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Benchmarking/Competitive Analysis

Summary: Most private funds are too restrictive and on-chain crypto competitors are offering only too-broad packaging of investment vehicles with relatively mechanistic and passive weighting schemes with no rewards and no hedging options at too high fees

Private Off-chain Crypto Fund Managers & Indices

Statistics on Off-chain Private Crypto Hedge Funds

TradFi-emulating crypto hedge funds (privately-managed) are already operating in the crypto space. According to the 2020 PWC report on crypto hedge funds, some interesting findings are worth highlighting:

  • The vast majority of investors in crypto hedge funds (90%) are either family offices (48%) or high-net worth individuals (42%).
  • The median ticket size is US$0.3 million, while the average ticket size is US$3.1 million.
  • Almost two-thirds of crypto hedge funds have average ticket sizes below US$0.5 million.
  • Crypto hedge funds have a median of 28 investors.
  • About half of crypto hedge funds trade derivatives (56%) or are active short sellers (48%).
  • Crypto hedge funds are also involved in cryptocurrency staking (42%), lending (38%) and borrowing (27%).
  • The median of the best performing strategies in 2019 was discretionary long only (+40%) followed by discretionary long-short (+33%), quantitative (+30%) and multi-strategy (+15%).
  • About 65% of crypto hedge funds have either a hard or soft lock and 63% have either an investor level or fund level gate.

The most recent version of the report tells much the same story.

These data highlight the opportunity in the crypto-community-owned accessible hedge fund niche. Clearly, $300,000+ typical investments pooling around 28 investors are not very inclusive. Under U.S. regulations, these funds can be marketed only to SEC 3C7 qualified purchasers i.e. limited partners with at least $5.0 million of investable assets.

Automated robo-advisors like Strix-Leviathon are applying defensive, maximum drawdown-limiting algorithmic strategies based on Sortino ratios, and they have just launched a more publicly accessible vehicle called Makara.

These 'expert'-managed and algorithmic funds may be well-managed, but I believe that investing knowledge for crypto is best gathered and applied across multiple data-driven experts and algorithms using a DAO. There is as yet no evidence that these off-chain privately-managed 'expert' or algorthmically-managed funds are really worth 2+20% fees. Especially for discretionary long-only strategies without rewards (just buy DPI and relax!). These fund management fee levels were  just blindly imported from TradFi with no rationale. If PowerPool executes the New Vision well, investors giving up 20% of their gains to external hedge fund managers will become a thing of the past. Instead, by staking xCVP, anyone can become a part-owner of their own hedge fund.

A very interesting opportunity/positioning for PowerPool would be to partner with existing TradFi hedge funds looking to enter the crypto space. There are many, and they will not find a more attractive platform partner than PowerPool executing to this new vision at full speed. For example, Point72, managed by Steve Cohen, is typical of prospective TradFi hedge fund partners looking to enter crypto, as are Millenium and Matrix.

Why are hedge funds eager to move into crypto? “Performance remains strong in 2021 after the Hedge Fund Research Index returned 11.8% in the year ended Dec. 31, the best return in a decade, data from Hedge Fund Research Inc., Chicago, showed”.

But with or without TradFi hedge fund platform partner(s), the key product development skill for the PowerPool DAO will be the ability to focus community attention on shortlists of the most interesting tokens, across multiple chains and layers, then invest in data analytics and leverage the collective 'wisdom of the crowd' to manage shortlists, investment timing and exposure limits. Currently, there is a huge wave of VC investment being dedicated to bringing TradFi real world assets onto crypto rails...but how will these future securitised token portfolios be structured and managed? PowerPool should build the platform and community anticipating this opportunity. Publicising the ‘New Vision’ should attract experts in this field to migrate towards the PowerPool, and having joined the xCVP DAO Community, within the Community they will migrate towards the SparkProd product development team.

MVIS/Bloomberg Index: non-thematic...
S&P Dow Jones Crypto Indices
CoinDesk DFX-Greyscale DeFi Fund
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Crypto DAO Pooled Investment Managers

Index Coop

The Index Coop is a decentralized autonomous organization (DAO) that exists to create and maintain crypto-native structured products built on DeFi asset management primitives (e.g. Set Protocol). As a DAO, Index Coop is governed by its community members. Collectively, they propose and vote on new products, the allocation of the treasury, and the future direction of the DAO. The DAO governance token is INDEX.

Index Coop has already captured the public attention with their independently-managed Ethereum DeFi market-cap weighted ‘index’ DPI, the speculative long-term 'metaverse' high growth pool token MVI and the auto-leveraged-exposure tokens like ETH2x-FLI and BTC2x-FLI, DPI2X-FLI and soon BED (Bitcoin, Ethereum & DPI) and BED2X-FLI (sponsored and marketed by Bankless DAO). It all makes tremendous sense for retail diversification. (except for the no rewards part...they are trying to earn yield on a proportion, but gains go to DAO, not pool)

Index DPI is leading the TVL/AUM shift to structured products:

The DPI shortlist is periodically re-weighted by DeFi Pulse, the independent Methodologist:

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Notice that DeFi Pulse enforce a 25% maximum cap on any one token, thus artifically limiting the weight of Uniswap, whose market cap would otherwise command a much higher weight.

Latest DPI re-balance:

Index are now starting to look to generate yield (we need to review this in detail):

This is the most recent token approved (I think it is a thematic mess):

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DeFi Pulse Index $DPI is consistently one of the most traded tokens on Uniswap, regularly doing $10-15m in volume now.

Index Coop have not (yet) addressed the defensive, yield and volatility (hedged) public pools space. But they are fast moving towards a Sortino ratio based managed volatility for mainstream investors space. To preempt them, PowerPool needs to move first and fast in this space according to the New Vision.

Index Coop have been aggressive in getting DPI listed on lending sites, like Ruler

Example of a governance/listing proposal by Index Coop on Aave in favour of DPI:

“DPI would make an excellent fit for collateral in the Aave ecosystem because it allows for a large pool of dormant capital (>$100m in non incentivized DPI AUM) to find a productive use. Additionally:

  • Significant Borrow Demand: There is significant desire from whales to lend out the DeFi Pulse index and to use the DPI as collateral to borrow stablecoins for farming, going leveraged long/short, and implementing structured products (e.g. carry trade).
  • Low Volatility: Because indices are a basket of tokens, they represent less volatility than the component assets by themselves
  • Efficient Sector Representation: Adding an index as collateral also gives exposure to all the component tokens while only having to add in a single token, thus saving gas in Aave’s system
  • Liquidity via Primary and Secondary Markets: Minting and redeeming represent the primary market of the indices, but many users can buy and sell indices on the secondary markets - mostly Uniswap. The price on the secondary markets are kept at Net Asset Value (the market value of all the underlying components) through a network of market makers that redeem the tokens when price is below NAV and vice versa.

Index Coop has a significant stake in a lending site like Aave via the DPI token, so Index can add their weight to the voting rather than depending only on Aave voters.

Tracking Benchmarks

In part due to an arbitrary 25% max cap on the weighting for Uniswap/UNI (over which Index Coop have no control because they outsource methodology to DeFi Pulse), the DPI token price has significantly under-performed the ETH HODL strategy:

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Launching BED Index with Bankless:

Index Weekly Reporting on Twitter:

BED charges a 0.25% fee which is split 50–50 between Bankless and Index Coop.

Note that Index Coop also charges a 0.25% fee on their DPI product which has a 33% allocation in BED. As a result, the total effective fee for BED is 0.57% (0.11% Bankless, 0.36% Index Coop, 0.10% DFP).

Fees are charged for the management of the index products and split with partners who are incentivized to help grow and promote the product with their audience.

New Index Coop Product: SYI...will compete with YLA

SYI allows all investors to invest in the market the same way money managers do in TradFi. Idiosyncratic risk is diversified away across a fleet of products. In its purest form, a static risk allocation is enhanced by tactical diversification. Meaning various productive assets are grouped together based on their risk and investments are made across risk tranches.

There is certain level of capital required to diversify risk across various DEXs, Lending and Asset Manager platforms, and small accounts are simply priced out. Small accounts are more worried about gas costs, added complexity and the time needed to manage such products. Small accounts place concentrated bets and hope that nothing goes wrong with that particular product. SYI changes this, the cost of purchasing SYI on a secondary market would be less than depositing into a mStable, Yearn or Rari Capital. This product also enables a simple passive hold strategy, which is a dream come tax time. All the interest is compounded and reflected in the token price.

There is further upside - the ability to invest in a product that holds the new V3 Uniswap NFT LP tokens and traditional ERC20 LP token. NFT LP tokens are coming and with that Curve’s moat is starting to eroded. SYI captures these market changes and progressively reallocates capital, this is the tactical element, and the results is to reduce idiosyncratic risk. This is just a right now example of how Index Coop can deliver peak user experience.

Upside - we are now starting to see treasuries across the space diversify away from their native token into more stable assets. Productive stable coins are a big part of this diversification strategy. As TradFi talent comes to DeFi the approach to managing treasury capital will become more like TradFi. We are seeing the early stages of this in-house at Index Coop and other DAO 8s are already further along. SYI becomes a very easy choice as a pillar of any diversified treasury. SYI enables teams to simplify their treasury and have a specialised resource managing their cash equivalent products for them.

Index Coop Organisation

Index Coop has been aggressively organising a broad team:

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It is instructive to read the list of tasks in the Index Coop Business Business Development team.

Index has now launched a Protocol Ambassadors program:

Index Coop: How are engineering resources currently organized?

Right now, Set Labs is the primary technology provider and a mission critical dependency for the Index Coop.

Here’s what the Index Coop is currently handling:

  • Deploying monthly contributor rewards
  • Funding liquidity mining rewards
  • Paying out methodologist rewards
  • Ad-hoc non-protocol work like INDEX Sale execution
  • Updates to indexcoop.com
  • Recommending FLI parameter updates

Here’s what Set Labs is currently handling:

The Index Coop is in the process of being onboarded to technical operations but any new product launches require Set Labs involvement and is subject to its internal roadmap & priorities.

Index are moving DPI liquidity to Sushi on Polygon

Llama/Index are proposing more structured funds for DAOs

iROBOT Index. Very interesting, where aims to become the 1st decentralized Robo-Advisor.

Between 100 selected tokens and through calculating it's Annualized Sortino Ratio, composes a pool of 10-15 assets.

StakeDAO

StakeDAO is a much broader-range structured investment provider, which makes it more difficult to organise and to market. Sample StakeDAO marketing tweet:

“Why Stake DAO? Say bye-bye to the bankers and put the profits back in your hands

100% of Stake DAO strategies revenues are shared with xSDT holders”

Here is their latest vision statement in Medium post format (still too broad and unfocussed IMHO)

StakeDAO has 10,000 followers on Twitter:

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They have already decided to divide themselves by product, rather than function. They are investing in recruiting to product teams: StakeDAO recruiting video link

StakeDAO Foundation has been created to play some of the roles required to further the goals of the DAO. Contributors funded the initial Foundation SDT capital base with their own vested allocations.  The Foundation’s SDT will be locked in a vault on a third-party lending protocol such as Aave or Unit. The Foundation will borrow capital against the locked SDT to finance research and development and initiatives that bolster the progress of the Stake DAO ecosystem. Potential uses of funding:

Incentives for new contributors: Stake DAO needs to be able to scale its contributor headcount and attract the top talent. Stake DAO needs to be able to compete with compensation packages offered in the current market, which are becoming increasingly competitive.

Talent retention: The Foundation enables the team to provide competitive compensation packages to retain the industry’s top talent and avoid the poaching of contributors by other projects.

Bootstrapping adoption: The Foundation will be a vehicle for the development of the Stake DAO ecosystem, funding community-directed initiatives that spur the platform’s adoption and, at times, incentivising relevant internal and external products (such as on third-party lending platforms like AAVE).

Strategic Initiatives: The Foundation may direct funds towards strategic mergers and acquisitions of third-party protocols to expand the product suite, improve existing products, and expedite the progress of our mission.

Marketing: The success of Stake DAO largely depends on its ability to retain and grow its user base and liquidity reserves - marketing plays an essential role in this function. SDT held in the Foundation can be allocated to marketing initiatives that promote awareness about the Stake DAO platform and its mission.

Operational costs: The Foundation may use funds to service costs attributed to maintaining Stake DAO products and services. For instance, server costs and audits.

PieDAO

PieDAO Competitive Benchmarking

According to the PieDAO Product Roadmap, PieDAO is approximating PowerPool in terms of functionality. The latest release supports Treasury Vaults, defined as follows:

Treasury Vaults are tokenized portfolios that truly unlock the power of the PieVault architecture. As well as using strategies such as lending they are able to hold positions in liquidity pools like Uniswap/Sushiswap and Curve, farming tokens by staking in contracts such as the Masterchef and Gauges and compounding profits. As such they lay down the tech for LP Indexes which were proposed by the community not long ago. These vaults can be co-governed between the DAO deploying the funds and PieDAO, allowing (each) DAOs community to ultimately vet decisions on how funds are used. Treasury Vaults are tailor-made for each DAO, allowing decentralized communities to easily maximize their potential and mitigate risk. The pilot program of Treasury Vaults is about to launch with Aragon, subject to a successful vote by their community. A proposal will be published for PieDAO to do the same soon.

PieDAO struggles with supplying liquidity across sufficient DEXes and other DeFi sites, to the extent that, like PowerPool, they have retained Wintermute, while also pursuing the ability to manage LP pools proactively.

Indexed Finance

Indexed Finance Competitive Benchmarking

Another competitor who also (confusingly) features ‘Index(ed)’ in their name is Indexed Finance, also based on Balancer, with a pure governance token NDX, based on UNI. They have been launching many pooled vehicles marketed as ETF-like crypto products for anyone. Their most popular offering is their DEFI Top 5 Index, which holds {UNI, AAVE, COMP, SNX, and CRV} with a market cap north of $17MM. The token has good liquidity on Uniswap, and a surprising amount locked on the Matic/Polygon bridge due to the arrangement with Quickswap. It is also listed on the lending site Ruler Protocol. They have announced a collaboration with MCDEX, a derivatives site, to offer a perpetual derivative of the pooled token.

They use a simple methodology of “Top N” category ranking and (square-root) of market cap weighting, as described here.  Each index has two 'groupings': the current constituent shortlist - those tokens that are currently active within the associated Balancer pool - and a secondary 'candidate' shortlist of tokens waiting on the sidelines, ready to be switched in if an active member underperforms relative to the others, or if a particular candidate's performance justifies its inclusion. Re-indexing occurs after three weekly reweightings. Re-weighting and re-indexing also occurs within the non-wrapped components, keeping target weights on track at multiple points.They track their results versus both an Ethereum & BTC HODL benchmark strategy.

Currently, Indexed are operating on their own fork of Balancer v1, so ownership of the pooled tokens stays with the token owners. “It's worth emphasising that the Indexed DAO itself does not control the assets that comprise the indices (pools) that we enable. They are kept within the Balancer pools themselves, and ownership of the assets is strictly limited to owners of the index tokens.” They use a 5-person ‘Sigma’ committee to launch new products, such as the proposed ‘Future of Finance’ fund-of-funds.

Index uses crowd-sourced quadratic voting and are moving to more thematic pools:

They are heavily incentivising buying their pool tokens to LP/stake them:

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Their marketing focus is via integrations into Zerion, Zapper, Debank, CoinGecko, Argent and DeFiLlama. To better serve the needs of users wishing to trade their various ‘ETFs’ without being subject to significant gas costs on Ethereum’s mainnet, they partnered with Quickswap, the Polygon sidechain-based exchange, and Quickswap have incentivised Indexed LPs with their native QUICK token.

Pollen
Enzyme (formerly Mellon)
SETS v2

Index Coop is looking to for developers to help add more functionality to SETs:

  • The Index Coop’s goal is to become the Blackrock of crypto and to do that we need to build, launch and maintain a growing range of products
  • Much of the smart contract heavy lifting is currently done by Set, and we would like to develop the Coop’s capability further
  • The engineering team is currently small and lacks the bandwidth to launch and maintain the growing pipeline of products
  • Using the current skills matrix, the skillsets of the team are skewed towards web2/front end, whilst the range of products we want to launch require extensive smart contract experience
  • High on EWG’s list of priorities are internal tools to improve rebalancing and payouts, both of which also require advanced SC capabilities
  • To continue to improve the capability of the EWG, we need the capacity to train other engineers to become proficient with smart contracts and the Set protocol
  • By making this position full time, we align the goals of the Coop and the contributor
Bitwise
DHedge-synthetics only? Maybe not?

Formation.fi-Looming threat

Formation.fi is targeting a similar market positioning to PowerPool:

“By optimizing the return-to-risk ratio for each unit of risk, and prioritizing secular diversification based on data-driven insights, Formation Fi promises to deliver superior returns over time. The platform also aims to simplify the DeFi world so that ordinary investors can participate and earn yield over the long haul. The Formation Fi platform has been developed for a diverse user base. To get started, users need only deposit their preferred cryptocurrency and select a preferred investment style, in the form of an index coin such as Alpha, Beta, Gamma, and Parity. Each index coin can then be further deployed for additional yield at the holder’s discretion. Thereafter, the protocol will commence generating yield with users gaining access to the best-performing cross-chain yield strategies according to their stated risk tolerance.  Formation Fi has developed its own native token which can be deployed in yield farming strategies or added to a liquidity pool to boost yield. A triple-utility token, $FORM entitles holders to voting rights, a share of future net income generated by the protocol, and grants exclusive access to Formation Fi’s Darkpool AMM pools.”