Apr 25 | 6 min read
The DeFi landscape moves fast, and while token holders can capture the appreciation of standard-bearing DeFi protocol assets through the DeFi Pulse Index (DPI), a vehicle taking a more risk-on approach and relaxing some requirements including time in the market, audits, anonymous teams, etc. allows GMI to capture exposure to more nascent DeFi protocols.
In this post, we’ll unbox the GMI index and examine the rules and criteria that determine the index’s composition and maintenance, also known as the methodology.
GMI was launched as a collaboration between BanklessDAO and Index Coop.
BanklessDAO is a decentralized community to coordinate and propagate bankless media, culture, and education. The goal is to drive adoption and awareness of truly bankless money systems like Ethereum, DeFi, and Bitcoin.
Index Coop is a decentralized community focused on enabling the creation and adoption of crypto index products. Index Coop collaborates with industry experts to launch and maintain indices that make allocating to crypto easy and accessible for everyone.
Among these two communities, three individuals were the primary drivers of the GMI index, Lucas Campbell, Ben Giove, and Peter ‘Lemonade’. As methodologists, they conducted market research, organized the proposals, developed the parameters, and will maintain the index.
The first step of the methodology is to determine which tokens should be included in the index. To be eligible for inclusion into the GMI index, each token must meet the following criteria:
Market Capitalization: circulating market capitalization must be over $30M and under $5B.
Ethereum Token: must be an ERC-20 token available on the Ethereum blockchain.
Ethereum Prioritized Roadmap
DeFi Appropriate: application or protocol facilitates or aids in the facilitation of financial products or services such as exchange, borrow/lend, derivatives, yield, etc. As opposed to application themes that fall outside of DeFi (e.g. keeper bot systems, oracles, staking services, MEV, bridges, etc)
Compound, Aave, or other money-market interest-bearing collateral tokens
Assets are not synthetically issued
noDPI: assets are not in common with the DeFi Pulse Index (DPI)
Traction: relative to its application category
Secondary Market Liquidity: token must have sufficient liquidity to support inclusion.
While there is no explicit criteria for security, if security concerns arise for a given token, the methodologist reserve the right to remove the component from the index ahead of the regular rebalancing schedule.
Once the eligible tokens have been identified, the next step of the methodology is to calculate the appropriate weighting of each token. The GMI index considers 3 factors to determine the weight of each token.
60% Square Root Market Capitalization
30% Liquidity Score
10% Dilution Score
The use of a market capitalization weighting score allows for an emphasis on asset sizing while also recognizing that too much concentration in any one token creates additional risk. Additionally, the square root weighting mechanism allows for smaller components to enjoy higher relative weightings compared to a simple market-cap weighting.
The liquidity score of a token is considered because of the potential underperformance that can result from rebalancing less-liquid assets. For a similar reason, the dilution score is considered because many earlier stage projects have the potential for more aggressive dilution via token emission schedules. As a result, tokens with less liquidity or higher relative inflation rates will be given a lower weighting.
Another rule in the weight calculation is an imposed cap on each token’s respective weight at a maximum of 15%. Excess weight for a given token will be redistributed to the remaining components of the index on a weighted basis. This same process will be repeated for every token exceeding the 15% allocation cap. This cap is in place to decrease single token risk and ensure the index is providing a diversified allocation.
The final step of the methodology is to maintain the quality of the index over time, which is done with two rules:
Term Limits: To maintain rolling exposure to early-stage and experimental DeFi upstarts, a ‘graduation’ system will be enforced which retires components after a maximum term length of 18 months. The idea is that the index should be ever-changing and not contain constituents for too long of a time frame.
Rebalancing: The index composition will be rebalanced according to the methodology every 2 months. New token additions and existing token removals are considered during this rebalancing phase.
There are 12 holdings in total. Here’s a brief summary of each token and its role in the emerging DeFi ecosystem:
Ribbon Finance (RBN): a protocol that simplifies the participation in complex structured products in the DeFi space. Structured products are packaged financial instruments that use a combination of derivatives to achieve some specific risk-return objective, such as betting on volatility, enhancing yields, or principal protection.
Tokemak (TOKE): a protocol designed to generate deep, sustainable liquidity for DeFi and future tokenized applications that will arise throughout the growth and evolution of web3.
Tribe (TRIBE): the governance token of Fei protocol that maintains the FEI stablecoin. Holders can vote on the future direction and upgrades for the platform and control the DAO treasury.
Maple Finance (MPL): an institutional capital marketplace powered by blockchain technology. Developed to solve the inefficiencies seen in traditional systems, Maple brings the corporate credit market 100% on-chain using smart contracts to remove time and cost frictions, and blockchains for immutability.
Convex Finance (CVX): a protocol built on top of the stablecoin exchange, Curve Finance. Convex rewards Curve liquidity providers and stakers with additional yield.
dYdX (DYDX): a decentralized exchange that specializes in sophisticated financial instruments such as perpetuals and margin. The combination of off-chain order books with on-chain settlement offers the benefits of faster trade execution and reduced gas fees.
Alchemix (ALCX): a protocol that allows for the creation of synthetic tokens that represent the future yield of a deposit. The novel product is a “self-repaying” loan using the yield generated from the deposited collateral.
Dopex (DPX): a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers - all in a passive manner for liquidity contributing participants.
Perpetual Protocol (PERP): a protocol to trade perpetual contracts for every asset powered by a Virtual Automated Market Maker (vAMM). The project aims to create novel financial instruments by democratizing futures and other crypto-asset derivatives.
Governance OHM (gOHM): the staked and governance-enabled token of Olympus DAO which has the goal of building a crypto-native stable currency using a floating market-driven price.
Spell Token (SPELL): the governance token of Abracadabra protocol which is a cross-chain stablecoin lending platform that allows users to make use of capital they own but are unable to put into use.
Reflexer Ungovernance Token (FLX): the “ungovernance” token behind the Ethereum based-RAI stablecoin.
GMI offers anyone, anywhere passive exposure to cutting-edge DeFi applications. And since the index will continuously adjust and evolve to capture emerging projects, so will your allocation. Beyond that core value proposition, there are 4 major benefits of buying GMI:
Simplicity: GMI offers set-and-forget, continuous 1-click crypto exposure to DeFi innovation.
Risk-Management: volatility of individual crypto asset classes is offset by holding an index. Bi-monthly rebalances prevent concentration, yet allow winners to run.
Cost-Efficiency: reduced gas costs, tax-efficient rebalancing, and intrinsic yield.
Transparency: the index follows a transparent methodology to assess tokens for inclusion and removal.
The GMI index can be purchased at app.indexcoop.com/gmi and is available on both Ethereum and Polygon. Simply connect your wallet and swap ETH for GMI.
You can also buy GMI directly your favorite decentralized exchange aggregator.
Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
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