Coop creates and maintains the world’s best crypto index products. It’s a community-led decentralized and autonomous asset manager governed, maintained, and upgraded by INDEX token holders, an organization focused on enabling the creation and adoption of crypto index primitives and
In traditional finance, an Index fund is a mutual fund or exchange-traded fund designed to follow certain preset rules so that the fund can track a specific basket of underlying investments. Typically they track benchmark indices of stock markets like S&P 500, Nasdaq 100, Nifty, Sensex, etc. Theoretically, they could track any asset. In recent years, they’ve been becoming increasingly popular as more and more people are pivoting toward the passive forms of investing. Index Coop plans to replicate this success in the crypto world by building crypto indices that allow investors to get the pie of the crypto market safely and efficiently.
Index Coop is a DAO and a community-led organization that creates on-chain indices and provides and maintains on-chain crypto index products for the web3 space and the cryptocurrency market in general, unlike in traditional finance, where only a few people top in the hierarchy have this power. Some of Index Coop’s products are built on Set Protocol’s battle-tested V2 infrastructure, these product methodologies are sourced from industry experts both in TradFi (traditional centralized finance) and DeFi (decentralized finance).
With a variety of products that have been launched by Index Coop, it has risen to be a one-stop-shop for DeFi index products removing the entry barrier into DeFi and helping the web3 economy to generate passive income with minimal knowledge of the space as possible. It has provided the following benefits to its users:
- Easy access to different DeFi protocols without purchasing all the underlying tokens individually
- Methods to hedge against a particular protocol, the volatility of the market, and certain risks of DeFi.
- Exposure to an asset class without deep knowledge by a broader audience
This article is focused on a deep dive into some of the products of Index Coop. All their products will not be covered here because they have a large collection of diverse products that they have launched in recent months.
Index Cooperative Products
1) DeFi Pulse Index (DPI)
The DeFi Pulse Index ($DPI) is a capitalization-weighted index that tracks the performance of Ethereum-based decentralized financial (DeFi) assets. It combines the qualities of an ERC-20 token with those of a standard index fund to offer a digital upgrade to the traditional ETF structure for the twenty-first century.
Defi Pulse Index is the first and most popular product of Index Coop. The idea of the DeFi Pulse Index was proposed by DeFi Pulse, a DeFi analytics platform, and was developed by teams at Set protocol. Right now it boasts a market cap of $28M and a circulating supply of 405,926 DPI tokens. Decentralized Finance is one of the major and most promising use cases that has come out of crypto. And since the DeFi surge in 2020, we’ve seen a huge number of DeFi projects pop up, partially due to the open-source nature of crypto projects, which allows anyone to copy the code and come up with their version of the product. Hence, keeping up with DeFi space and learning about all the new projects can be surely overwhelming. DPI seeks to solve this and various other issues with investing in DeFi projects by providing a benchmark token that tracks the price of the most important and useful projects in the DeFi space.
DPI is the leading on-chain index fund for getting exposure to decentralized finance. It allows you to buy a single token and with that get exposure to more than 15 decentralized governance tokens. These are tokens of protocols like AAVE, Compound, Uniswap, Synthetix, etc. It covers tokens that are attacking and moving grounds in a decentralized way and providing better ways to lend, make markets, swap tokens, create derivatives, etc.
Benefits of DeFi Pulse Index (DPI) to Users
a) It acts as a hedge against volatility: People who’ve been following the space for sometimes, know that crypto markets can be insanely volatile. If you’re not careful in your selection of assets, it can easily wipe out half of your portfolio in a day. These things scare new investors. DPI provides downside protection due to holding a wider selection of tokens and allowing only the most valuable and useful tokens to be part of the index. Instead of having exposure to one token, DPI gives users exposure to multiple strong and specially selected tokens, so that the volatility of one does not affect the user much.
b) It is cheap and efficient (saves gas): Rather than buying 15 or more individual tokens and paying gas every single time, you purchase a single token in a single transaction and still get the same exposure to all those tokens. Now technically this argument alone should be enough to convince someone to buy an index product. Because given the current gas prices, it can save you hundreds if not thousands of dollars in gas fees alone. Buying DPI simply Eliminates the need to perform countless costly transactions manually, saving us time and money.
c) Automatic Rebalancing: Once a month, DeFi pulse will run their entire universe (platform) through a series of screens. That will output how many tokens will be in the index for the following month, and Set Protocol will make those changes on their backend without the end-users having the do anything on their end. Defi evolves pretty fast and new projects can come and dethrone existing ones in a matter of months. So, there’s this constant need to watch out for the space and rebalance your portfolio accordingly. DPI eliminates this by automatically adding new tokens and rebalancing itself as per the preset rules, thereby saving lots of time and mental hassle.
d) It is ideal for people just interested in investing. As mentioned earlier, right now there’s a deep learning curve involved for the people who want to invest in the space, which acts as a hindrance or barrier. People have to first learn about blockchains, then Ethereum, DeFi, and much more. Think about it like this, What if using the internet had required understanding the nitty-gritty of HTTP, SMTP, and other protocols, probably it still would have remained a thing of tech bros and elites, right? Defi pulse index offers a safe and reliable way for anyone in the world to get the pie of the financial revolution that is happening in defi without knowing what is happening behind the scenes.
What are the DeFi Pulse Index (DPI) inclusion criteria?
DeFi Pulse Index only keeps track of selected tokens because there is a large number of tokens in the DeFi space and some may not be worth tracking. DPI provides well-detailed criteria which a token must pass in other to be considered for tracking. The token inclusion criteria consider a wide range of characteristics across four primary categories: descriptive characteristics, supply characteristics, traction characteristics, and user safety characteristics. For details on the inclusion criteria, please visit here
What criteria are used to determine token weightings?
The DeFi Pulse Index methodology weights tokens in the index depending on their circulating supply and market cap. To avoid over-concentration, index constituents are limited to a maximum allocation of 25%. Any extra weight above 25% that would have gone to the token is weighted and redistributed to the remaining components of the DeFi Pulse Index.
2) Interest Compounding ETH Index (icETH)
The Interest Compounding ETH Index (icETH) is the first yield product of Index Coop. It enhances staking returns with a leveraged liquid staking strategy by using Lido’s Liquid Staked Ethereum token, stETH as collateral to recursively borrow additional ETH to procure more stETH through Aave V2 market.
Built on Set’s leverage token infrastructure, icETH multiplies the staking rate for stETH while minimizing transaction costs and risk associated with maintaining collateralized debt in Aave. Token holders retain spot exposure to ETH and amplify staking returns up to 2.5x. The token is made possible by the acceptance of stETH as collateral on Aave V2 Market.
Rationale
Investors are continuously seeking better yield opportunities for the largest blue-chip assets in crypto, and ETH is no exception. ETH is the most prominent and most liquid asset in DeFi. It functions as a utility token, a medium of exchange, an interest-bearing asset, and a store of value (amongst other things). For this reason, it is arguably the most investable digital asset in crypto today. The advent of liquid staking tokens, like stETH from Lido, has enabled investors to earn a competitive yield on ETH compared to market rates across the largest money market protocols like Compound or Aave.
The Interest Compounding ETH Index (icETH) utilizes productive stETH as collateral and ETH as low-interest debt to provide higher returns and exposure to minimum risks. Since stETH is listed on the Aave V2 market as collateral, icETH was launched so that token holders have spot exposure to ETH and nearly twice the yield compared to simply holding stETH.
How it Works
Within Aave, icETH deposits Lido’s liquid staked Ethereum token — stETH — as collateral and borrows ETH, which is then swapped for more stETH. That stETH is then deposited as additional collateral in Aave, allowing for more ETH to be borrowed and subsequently swapped for additional stETH. This cycle repeats until reaching the target leverage ratio of 3.1x. If the index needs to deleverage, it will execute the same process in reverse: exchange stETH for ETH, reduce debt position in Aave and repeat until reaching the target leverage ratio.
Index Coop developed an automated keeper system that constantly monitors the real leverage ratio of the icETH index. This system rebalances the index if the leverage ratio moves outside of the safe range which is usually within 3.0x — 3.3x. The index would recenter to the goal leverage ratio of 3.1x if the price of stETH suddenly de-pegged from ETH resulting in a real leverage ratio of 3.4x. The index’s NAV (Net Asset Value) is preserved throughout time thanks to the floating leverage ratio, which eliminates the requirement for rebalancing.
Index Coop also has a secondary safety mechanism called ripcord to rebalance the system if the keeper system fails. If the real leverage ratio were to exceed 3.5x and the primary keeper systems were to fail, the ripcord function could be called to aggressively recenter the index back to the target leverage ratio. This function is publicly callable and incentivized with 1 ETH, adding another layer of permissionless defense against liquidation. For a deeper understanding of what leverage liquid staking is, please watch this video.
Benefits of the Interest Compounding ETH Index
There are 4 major benefits to using icETH:
- Ease of use
- Minimized (but not eliminated) risks
- Lower gas fees
- Compatibility with DeFi protocols
a) Ease of use
One of the best benefits of icETH is exceptionally easy to use. You need at least 32 ETH (do the maths and convert to USD) to participate in liquid staking of ETH and to be involved in leverage liquid staking without icETH, you must be tech-savvy and have a deep understanding of liquidation processes to actively monitor your position to avoid getting rekt. With icETH, you simply buy and sell as you would normally do for any other token because the leveraged liquid staking mechanisms have been abstracted into a single token. And because icETH rebalances your position for you, constant monitoring or management is not required.
b) Minimized Risks
There are always inherent risks involved with the use of leverage, but the high correlation between icETH’s collateral (stETH) and debt (ETH) assets significantly lowers liquidation risk. Because the price of both tokens moves in tandem, the LTV ratio ( i.e. the percentage of your collateral value to the value of the asset you may borrow against) is stable and only requires rebalancing every few months. The result is lower liquidation risk and less volatility decay for icETH, enhancing fund safety and preserving assets value.
With the Keeper system and the ripcord mechanism, the icETH automatically rebalances the leverage ratio to always be between 3.0x and 3.3x even in extreme market conditions.
Lastly, if ETH borrowing costs in Aave surpass the staking yield on stETH, icETH can be de-levered so that the effective yield on the index does not fall below the staking yield for stETH.
c) Lower Gas Fees
Rather than submitting a dozen different transactions in Aave and different DEXs, users can simply buy the icETH token and benefit from the socialized gas costs. Compared to executing this strategy manually, icETH holders save significantly on gas fees. icETH is also the cheapest alternative, with a streaming charge of 0.75 percent, as compared to other tokens and vaults that use a similar method or offer a comparable income.
d) Multi-Platform Compatibility
icETH can be fully integrated into a variety of DeFi protocols because it is a fully collateralized ERC-20 token, therefore expanding and broadening its utility and use cases. Just to buffer the point, icETH is based on Aave v2, a borrowing/lending protocol that allows for the creation of a collateralized debt position.
3) JPG: An NFT Index
The JPG NFT Index token ($JPG) provides exposure to a diversified basket of blue-chip and premier NFT collections such as CryptoPunks, Bored, Ape Yacht Club, Meebits, etc through the convenience of a single token ($JPG). Investors can gain access to some of the most well-known NFT collections through JPG, without the significant cost and curation (the process of selecting)that comes with investing in individual NFTs. JPG was created for those who wanted to get into the NFT market but didn’t have the necessary funds or curating skills. The product is also aimed at NFT fans who seek a diverse portfolio of blue-chip NFTs as part of their main position.
Rationale
Non-fungible Tokens (NFTs) are a cultural, artistic, and financial breakthrough with a market cap of more than $40 billion. However, because of the high level of curation knowledge required and the expensive entrance prices, average investors have had a tough time accessing NFTs. The JPG NFT Index token overcomes these obstacles by combining a fully supported, diverse array of blue-chip and premier NFT collections into a single index token.
Rather than holding the NFTs themselves, the index exposes holders to DeFi projects that fractionalize ownership over NFTs, such as NFTX, WHALE and Jenny DAO. These DeFi products on which JPG relies only launched in the past couple of months. JPG is composed of fungible versions of NFTs such as fractional NFTs, NFT liquidity vaults, NFT curation DAOs, NFT currencies, and wrapped NFTs. Additionally, JPG provides governance rights to vote on the token protocol.
Benefits of JPG
JPG provides a portfolio of leading NFT collections with the convenience and liquidity of a single index token. Key advantages over holding individual NFTs include:
- Broader diversification
- Curation provided by the underlying protocols
- Lower capital requirements
- Higher entry and exit liquidity
- Faster order fulfillment
- Reduced transaction fees
- Protocol governance provided by the JPG token
JPG allows holders to access the NFT market with all of the ease of an individual token.
What are Collectooors?
Collectooors is 1 of 100 NFT collections linked to Index Coop’s JPG NFT Index. All components of the JPG Index are fully collateralized by NFTs. The NFTs underlying $JPG is the “Collectooors” and can be redeemed at any time, in a permissionless manner.
Collectooors holders have Meta governance Power and can perform the following functions:
- Curate future additions to $JPGVote on governance proposals for underlying tokens.
- Vote on governance proposals for underlying tokens.
- Direct airdrops/yield.
- Distribute the remaining 25 Collectooors NFTs in the Collectooors treasury in any way they see fit.
- Launch spin-off NFT projects. Create a DAO around Collectooors’s existence. Propose a voting delegation from one Collectooor to another. Opportunities are vast.
- Both the writing and execution of the Collectooors roadmap are up to no one but Collectooors holders.
Closing Thoughts
Index Cooperative has a handful of DeFi native products to its name enabling the adoption of crypto index primitives that offer a one-stop-shop solution to DeFi problems and higher yield to the users. Visit their website to check out other products from Index Coop.
