PowerIndex v2: Unlimited ETFs & Automated Portfolio Strategies
An introduction to PowerIndex v2 and our first products as part of this new approach — ASSY and YLA.
The two most attractive features of DeFi are that it’s open to everyone and has a potentially unlimited level of composability. Traditional ETFs are limited to holding securities, commodities or financial instruments with almost no way to use them to receive additional value. Integrations and rebalancing options are also limited when compared to how DeFi products can be used as part of complex yield-generating schemes.
When it comes to DeFi ETFs the sky’s the limit. Seriously.
For PowerIndex v2 our thesis is simple: DeFi ETFs shouldn’t be limited by what defines a traditional ETF. Imagination should be the only limitation for ETF design. We will take care of the rest.
When people supply liquidity to a public portfolio or ETF they do it for one obvious reason — to access greater capital gains with lower risks than holding the assets in their wallet. Typically are three main types of ETFs on the market right now:
- ETFs as a static basket of assets weighted by market cap and rebalanced from time to time (for example, once a week).
Pros: The basket grows as if you have these tokens in your own wallet without any “AMM-rebalancing”.
Cons: It’s capital inefficient. You gain no additional income from swaps or using composite tokens. Infrequent rebalancing and no single side liquidity provision option.
- ETF as a Balancer AMM pool.
Pros: Generates additional income from swaps and single-side liquidity provision (if there is enough liquidity in the pool)
Cons: The AMM rebalancing mechanism is based on arbitrage trades that leads to “selling winners and buying losers”. The basket grows less when compared with versions without swaps (example 1). Additionally, there is a vulnerability that can lead to losing pool capital if any token from the basket faces an infinite-mint hack. No additional income from using pooled assets.
- ETF as a Balancer AMM pool using pooled liquidity for generating additional value + governed by the community (weights changing based on governance decisions).
This is what basically PowerPool v1 was.
Pros: Income from swaps and vault strategies, meta-governance, flexibility and community governance power.
Cons: The same problems as in the previous two points — AMM rebalancing cuts profits from basket growth and is vulnerable to attacks. We faced this problem with Cover in the YETI pool, however near instant team actions saved users’ capital.
The DeFi ETF/public portfolio market is now in its initial stage of development. The two general approaches for ETF products competing for users’ capital now are a Static Basket vs Smart Balancer pools. Balancer Pools can offer additional income from swaps and usage of pooled assets, single side liquidity provision, and changing pool composition via governance. But, they also have a drawback — AMM-based rebalancing, in some cases limiting growth of basket.
Introducing PowerIndex v2
The Unlimited ETF product is the foundation of PowerIndex v2.
Existing ETF/public portfolio products have limited options for creating ETFs and derive profits from that. The addressable market for our Unlimited ETFs is billions of USD value locked in productive assets (native protocol tokens such as AAVE or SUSHI), derivative and LP tokens (aTokens, cTokens, Yearn Vaults, Uniswap/Sushiswap/Balancer LP tokens), complex financial instruments such as futures/options, algorithmic assets (algorithmic stablecoins protocols), and many others. DeFi protocol tokens (for example, PIPT and YETI composite tokens) require more complex ETF logic applied to them than basic AMM pools.
Moving from holding a static basket of tokens to any type of D(AMM) pool is shifting the paradigm of capital management from passive holding to an active trading strategy.
Balancer AMM pools are the most basic automatic trading strategy, executed by arbitrageurs. However, they are obviously not the best choice for ETFs.
DeFi grows incredibly fast and we believe that ETF products will hold TVL measured in the billions of dollars.
However, static baskets or basic Balancer AMMs aren’t suitable for the majority of assets and strategies. This is why the core of PowerIndex v2 is Unlimited ETF — the product that allows users to create complex automatically-traded portfolios or ETFs.
PowerIndex v2 Unlimited ETF is a financial lego that enables the creation of automatically traded portfolios and ETFs with an incredible level of flexibility:
- Automatic trading strategies and rebalancing based on a Dynamic AMM. Basically, it allows the implementation of a trading strategy that is applied to composite assets based on different triggers and metrics. The most obvious are M.Cap, TVL, and dBalance. Much more complex weight controlling signals are also available for implementation.
- Generating APY from pooled assets. Assets in automatically traded portfolios/ETFs can be used in Vaults strategies such as staking in native protocols for earning protocol fees (AAVE, SUSHI), lending protocols, third-party Vaults, and others.
- Meta-governance, if assets in the pool have governance functions.
- Integrations with smart routing systems such as 1inch and Balancer to attract more trading volumes and associated fees.
- Permissionless nature — anyone define the basket, trading strategy, launch a pool, and attract liquidity to it.
PowerIndex v2 is a tool for creating efficient portfolios which can maximize capital gains on particular asset sets and asset classes. At present, there are no tools for creating and managing automated portfolios efficiently for the majority of derivative assets such as LP tokens/interest-bearing tokens/yVaults/etc. The total value of these assets is counted in billions.
PowerIndex v2 allows the consolidation of billions of fragmented liquidity and benefits LPs based on strong network effects, integrations, and a new level of composability.
The Unlimited ETF: how it works
The Unlimited ETF is built from several components that allows to launch automatically traded portfolios and ETFs with functionality stated above.
Dynamic AMM or DAMM: Balancer AMM pool with dynamic weights changing based on external controlling signals. Controlling signals can be based on oracle data feed or AMM itself (using AMM as a price censor based on changing token balances). Dynamic weights changing model was originally developed by the PowerPool team in collaboration with 1inch.exchange co-founder Anton Bukov back in October 2020. It is audited and was implemented by default in PIPT and YETI in December 2020. It means that PIPT and YETI can be seamlessly converted to DAMM without liquidity migration once the CVP community makes a proposal for that.
Link to the contract with weights changing algorithm: https://github.com/powerpool-finance/powerindex/blob/master/contracts/PowerIndexPool.sol
The Wrapper and Router contracts. It is the basic building block of Unlimited ETF implementation for using composite assets in a productive way, for example — staking in native protocols, Vaults, enabling work token functionality, etc. The alternative design option is to stake assets directly from the pool contract, but it limits the flexibility of the solution. In the case of using the proposed scheme with Wrapper, tokens staked somewhere are presented inside the pool as wrapped tokens or piTokens (for example, piAAVE if AAVE is staked in AAVE Safety Module).
The wrapper allows the community to change fund management strategies for staked assets on-the-fly without affecting the pool operation. It adds a new layer of flexibility to the Unlimited ETFs: it allows to change staking strategy if there are better options on the market for using pool assets. All rewards received by token usage are deposited into the pool benefiting index token holders.
Link to the router and wrapper contracts: https://github.com/powerpool-finance/powerindex/tree/master/contracts/powerindex-router
The PowerOracle. Dynamic weights changing in Unlimited ETFs is based on controlling signals: weights cannot change themselves. Controlling signals are produced by the Controller contract based on the Oracle data feed and Strategy contract. The basic controlling signal can be prices of assets multiplied on actual supply information if we consider classic market-cap weighted ETF. The more complex logic can include TVL, the rebase events for algorithmic assets, decay time for options, and many more. The PowerOracle was launched in October 2020 and was live on-chain all the time, providing price feeds for 18 assets.
Link to the PowerOracle contract: https://github.com/powerpool-finance/power-oracle-contracts/tree/master/contracts
First PowerIndex v2 products
ASSY: AAVE SNX SUSHI YFI concentrated bet
ASSY was proposed by Marc Zeller from AAVE and contains AAVE, SUSHI, SNX, and YFI. The proposal to create ASSY was approved by the PowerPool community. It will be the first index in the PowerPool ecosystem based on an automated trading strategy, different from a traditional Balancer AMM. Main features:
Automatic trading strategy: market cap weight adjustment
Dynamic AMM automatically rebalances the pool according to relative market caps of assets. If the price and market cap of an asset grows relative to other assets in the pool, its weight in the AMM equation also grows smoothly. It’s updated every hour, and during the next hour weight shifts to the new magnitude*.
*The DAMM strategy for ASSY will be enabled in 10 days after launch
It will improve the efficiency of the ASSY portfolio, keeping more growing tokens in the pool and less dumping tokens.
In simple terms, it is dedicated to solving the “selling winners and buying losers” problem.
Productive usage of pooled assets: an additional APY for ASSY holders
- AAVE will be deposited to the AAVE Safety module | after bootstrap phase
- SUSHI will be deposited into Sushi Bar | after bootstrap phase
- SNX will be used for minting sUSD and supplying it to Curve | roadmap
- for YFI the perfect strategy will be defined soon since YFI staking is not relevant anymore
Meta-governance will be enabled for AAVE after the liquidity bootstrap phase (as it is based on AAVE staking). Other tokens using snapshots will be added in case of moving their voting systems to on-chain voting.
Integrations with smart routing systems
ASSY will be integrated with 1inch after launch to process more trading volumes and benefit LPs and CVP holders via trading fees.
Yearn Lazy Ape Index
The index was proposed by the Yearn core team member — milkyklim and already approved in Proposal 18.
Index composite tokens are yVaults LP tokens:
Instead of using equal weights — 16.66% it is planned to use dynamic weights proportional to vaults TVL. The purposes of index implementation are to diversify income from yVaults and create a deeply liquid pool allowing to swap yVaults and benefit LPs and CVP treasury from charged fees.
Besides an option to supply yVaults tokens to the index there will be an option to supply stablecoins directly to the index, performing several complex operations on-the-fly:
Supplying stablecoin to yVault → Minting yVault token → Depositing yVault token to YLA index
So, it is a single entry and exit point to yield-generating strategies based on yVaults for the Yearn community and other Defi users.
This index is composed of yVaults LP tokens and demonstrates the capabilities of PowerPool v2 Unlimited ETF. It is a portfolio of LP tokens with adaptive weights, benefiting the whole community of yVaults liquidity providers.
2021 Unlimited ETF Vision
The PowerPool v2 Unlimited ETF allows the creation of an advanced automatically traded portfolio for different classes of assets. One of the most interesting ones is the cases when there is a certain community (like the Yearn community) using some kind of derivative tokens. In this case, the ETF with proper trading strategy can greatly benefit such a community, attract huge TVL without vampire it from this ecosystem, and it is a big win-win situation.
This portfolio with an automatic trading strategy is not isolated. It is integrated with 1inch and Balancer, allowing DeFi users to trade these derivative tokens with huge liquidity. Index portfolio works, the market is established, LPs benefiting from additional income, and ordinary users got a single entry point into the yield-generation strategies.
Our vision is that the community will create more Unlimited ETFs in the coming months, targeting use cases with big TVL and community impact, for example:
- Automated portfolios for generating yields from complex systems like algorithmic stablecoins, etc.
- Automated trading portfolios for LP tokens (for example, popular pairs from Uniswap and Sushiswap).
- Automated portfolios of interest-bearing tokens such as aTokens, cTokens, etc
- ETFs containing productive assets such as tokens of oracles, NFTs protocol tokens, etc
- ETFs composed from Defi protocol tokens and other assets with creative weight changing rules, maximizing capital gains + using these assets in a productive way at the same time