Structured DeFi Products: More than Just a Crypto ETF

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).

Crypto-native structured products are a new investment vehicle that takes the benefits of both an ERC-20 token and a traditional index fund and combines them into a hybrid product. This hybrid offering can be used throughout the DeFi ecosystem, making it a 21st century digital upgrade to the traditional ETF structure pioneered by asset management companies like Vanguard, Blackrock, State Street, and more.

ETFs are low-cost investment vehicles that seek to track anything from the price of a commodity to a diversified basket of stocks. A common example of an ETF is $SPY, an index ETF that tracks the performance of the S&P 500. Crypto-native structured products are similar to ETFs since they also provide a low-cost way to invest in a variety of assets and strategies. Both investment vehicles are efficient, liquid, cost-effective, and make investing simple. If you’re looking to invest in an index or into a specialty strategy (e.g. leveraged exposure to an asset price), it is much cheaper to purchase an index ETF or a crypto-native structured product like $DPI.

However, there are also some additional benefits to holding structured DeFI products that traditional ETFs don’t have.

Benefits of Structured DeFi Products

The benefits of structured DeFi products versus traditional structured products (e.g. ETFs) include:

• Composability — Crypto-native structured products are like money legos. They can be used to build entirely new products.
• Marginability — A cryptoasset can be used as collateral for lending and borrowing in exchange for interest. Crypto-native structured products are no exception.
• Liquidity — Crypto-native structured products can be minted or redeemed for the underlying constituents. In other words, new units can always be created and your position can always be redeemed.

Composability

The products created by Index Coop are ERC-20 tokens. This means they can be integrated with or used in multiple protocols within the DeFi ecosystem. To underscore this benefit, let’s look at two examples of composability for the $DPI product.

You Can Use $DPI as an Asset in Another Protocol

$DPI can be used as an asset within other DeFi protocols. For example, $DPI was recently used in PoolTogether, the no-loss DeFi lottery. PoolTogether is a platform where users are able to deposit collateral (in this case $DPI) in order for a chance to win the interest generated on the total deposited pool as a weekly prize. A traditional vehicle such as an ETF is limited to holding within a brokerage account and cannot be used as an asset elsewhere.

You Can Use $DPI to Create New Assets

$DPI can be used to create new assets that retain some of the characteristics of the investment while providing additional benefits, such as income generation. An example of this is liquidity pooling on a decentralized exchange (DEX). The $DPI holder pools $DPI with another asset such as $ETH on a DEX like Uniswap. The DEX issues the depositor a new token, $DPI-$ETH, that generates a yield by capturing a portion of the fees when another user trades between those pairs. In traditional finance, it is not possible to use an ETF in this way.

Keep in mind that these are just two examples of the myriad of ways in which a cryptoasset can be used throughout the DeFi ecosystem.

Marginability

Another advantage of DeFi structured products over traditional investment vehicles is the accessibility and the rates available when lending and borrowing crypto assets.

In traditional finance, in order to use your securities as collateral for a loan, one must first apply for margin by filling out an application with various personal information such as yearly income, employment status, social security number, and more. Once approved, one is able to take out a loan at interest rates as high as 8.5%.

DeFi changes this model. If you own an ERC-20 like $DPI, you can use it as collateral in a lending protocol such as Aave or Cream. There are no personal information requirements, the loan is issued instantly, and the rates are typically better (although notably variable). As a point of reference, on Aave, one can take a loan out in $DAI (one of the most popular stablecoins) at a net rate of 2.32% at the time of this writing.

Liquidity

Crypto native structured products are highly liquid. Minting and redeeming is done automatically via a smart contract. At any time, an individual can mint new units of an index like $DPI or redeem units of $DPI for the underlying tokens. This is a feature available for owners of ETFs, but it is typically reserved for large institutional holders. DeFi makes this feature available to all holders regardless of position size.

This minting/redeeming feature also comes with heightened visibility into the portfolio. The Net Asset Value (NAV) and the current fund composition is readily available when trading. ETFs also display this information, but there has been increasingly less transparency in line with the growth of active ETFs.

If you are interested in purchasing a crypto-native structured product, check out this how-to guide from Index Coop. You can also join us on Discord and drop any questions you might have in the #help channel!