How to DIY a Crypto Index Fund?
Two days ago I wrote a blog on a brainstorming session with Shorupan Pirakaspathy and Warren Carson (of Nvest and Global X Change), whom I met at World Blockchain Summit (WBS) Taipei.
Our main topic was on how we could make index fund truly accessible to people, so more could take part in the upcoming crypto/blockchain boom, yet in a very safe way, with an instrument that has been proven on the stock market and endorsed by Warren Buffett himself.
The discussions were based on our current offering of Joint Commonwealth Fund (JCF), a crypto index fund aimed at making basic income universal and feasible by the private sector.
We immediately got some good feedback, including two main issues within the proposal:
1. how can a system perform “automatic re-balancing” of individualized index fund? As the whole point of a “fund” is to accumulate people’s money into the same place, so that certain “costs” associated with managing, or operating the money could be minimized.
2. where will the private keys be stored? If the system were to “automatically” perform re-balancing on behalf of the investor, then it must have access to the private keys. This goes counter with individualized index funds, and is also the main security vulnerability for centralized exchanges.
I’ll try to offer some suggestions as to how they can be addressed, but by no means they are comprehensive as these are still concepts in progress. My proposals are the follows:
1. A user (investor) keeps all investment funds in a personal private wallet (such as Chrome wallet).
2. The user sends portfolio status to an “index fund service” to get re-balancing suggestions given desired parameters (such as by top 10, 20 cryptos, certain crypto class, and max ratio for an asset).
3. After recommendations are received, the user wallet executes re-balancing via a decentralized exchange (DEX) interface. Or perhaps an interface service to major exchanges (such as Global X Change).
This approach will have the benefit of having no entry/exit/management fees (0% fee), except the fees to perform re-balancing trades. Another important aspect is that, as no “index tokens” need to be created, we can avoid the issues of “security tokens” and the related compliance implications.
Now, there are few “optional” items that a user can choose to participate, namely:
1. Centralized custody and re-balancing
Considering the potential high costs in re-balancing (the smaller the fund, the higher the cost ratio), and the risks of keeping private keys personally, a user may decide to put a designated percentage (can be from 0% to 100%) of this “personal fund” to a centralized custody service.
This service in turn will bear the responsibility of keeping the assets safe, while charging an annual fee (such as 0.1%) or an equivalent monthly fee. An added benefit is that as the centralized fund may be able to re-balance with lower overall trading fees due to the economy of scale.
2. Support of a passive (basic) system
To provide a long-term social safety net to either the investor him/herself or to friends and family, the user may choose to participate in a “dividend program”, where up to 15% of the annual “profit” (determined as the capital gain of the invested amount) may be sent at the user’s consent to a smart contract, which keeps and redistributes the fund for passive income purpose.
This is akin to an “automatic profit tax”, where the “dividend pool” would pay 25% of its total size as a dividends to all KYC-verified users equally. The user status may need to be renewed annually to verify aliveness.
Users must be a “dividend pool” contributor for more than a year to receive the dividend, which also would mean that longer a user stays, the more passive income received.
To enlarge user-base to non-investors, users can also donate / give the dividends received automatically to another designated personal or organizational account, thus supporting a passive income system off the potential profits generated by his / her personal index fund.
The above ideas may still be rough, but I hope they would stir up discussions about how a new technology such as blockchain could become an instrument for social good, allowing more people to benefit financially, as opposed to simply making the rich gets richer.
If you enjoy this article, please check out Joint Commonwealth Fund (JCF) as well.
