Q1 Retrospective and What’s Ahead for Q2
For those who want the quickfire summary, here’s what we have lined up for Q2:
- Indexed Finance V2
- Introduction Of Core Index Exit Fees
- Protocol Revenue Disbursal [NDX Staking]
- Algorithmic LP Incentivization
- KPI Airdrop [Partnered With UMA]
- Increasing Community Engagement [The IGP]
More details on each of these points follow.
If you blinked, you missed it — Q1 2021 is behind us already. Indexed Finance launched in the run-up to Christmas last year, and we’ve made significant progress towards our goal of providing diverse, cost-efficient ETF products.
It’s been a frantic few months in the crypto space — the surge in interest for NFTs, Ethereum finally breaking US$2,000 and DeFi protocols capturing US$100 billion to name just three events. In the mania of an up-only market we’ve been focusing on enabling simplified, passive exposure to diverse market sectors, and we’d like to share a rundown of what we consider our successes in the past quarter, as well as detail our plans for the next few months.
For those of you who have been with us since the start, thank you for your patience whilst we continue to build out our protocol. For those of you who are recent joiners, welcome — we hope that your experience with Indexed Finance has been positive thus far, and that it continues to be so as we evolve. And for those of you yet to onboard with us, we’re hoping that this post will go some way to encourage you to do so!
Following a silent launch on the 8th of December last year, Indexed Finance received an investment of US$90,000 from Molly Wintermute via their M&A fund. Beyond its usefulness as money for the Indexed development fund, this investment was a deeply-appreciated nod by one of the most prolific figures within the DeFi space.
Fuelled by this investment, our increased visibility led to significant numbers of DeFi enthusiasts discovering our platform, growing our TVL from under US$5 million to US$70 million at its peak in mid-February. Since the conclusion of our early-phase fast NDX token emission schedule on the 8th of March, the TVL has dropped, but currently holds steady at approximately US$30 million.
For those interested in descriptive statistics, some performance details of the two Indexed ETFs that have been running throughout Q1, benchmarked against both DPI and ETH, under the conservative assumption of a 10% risk-free rate (data sourced from the Indexed subgraph and CoinGecko historical data, raw figures available here):
In February, the Indexed DAO elected the Sigma Committee — a group of five community members responsible for the agile launch, liquidity incentivization and maintenance of new index ETFs desired by the community. Following the deployment of our third ‘core’ index ORCL5, which tracks the oracle service market sector, the Sigma program launched two such community indices in short order, namely DEGEN — which tracks a basket of higher risk/reward assets sourced from crypto Twitter by redphonecrypto — and NFTP, an ETF covering various governance and protocol tokens for platforms focusing on NFTs and the wider metaverse.
Over the course of Q1, we engaged in integrations with several wallet and analytics platforms across the DeFi space. Our visibility and distribution channels have both increased as a result of integrations into Zerion, Zapper, Debank, CoinGecko, Argent and DeFiLlama.
To better serve the needs of users wishing to trade our various index ETFs without being subject to significant gas costs on Ethereum’s mainnet, we partnered with Quickswap, enabling buyers to gain exposure at a fraction of the cost via their Polygon sidechain-based exchange. Quickswap have generously been incentivizing liquidity providers for various pairs of our products with their native QUICK token.
The Ruler protocol added our largest ETF — DEFI5 — to its lending platform as eligible collateral for unliquidatable loans against DAI. On the day of launch, DEFI5 quickly became the asset with the highest borrow-to-loan ratio across the entirety of the Ruler platform.
Despite not happening in Q1, there are two other events worth noting in this retrospective:
- Wintermute Trading put forward a proposal to become the official Indexed Finance market-maker, with the aim of pushing for listings of the governance token NDX and our ETF offerings on Tier 1 centralized exchanges (e.g. Kraken, Binance, Coinbase).
- Bancor held concurrent votes on whitelisting NDX and all of our existing ETFs on their platform, enabling users to provide single-sided liquidity with impermanent loss insurance. With the exception of the DEGEN index, all proposals passed. The NDX pool is already live.
In January, the full-time Indexed team consisted solely of Dillon Kellar, the Solidity developer who single-handedly built out the protocol. At the end of Q1, the core team now has four full-time members:
The search for a second full-time Solidity developer that can assist us as we move forward continues as we go into Q2. The above are backed by multiple exceptional community members, of which there are far too many to name here.
That’s enough looking back — now let’s get to what you’re all here for: our Q2 roadmap.
We are taking it as given that the index/ETF space will become increasingly crowded as 2021 burns on, and as such are currently focusing our efforts on evolving the Indexed protocol to further distinguish ourselves from our competitors, increasing the utility of the NDX governance token and indices alike.
In one sentence: our KPI goal for Q2 is to capture US$100 million TVL within the Indexed protocol.
To that end, here are our objectives as they currently stand.
Indexed Finance V2
We have begun work on a protocol upgrade that will allow us to deploy new indices using new portfolio structures. We won’t abandon the Balancer model that we currently use as the backbone for our existing ETFs, but we need something more flexible.
Balancer pools are useful portfolio structures for two reasons: they drastically simplify the rebalancing process, and they earn some passive revenue from swap fees. Unfortunately, they also make it very difficult to do anything with the underlying capital.
Indexed V2 will enable a new “vault-like” portfolio structure, where the capital in a fund can be deployed using arbitrary (approved) strategies such as yield farming, lending to protocols such as Aave/Cream/Yearn, utilizing leverage, etc. This will allow us to experiment with interesting portfolio management strategies and — when there are significant profits to be made with these strategies — add small performance fees that can be split with strategists to encourage developers to work with Indexed.
We’re already thinking about the strategies we want to build with this. One obvious one is to make a portfolio similar to DEFI5/CC10, where we take the top tokens in the DeFi market and use Yearn vaults or lending protocols to earn additional interest. Another is to make leveraged bull/bear ETFs that use lending protocols to get leveraged exposure to a particular token. There are plenty of interesting things we can do once we’re free from the constraints of the AMM structure, and we’re excited to work amongst the Indexed team and with other developers to explore new ETF models.
While the additional functionality enabled by this protocol upgrade is significant, it is only “worthwhile” for assets that we can utilize productively within the wider DeFi ecosystem. As such, V1 will continue to be used and improved upon in conjunction with V2 going forward. As a case in point, indices such as $DEGEN or $NFTP would not benefit from V2 variants, as there are hardly any yield farming opportunities for their constituent assets.
We are aiming to have work on V2 completed pending audit (subject to time availability) or thorough peer review in May.
Uniswap V3 Position Managers
The launch of Uniswap V3 is coming up, and with it many new opportunities for market makers. For those unfamiliar with Uniswap V3, we recommend you read their blog post, but the basic summary is that it represents a massive shift in how AMM liquidity is handled, with liquidity provided at the level of specific price ranges rather than entire pairs. It will create the potential for much greater capital efficiency at the expense of higher management overhead, and we believe there will be huge demand for strategies that take advantage of these new features while retaining the simple user flow of V2.
Indexed exists to bring passive management strategies to the DeFi market. Market making is a major part of that sphere, and tools that enable passive handling of Uniswap V3 liquidity will be critical going forward. To this end, we’re building two position managers for Uniswap V3 that we think will make liquidity provision more accessible and efficient.
The first is a simple system that can create an LP token representing a particular price range for a Uniswap pair. This will primarily be useful for very stable token pairs, such as those between stablecoins pegged to the same currency, but it will also be useful for other strategies that seek to combine multiple specific price points.
The second is an LP strategy that rebalances liquidity according to the volatility of the pair. The idea here is to maximize swap fees by always holding liquidity in a very tight range around the mean price so that capital isn’t being wasted covering price points that are unlikely to see any volume.
We plan to have the simpler system ready for the launch of V3, and to release the volatility-based manager shortly afterwards.
Core Index Exit Fees
The launch of our first two Sigma program ETFs — DEGEN and NFTP — introduced a modest exit fee of 0.5%. This is charged when index tokens are burned for their underlying assets — it does not impact the average trader, who is more likely to market sell the tokens than burn them; rather, it’s primarily incurred by arbitrageurs that seek to profit from differences between the net asset value and the market price of the ETF. These fees have thus far been routed to the Indexed DAO Treasury, pending distribution to NDX holders upon the introduction of staking (more on this below).
Having monitored the impermanent loss (IL) sustained across our core (non-Sigma) ETFs to date, we have observed that the swap fee of 2.5% — imposed on swaps within the pool as well as single token mints and burns, and designed to lessen the impact of IL on index holders — is larger than it needs to be.
To this end, we will shortly be proposing to the Indexed DAO that the swap fees for all of our products be reduced from 2.5% to 2%, and the deducted half-percent instead be refactored as an exit fee, in line with those under the Sigma program.
This shift represents a deduction in fees charged on any particular transaction, but it is likely to increase the swap volume within the AMMs, as swap routers will route trades through the pools more frequently. We expect that the total fees generated for index token holders will thus have a net increase. By simultaneously adding an exit fee, we will create an additional source of revenue for the protocol via a mild offset of the potential profit margins of arbitrageurs (a fractional subset of the overall users of the Indexed protocol).
Protocol Revenue Disbursal [NDX Staking]
Up until now, the NDX token which governs the Indexed DAO has been utilized purely as a governance token in the spirit of UNI, from which it was forked. However, as the Treasury has gathered revenue via exit fees on the Sigma indices — as well as looking forward to future revenue streams such as the above proposal for additional core index exit fees, performance fees on yield-farming strategies, etc. — we now wish to introduce a method to disburse said funds to dedicated supporters of the protocol.
As such, we are currently working on adding the ability for users to escrow NDX for a set period of time in exchange for a dividend-bearing token dNDX that receives a share of protocol revenue. By increasing the duration of the lockup, stakers receive a greater amount of dNDX and thus a greater share of protocol revenue. As currently proposed, early withdrawals are allowed subject to a slashing penalty distributed back to the remaining stakers, and withdrawing the deposited NDX requires the depositor to burn the dNDX they were issued.
Development work on the contracts enabling the above has already concluded — subject to documentation and any last-minute performance improvements that can be found — and the proposal has been put forward on the Indexed forums for discussion.
Algorithmic LP Incentivization
Throughout Q1, the Indexed team distributed 25% of the total NDX supply over a three month period to Uniswap LP and ‘naked’ staking for DEFI5 and CC10. The purpose of this was to attract initial TVL for the protocol and quickly dilute the core team’s governance power.
Following the conclusion of the above in early March, the DAO passed a temporary stopgap solution that continued LP incentivization for the three core ETFs whilst we developed a longer-term, dynamic solution that is sustainable going forward. Rather than locking in set reward amounts over fixed periods of time, we have instead decided to opt for a solution that permits daily rebalancing of reward emissions on a per-ETF basis in order to drive liquidity towards the ETFs that are most in need of a reduction in slippage against ETH purchases.
To enable this, we intend to roll the mechanics of reward distribution into a fork of the Masterchef distributor contract used by Sushiswap, which will allow us to try out various methods of allocating liquidity between pools and can be used without migration, regardless of other protocol upgrades. In addition to making distribution more dynamic, this contract will also allow us to create dual-token reward pools whenever another project is interested in incentivizing a token we enable staking for.
Work on the above has also concluded — again, pending documentation and last-minute performance improvements that can be found -, however given the non-standard nature of the changes, we wish to have the contract peer-reviewed prior to deployment. A proposal will be put forward from the core team by mid-April.
KPI Airdrop [Partnered With UMA]
As we have grown, we have been increasingly interested in seeking out ways to draw visibility to the Indexed platform from various DeFi communities — those engaging in good governance practices, those with objectives aligned with our own, etc. In the search for novel — and mutually beneficial — incentivization mechanisms for onboarding, we are particularly interested in the key performance indicator (KPI) airdrop mechanism that has recently been introduced by UMA for extending user bases.
To wit, a fixed amount of a token (in our case NDX) from the treasury is used as collateral in the minting of ‘option tokens’ which are redeemable for NDX at an exchange rate subject to a KPI measured at some fixed future date. In our case, the obvious KPI candidate is the total TVL of all Indexed ETFs — or rather, a time-weighted average of TVL over the previous few weeks to ensure that the KPI isn’t being easily gamed.
These option tokens are then airdropped to a cross-section of early supporters of Indexed (e.g. voters and minters) and external communities that we believe have motivations aligned with our own or are otherwise attractive candidates for onboarding, with eligible addresses similarly harvested via activity such as voting via Snapshot.
Notably, these options are such that they are only redeemable for the underlying NDX collateral subject to various KPI levels being met. For example, if the TVL of Indexed is lower than US$100 million at the time of redemption, an option could be set to be valueless, with a redemption rate of 1 NDX per option at exactly US$100 million, increasingly linearly to 5:1 at US$500 million and above. At the end of a fixed redemption period, any NDX not bound for redemption is reclaimed by the Indexed treasury.
The act of airdropping these option tokens themselves does not immediately invoke a dump as you would typically expect were it simply the case that the collateral was handed out. Conversely, the expectation is that recipients of the option airdrop are incentivized to grow the protocol TVL in order to maximize their potential, thereby justifying the expense of the underlying collateral to the treasury.
The core team is working with UMA on the process of whitelisting NDX for this purpose, as well as gathering data on potential candidate communities, and anticipates putting forward a proposal to the DAO by late April.
Increasing Community Engagement [The IGC]
As we continue to develop the Indexed protocol, our focus will shift towards increasing awareness of our products, unique selling points and brand — both within DeFi and when reaching out to retail investors. At the time of writing, we are currently sponsoring the Unchained podcast, but acknowledge that a great deal more needs to be done to improve awareness and refine our marketing strategy.
To this end, we recently proposed terms for an Indexed Growth Committee — with an allocated budget of US$100,000 and 10,000 NDX for Q2 -, run by members of the Indexed community. We’re grateful about the interest and quality of the applications put forward. The committee consists of marketing & growth experts and was approved with an on-chain vote earlier today.
The committee will collectively decide how best to allocate funds for the purposes of growth and marketing-current topics of exploration include:
- Refined messaging regarding market positioning and platform offerings
- Targeted advertisements (e.g. podcasts, Reddit, Etherscan)
- Education (e.g. videos, infographics)
- Partnerships (raising visibility of our index products in popular wallets, DeFi protocols)
- Influencer collaborations
- Treasury management solutions
- Implementation of a referral system
As always, we welcome suggestions from the wider community (be they Indexed, DeFi or retail), and aim to use Q2 to start grabbing the attention of a wider audience. To turn a phrase, we know what we have — now it’s time to start working on making sure everyone else knows it too.
Given the breakneck speed at which the space is evolving, we commit to working on delivering the above on a best-effort basis. However, we wish to leave ourselves space to react to new developments as they occur, so it may well be the case that we end up taking a side-road occasionally.
In order to get feedback from the community — and any other interested parties — we’ll be hosting our second community call on the 21st of April at 18:00 UTC. Further details will be provided on our various social media platforms, so keep an eye out if you’re interested in participating!
From all of us at the Indexed team, thanks for reading!