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Table of Contents 🕹️
The Index Coop
On the Horizon
“Bitcoin just shows you how much demand for money laundering there is in the world. That’s all it is.”
-Larry Fink, BlackRock CEO
I. Introduction 👾
In Linda Xie’s introduction article to decentralized autonomous organizations (DAOs), she defines a DAO as:
[…] a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.
DAOs have received some recent attention after a bill in Wyoming successfully navigated the state legislature, creating an avenue for DAOs to form as legal entities within the state.
Aaron Wright @awrigh01Wyoming is beginning to vote on a bill that would help folks create legally recognized DAOs. Tune in here: https://t.co/CmActbeODn
Here are just a few benefits of DAOs compared to traditional companies:
Transparency - All actions of a DAO are visible by anyone. The entire balance sheet of a DAO is available on-chain. Business decisions are made in public forums, Discord servers, and Telegram groups.
Accessibility - Anyone can participate in a DAO. All it takes to begin working with one is to raise your hand when something comes along you can help with. If you have an idea on how to run the DAO better, propose it. If you disagree with the direction of a DAO, you can stop participating at anytime. Little to no frictions are involved when entering or exiting. This leads to a consistent flow of talent passing through these communities as projects and objectives evolve.
Democratic - The governance of a DAO is typically done via vote. Holders of a governance token stake on the outcome of proposals. This differs from traditional models where stakeholders might only elect board-members or approve dividends. In a DAO, every major decision is delegated to the community for better or worse.
I highly recommend checking out the full post by Linda since it’s an excellent primer. The goal of this piece, however, is to provide a case study in DAOs by taking a look at one of the most successful communities operating today: Index Coop.
Their mission is simple: create a decentralized BlackRock for the digital era.
Down with TradFi.
II. The Index Coop 👾
We’re a community of finance professionals, engineers, DeFi experts, meme-makers, content marketers and crypto enthusiasts focused on making crypto investing simple.
Together we launch, grow, and maintain the most trustworthy crypto indices on the market.
Index Coop is a DAO for the creation and maintenance of crypto-native structured products built on DeFi asset management primitives such as Set Protocol.
As a DAO, Index Coop is governed by a community of INDEX token holders who collectively propose and vote on new products, management of the community-owned treasury, and the future vision and strategy of the business.
Index Coop has had tremendous success with its DeFi Pulse Index (DPI) product, a crypto index designed to track the DeFi industry. Since its release in September of last year, it has grown to almost $175mm in assets under management across 13,000 wallet addresses.
In addition to DPI, The Metaverse Index (MVI), which was designed to capture the trend of entertainment, sports and business shifting to virtual environments, launched just last month. It has also seen some phenomenal growth thus far with over 1,100 addresses holding it. The methodologists behind the MVI recently initiated a newsletter called the MetaPortal, which I recommend checking out as their first monthly update was very insightful. More on the MVI’s constituents here.
The Coop has also recently expanded into leveraged products. The Flexible Leverage Index (FLI) lets you leverage collateralized debt without having to manage the collateralized debt. It abstracts away the management process by automating it within a simple ERC20 token built on Set Protocol. A 2x ETH product is currently available and a BTC product will be released soon.
Another product on offer is the Coinshares Gold Index (CGI). The CGI is a low-volatility index for exposure to gold, BTC, and ETH. CGI utilizes volatility harvesting by combining an equal-weighted basket of cryptoassets with gold. It uses a weighted-risk contribution measure as a monthly rebalancing mechanism.
III. Decentralizing BlackRock 👾
The goal of creating a decentralized BlackRock is no easy task, and arguably the most difficult feature to recreate is the product selection process.
A successful new product launch will increase assets under management, cash flow, and brand reputation. On the contrary, an unsuccessful launch creates risks for investors and the Coop itself.
Index Coop has built a process to ensure only successful ideas reach fruition.
It begins with the methodologist. Index methodologists are data providers that publish research and data on new and existing strategies. Anyone in the community can become a methodologist by proposing a new product. If the product reaches market after passing a series of votes, the methodologist will receive a bounty and a portion of future streaming fees. The closest analogues to traditional finance are data providers such as State Street or MSCI who publish new indices that companies like BlackRock then turn into products.
So let’s say you have an idea you’d like to propose to the Coop. Here’s how the idea is transformed into reality:
A community member brings forth a product’s high level specifications to the governance forum or Discord along with their reasoning around market fit.
If initially accepted by the community, the methodologist then completes a Product Addition Application and posts it on the governance forum.
The proposal goes to a vote after seven days. This is referred to as Decision Gate 1.
If a sufficient number of ‘yes’ votes are received to gain a quorum, the proposal is reviewed by an Index Coop working group. Details are hammered out here and a final proposal is created.
The final draft is again put up to a vote by the community in Decision Gate 2. When approved, the product is launched in a timely manner afterward.
And thus the entire product launch process is delegated to the community of INDEX token holders.
Crypto-Native Structured Products
A question you might find yourself asking is what benefits do crypto-native structured products offer over their traditional counterparts? If BlackRock ends up making a DeFi index tomorrow to compete with Index Coop’s DPI, why would investors select the riskier, crypto-native product over the ETF?
One answer is composability.
DeFi tokens can be integrated into multiple protocols within the DeFi ecosystem. Some examples of this:
There is currently a proposal in the works to add DPI to Aave, the DeFi lending protocol. This would enable an investor to use their DPI position as collateral for loans or lend it to others for a yield on their deposit. This is already possible on Cream.
DPI has been used in PoolTogether, the no-loss DeFi lottery. Users deposit collateral and each week can be randomly selected to win the interest generated on the total deposited pool. I wrote about PoolTogether and the history of lotteries here.
Then there is the classic LP income strategy where you provide liquidity on a Dex like Uniswap or Sushiswap in order to receive a portion of the trading fees. One interesting strategy is pooling FLI-2xETH with ETH. This effectively creates a yield-generating 1.5x ETH position.
These are just a few examples of actions not possible with an ETF. The myriad of use cases for structured crypto products versus traditional investment vehicles will likely be the subject of a future piece.
In addition to running on decentralized governance, Index Coop has a unique advantage as an index creator in the form of metagovernance. Since these structured products hold the underlying tokens, Index Coop holds voting power in the constituent protocols.
This is similar to traditional finance where the dramatic growth of passive investing has conferred enormous voting power to a handful of asset managers. Asset managers hold most shares of US public companies, and their clients typically give authority to vote proxies on their behalf. The number of votes controlled by large asset managers can ultimately decide the outcome of an initiative.
However, due to the associated costs of proxy voting (e.g., due diligence, economies of scale), a duopoly in proxy advisory services has formed. Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis) control a substantial portion of voting power. These proxy advisory firms face modest regulation and are able to exert considerable influence on an outcome, especially as many individual voters remain apathetic since their vote has essentially zero impact on the result.
Decentralization means Index Coop’s metagovernance process falls to INDEX token holders. Instead of outsourcing voting rights to proxy advisory firms or creating a committee to evaluate and vote on metagovernance proposals, Index Coop has elected to outsource the decisions to the community. Anyone that holds INDEX is able to vote through Snapshot on the governance policies of constituent protocols.
This creates enormous value for the INDEX token. It is not only a play on the long-term success of Index Coop and their products. It is also a way to capture the value of governing multiple protocols.
INDEX is the token of DeFi governance.
Decentralization, while democratic, leads to slower progress as the community reviews every major decision together. Many DAOs have turned to working groups to address this challenge.
Working groups enable DAO members to have greater autonomy, faster decision making, and easier access to treasury funds. According to pet3rpan, they are a part of the natural progression of decentralization.
The current funded working groups for Index Coop include:
Analytics - The goal of the analytics group is to ensure the Coop has objective data available at all times. Since the Coop relies on data to make decisions on everything from product methodology to liquidity management to KPIs and more, this group is vital to the organization’s initiatives.
Growth - The growth working group is responsible for distilling the Coop’s core values to the public through brand awareness and product availability. This is effectively the marketing arm of Index Coop, responsible for generating impressions while also building strategic partnerships with the proper channels.
Treasury - In recent months, many DAOs have begun to consider their treasury management strategies. A strong bull market coupled with increasing use of DeFi protocols has generated large cash hoards. Index Coop is no exception with a current treasury AUM of $80mm at the time of this writing. The treasury working group is responsible for crafting plans on preserving and growing this capital pool. Oversight on budgeting, treasury diversification, and working capital management has been granted to this group.
Product - The product working group is responsible for analyzing and critiquing new product ideas as methodologists present them. They also oversee liquidity mining programs associated with product launches and strategic proposals with other DAOs to improve fund utility.
Blockchains enable greater transparency, but it's difficult for the average user to compile all the information. Regular reporting of treasury composition, income, and market dynamics can vastly improve stakeholder governance by ensuring interested parties are up to speed on the state of the company.
High financial reporting quality comes from completeness, unbiased measurement, and clear presentation. The Treasury Working Group’s Treasury Report is an attempt to do just that:
In addition to balance sheet reporting, rebalancing on the Coop’s products are presented in a highly transparent manner. This allows investors to quickly see changes underneath the hood of their investments.
But I would be remiss to discuss the openness and transparency of a DAO without recognizing that all transactions are verifiable and observable on-chain at any time. For a taste of this, check out the Zerion or Etherscan page for the Index Coop’s treasury address (I would provide a link here but Substack doesn’t allow any wallet addresses 🤦). Every treasury transaction is captured on-chain and anyone can view the books.
Be sure to check out Index Coop’s regular commentary on Substack and Medium.
IV. On the Horizon 👾
What comes next for the Coop?
After primarily focusing on DPI in the beginning, attention is now turning to building out new indices. The Metaverse Index and the Flexible Leverage products have just launched. What comes next is ultimately up to the community.
Initiatives on expanding centralized exchange access, crafting strategic partnerships, and creating a robust treasury diversification program are all in the works. Content marketing, analytics, and graphic design are needed now more than ever as the DAO continues to grow. There is an active call for contributors on all of these fronts.
In 2021, with distrust in institutions at all time highs following a tumultuous 2020 and a Robinhood-GME fiasco we all know by now, there is widespread recognition that we need to build a better system. Many in the old guard have yet to recognize the potential of DAOs, DeFi, and NFTs. These new technologies and the communities forming around them will upend these defunct traditional models and revolutionize our economy, society, and culture.
It’s likely some of these companies will realize too late that their competition had grown in parallel while they slept at the wheel.
So stop by the Discord. Let’s overthrow BlackRock together.
“I'm not interested in preserving the status quo; I want to overthrow it.”
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