Proposal 4x: Launch (mostly) Ethereum DeFi mirror of Synthetix sDEFI
Utilize composability to deliver the first broadly-diversified, actively-managed and fully-hedgeable (mostly) Ethereum DeFi pool with rewards harvesting, in collaboration with Synthetix
Proposal XX - Launch PPSDEFI pool to mirror Synthetix sDEFI
Create a new “DeFi blue chip” ETF-like pool that replicates the composition of the updated Synthetix synthetic DeFi token that tracks top DeFi tokens (but synthetically, without rewards or future meta-governance bonuses). The previous version proposing updatind sDEFI is here:
SCCP-98: Rebalance sDEFI and iDEFI
This SCCP proposes to rebalance the sDEFI and iDEFI index synths. The proposal is to keep with a quarterly cadence of updating the index. The last re-balance occurred in late January, when SUSHI, 1INCH and BNT joined the index. sDEFI index gained 21% since the last rebalancing, trading at $16,391.95 as of time of writing.
By mirroring the composition and weights of the Synthetix sDEFI token, PowerPool PPSDEFI pool investors will have flexible options to hedge (or not) against steep declines in the capital value of their broadly-diversified DeFi investment, while generating full rewards and future meta-governance bonus upside. For those investors already active on the Synthetix platform, pairing an investment in PPSDEFI tokens with some level of investment in the corresponding inverse/short Synthetix tokens will accomplish any level of hedging protection. For investors who do not want to buy their own hedging protection on Synthetix, PowerPool could decide to also launch a neutral-yield version of the PPDEFI pool that includes inverse 'shorting' tokens to a level of about 80% of the NAV of the hedged pool, which will in any case grow in value relative to the synthetic sDEFI token due to rewards and other token holder distributions.
Ethereum DeFI is an area that most crypto investors should have significant exposure to, but without sacrificing the rewards and governance-related distributions which lie in the future, as major DeFi protocols with (for regulatory reasons) currently governance-only tokens like Uniswap mature. The proposed PP-DEFI product will enable the average investor to gain this broadly-diversified DeFi exposure, but with the additional option to reduce the downside capital risk all too evident in de-leveraging downturns like the one just experienced in the market. This proposed product is based on the idea that there are already too many different Ethereum DeFi ‘indexes’, all of somewhat questionable validity, and that a single weighted list with more consistency/composability across all forms of investment; ETFs, lending/borrowing, synthetics, and derivatives would provide the most value. For example, a broadly diversified DeFI token with downside hedging would be much better collateral on lending/borrowing sites, with reduced risk of liquidations. This product is intended to test the market for this type of ‘hedge fund’ product, beginning with broadly-diversified, curated exposure to Etherium DeFi.
Launching a 'tracker' or 'mirror' copy of Synthetix sDEFI (called PPSDEFI) containing real assets is judged the best starting option because:
(1) The composition has been independently proposed by a major, reputable entity (Synthetix DAO) and will be precisely calculated and maintained over time (typically 2-3 times per year) by Synthetix;
(2) Synthetix DAO has already decided on their own to offer their version of sDEFI (and not sDPI), and this automatically creates an inverse shorting option like iDEFI, the price of which always moves in the opposite direction from both sDEFI and PPSDEFI. This opens the prospect of PowerPool offering hedged high-yield, low risk products;
(3) The PowerPool matching PPSDEFI pooled 'ETF' can be easily and effectively hedged using the corresponding Synthetix iDEFI inverse token product, without any additional development by either side;
(4) Unlike the synthetic version, ‘real’ assets in the PPSDEFI pool can be used for yield generation via staking and will recieve distributions of future meta-governance rewards but with managed risks of volatility based on hedged position.
(5) The Synthetix sDEFI product tends to be skewed long, and more use of the inverse iDEFI to hedge a ‘real’ PowerPool pooled vehicle will help keep the Synthetix book more balanced.
Synthetix and PowerPool are ecosystem partners, and launching this and other similar products will be a win-win strategy for both protocols. Launching and promoting the Synthetix sDEFI/iDEFI synthetic pair together with PPDEFI and easy onboarding via ZAP will facilitate usage of both tokens. The general availability of the sDEFI/PPSDEFI twinned pair, with the iDEFI inverse synth also tradeable, will attract arbitrage bots/traders to both products, driving liquidity (and fees!). The availability of two-equally-weighted Ethereum DeFi pools, with two independent managers, in both synthetic (with inverse for hedging) and ‘real’ rewards eligible formats will also become a powerful argument to obtain the CEX listings key to massive retail inflows.
The proposed PPSDEFI product should be launched as a static basket of assets (for example, AMM pool without swaps, exits and joins). Because this is a tracker/mirror pool, it is necessary to avoid constant rebalancing that is inevitable in case of using an AMM (and dynamic AMM as well). The PP-DEFI product should precisely track performance and value appreciation of the synthetic DEFI to achieve goals mentioned above (an ability to create efficiently-hedged yield generating positions).
The proposed long-only PPSDEFI unhedged product will exactly track the revised list and weights, and should trade initially at the same price as sDEFI, but over time, as rewards and governance distributions accumulate, the PPSDEFI pool should trade at a premium. One option will be to periodically (quarterly?) pay a ‘dividend’ to PPSDEFI holders (in CVP) to return the value of the real pool to match the synthetic version. This will recall traditional equity markets where stocks trade at different values before and after dividends are declared.
Once the long-only version of the PPSDEFI product is launched, and some investors are already providing their own hedging on Synthetix, PowerPool can agree with Synthetix the best way to manage an auto-hedged pool neutral-yield version of PPSDEFI (PPHSDEFI) where PowerPool mints a partially-hedged 80% in shorts/iDEFI tokens that are held in the auto-hedged pool, with Synthetix staking, minting and (unvested) rewards accruing to the PowerPool DAO Treasury. The fees on this auto-hedged pool will naturally be higher, as will the utility of the resulting auto-managed volatility, allowing the PPSDEFI-H tokens to become widely acceptable as collateral, but with higher yields and more upside than stable coins.
If this Ethereum DeFi product is reasonably successful, together with Synthetix and/or other synthetics platforms, a similar pattern can be replicated for every L1 chain where DeFi is emerging, starting with BSC.
Timing and Phasing
Synthetix has indicated that they will soon deprecate the iToken model in favor of a new paradigm, currently operating only for BTC & ETH. The change is to eliminate non-composable manual operations currently performed by Synthetix to maintain iTokens. Rather than integrate the existing iDEFI hedging option, it is proposed for PowerPool to launch PPDEFI as a long-only product even before the Synthetix hedging inverse/shorting option is live.
Research on Constituents:
The previous Synthetix sDEFI list contained 20 DeFi tokens weighted as follows: