[DPI] - DeFi Pulse Index Collateral Onboarding Application MIP6

1. Who is the interested party for this collateral application?

INDEXcoop is a decentralised organisation initiated by TokenSets and DeFi pulse

This application is made by @overanalyser and @DarkForestCapital two members of the INDEXcoop community.

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token.

$DPI is an ERC20 index fund. It represents 100% asset ownership of the underlying tokens. The intention of the fund is to allow ownership of key governance protocols within the DeFi Space. This could be thought of as wrapped DeFi (wDeFi). Such a structure has the benefit of providing asset exposure while minimising the downside risk due to individual projects failing.

Entry into the reference index is governed by DeFi Pulse with a formal methodology in place . The Smart contracts used are developed by TokenSets

TokensSets are ERC20 tokens that directly represent a basket of the underlying components, which are fully collateralized (assets held in 1:1 collateralization in a smart contract like Wrapped Ether). The supply of the DPI token is based on issue and redemption. Tokens can be issued by depositing the underlying collateral to mint and can be redeemed by burning the Token and retrieving the underlying constituents. TokenSet pools can be rebalanced, where constituents and weights can be adjusted through trades on DEXes.

3. Provide a brief history of the project.

$DPI was launched in mid September 2020 as a joint project between DeFi Pulse and Token sets. On the 6th October the INDEXcoop was launched to produce a community managed organisation focusing on the creation and adoption of Index funds.

Set labs and DeFi Pulse are founding members of INDEXcoop with vested holdings (28% and 2% respectively). The remaining INDEX tokens are are being distributed to the community (1% to DPI holders on 3rd October, 9% as liquidity mining DPI:ETH pair) or being held as community treasury.

The fund is currently composed of 11 governance tokens based on their circulating market capitalisation :

The current market cap for $DPI is ~$18 M USD vs $3 Billion for the underlying tokens. As the fund is based on a market cap allocation it currently contains ~ 0.4% of the circulating tokens for each and every underlying component (e.g. 4,400 $MKR, 145 $YFI…)

The key benefits of using $DPI as collateral is that it can be directly redeemed to the underlying tokens (worth a combined $3 Billion USD) while being protected from the downside of a single project failure.

This means that the DPI token should smooth out the overall performance and the volatility of the underlying tokens.

Further details on INDEX funds and how they are constructed using the and behave can be found here: https://overanalyser.medium.com/ . The v2 Set protocol smart contract design pooled structure of the fund means that collapse of a single component can not result in the pool being drained of the other tokens. Rather the combined value of the pool would drop based on the affected tokens value. This is unlike Balancer or Uniswap pools where price collapse results in draining / rug pulls.

Intrinsic productivity

The INDEX community is currently looking at ways of releasing some of the potential yield contained within the underlying governance tokens. This may include taking part of the total DPI underlying assets and staking governance contracts (e.g. YFI), or lending it via other protocols (e.g. cUNI, aREN…). If such a change to the fund structure takes place it will add some smart contract and liquidity risks compared to just holding the native tokens. Current discussions are looking at a combination of lock ins of $DPI and INDEX staking as risk management strategies if we decide to take this route:

Extrinsic productivity

As DPI numbers are based on issuance and redemption, the availability of extrinsic productivity (i.e DPI vaults) is expected to make holding DPI more attractive and so help increase the number of DPI minted and the total market cap available for locking into a vault (MakerDOA or otherwise).

Governance of underlying tokens

As proxy holders of a significant proportion of available tokens, the INDEXCoop community has the opportunity to participate in the governance of other protocols. This is currently being discussed within the community.

https://gov.indexcoop.com/t/dpi-as-a-productive-asset/193 https://gov.indexcoop.com/t/the-road-to-1/139/10

To date the INDEX community has focused on internal governance. However, we see opportunities to help protocols grow over the longer term.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

DPI index methodology

Tokensets developer documentation:

DPI coingecko listing

DPI Token address https://etherscan.io/token/0x1494ca1f11d487c2bbe4543e90080aeba4ba3c2b

Assets within DPI smart contract

Dune analytics and here

High Level description of DPI issuance and redemption

5. Link any available audits of the project. Both procedural and smart contract focused audits.

Set’s V1 contracts have had upwards of $27M locked and have been live for 18 months. Set’s V2 contracts (including $DPI) have had upwards of $18M locked and have been live for 3 months.

V1 Smart Contract Audits:

V2 Smart Contract Audits:

6. Link to any active communities relating to your project.

Since forming in early October, the main community activities have been within our forum and discord. Forum https://gov.indexcoop.com/

Discord https://discord.gg/DgvcYgAMEp

Website https://docs.indexcoop.com/

Documentation https://docs.indexcoop.com/

Reddit https://www.reddit.com/r/INDEXcoop/

Newsletter https://indexcoop.substack.com/p/view-from-the-nest-1

Twitter https://twitter.com/indexcoop

7. How is the applying collateral type currently used?

At the moment the collateral is mainly used as a diversification tool for passive ownership of the underlying tokens. $DPI has been listed as collateral on CREAM. The INDEX community is applying to other communities (Compound, Aave) to have it added as collateral to make the DPI a more productive asset to encourage long term ownership and growth of AUV.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

No

9. Where does exchange for the asset occur?

The primary market is by the issue and redemption of DPI from the underlying tokens via the Tokensets contracts. https://www.tokensets.com/issue/dpi

The main secondary market is on the ETH-DPI pair on uniswap. this currently has a $23 M pool depth (obviously boosted by the liquidity mining programme in operation until 6th December).

The primary and secondary markets are linked by arbitrage, including flash loan transactions. see here for a description of the arbitrage opportunities for such index funds.

The Concourse team has an open source version of an arbitrage bot that mints and redeems automatically.

There are other secondary markets and the Community is working on further listings.

10. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

N/A

11. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

N/A

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

Many of the assets in the DeFi Pulse Index are already supported by MakerDAO oracles. There are two options for oracles: having a dedicated feed for the DPI itself or taking the sum of the underlying.

EDITs - Arbitration to Arbitrage x2, “Elastic supply” removed and reworded to say that DPI token numbers are based on issue and redemption - Intention is to avoid confusion with Ampleforth / YAM. OA 09nov20 etc.

13 Likes

DPI will be a great collateral. It is still small, but I expect it to grow with usage by protocols (just like we had with WBTC).

One nice feature from a risk perspective is that it is resistant to a total failure of a protocol due to its market cap feature. This removes significant tail risk and reduce volatility.

It is still a bit small (in the number of component) but that will evolve with time.

3 Likes

I agree. DPI is quite interesting as collateral. As an index fund, it has less volatility than any of it’s individual constituents.

And marketcap weighting is an sound passive strategy with low turnover.

One typo, I think you meant arbitrage.

1 Like

Thanks. Fixed, and I’ve reworded a couple of mentions of elastic supply to avoid comparison with Ample / YAM etc. The number of DPI tokens is based issue and redemption using the underlying tokens.

2 Likes

You’re right, this is an awesome feature.

@overanalyser have any of the INDEXcoop community expressed a desire to take leverage or credit against the DPI token? Has it seen usage on CREAM?

Hey LongForWisdom,

At the moment most DPI (around 75% *edited to add this is in terms of capital, not number of holders) is being supplied to the Uniswap ETH:DPI pool to farm $Index so the numbers are a little skewed, but we are seeing some usage start to pick up on Cream. I guess you’d be looking at Cream for a gauge of potential demand on Maker? Once the farming ends on Dec 6th we would expect holders to find their way to Cream and hopefully Maker as they look to put the token to work.

As you and SebVentures mentioned, DPI makes great collateral for a few reasons and we are working as Index Coop to try and communicate this. I think as more users realise DPI offers lower volatility compared to the individual constituent tokens, it’s use case as collateral will strengthen. I don’t know of any specific requests from within the Index Coop for leverage/credit but I’m sure OverAnalyser will be along soon and might have more info. Of course if DPI gets added to Maker that paves the way for a potential Yearn vault strategy which will increase deposits…

6 Likes

The short answer is that I don’t have any strong evidence that DPI holders would make substantial use of a Maker Vault. And to be honest, I’m not sure how much evidence we could get without building it and seeing how many deposits we get

As @DarkForestCapital says, the vast majority of DPI is currently farming the DPI-ETH uniswap pool. Once the INDEX incentives end in December, I would expect some pull back from the liquidity pool and an overall reduction in total DPI holdings. However, the opportunity to used in a Maker Vault (or Cream collateral), makes holding DPI more attractive for some people. How large that opportunity is, I don’t know. However, I think DPI has many attractive features for holders and vaults.

1 Like

Hey this is Felix here from Set. We do have multiple anecdotal sources (with $100k+ in DPI) that want to put DPI as collateral and draw out stablecoins (DAI) to farm. As many users do not have a high degree of trust with CREAM yet, the larger actors have not moved to draw out DAI.

That said, one thing we’re thinking is working with YYFI or creating a strategy ourselves that takes DPI, draws DAI, and then leverage farms with the DAI. Based on anecdotal sources, there may be enough demand to generate a few million in DAI.

4 Likes

The INDEXcoop community have just proposed to the Yearn community that they consider making a $DPI vault based on a Maker $DPI vault. This is based on the assumption that MakerDAO do decide to add $DPI as collateral, and that the yearn strategy can access the maker price oracle [which I understand is in place for the ETH vault].

We believe that the combination of DPI as collateral, and a Yearn vault based on generating DAI would be good for all three communities.

3 Likes