The Definitive Guide to the DeFi Pulse Index
The DeFi Pulse Index is a capitalization-weighted index that tracks the performance of decentralized financial (DeFi) assets across Ethereum. It combines the features of an ERC-20 token and a traditional structured product to create a 21st century digital upgrade to structured products.
July 30, 2021
What is the DeFi Pulse Index?
The DeFi Pulse Index is a capitalization-weighted index that tracks the performance of decentralized financial (DeFi) assets across Ethereum. It combines the features of an ERC-20 token and a traditional structured product to create a 21st century digital upgrade to structured products.
DeFi moves at a rapid pace of innovation. As the number of high-quality teams launching compelling DeFi tokens has grown, it’s become increasingly more difficult to keep up with. Having a deep understanding of decentralized finance, the nuances behind each protocol, and which tokens have attractive economic designs can be cumbersome for some and mystifying for others.
Against this backdrop, a number of decentralized structured product have emerged to allow investors to get passive, diversified exposure to the DeFi market. $DPI is one such structured product, offering broad exposure to DeFi within a single structured product. In this definitive guide to the DeFi Pulse Index we answer the following common question about the Index Coop's flagship product
3 Reasons People Buy DPI?
There are three core benefits of buying $DPI: simplicity, cost-efficiency, and tax-efficiency.
1. Simplicity
Index investing is widely regarded as one of the easiest ways to diversify a portfolio. Anyone can allocate their capital into an index, gain exposure to a diversified basket of assets, and experience competitive performance with the broader market. You need very little expertise to invest in an index.
2. Cost-Efficiency
When investing into any product, it is important to consider the associated costs. With crypto, a major factor in cost assessment is gas: the amount paid to the Ethereum network to execute a transaction on-chain. Since $DPI is a bundle of assets wrapped into a single ERC-20 token, you can invest into 14 of the largest DeFi names via a single transaction. This can provide cost-savings compared to buying each of the constituents separately. In addition, rebalancing costs are borne by Set and Index Coop, so you don’t pay transaction fees to rebalance the portfolio.
3. Tax-Efficiency
Another major consideration is the tax consequences of rebalancing. Depending on your local laws, taxes can play a major role in transactional costs. For example, in the United States, you have to pay capital gains tax when buying, selling, or exchanging cryptocurrencies. The way $DPI is structured, the exchanges happen inside of the ERC-20 token wrapper, so you are never actually selling the tokens. You hold one token, $DPI, and all of the rebalancing being done underneath the hood does not trigger any capital gains or tax liability for you. Instead, you would only be required to pay a capital gains tax once you sold $DPI.
That said, the tax implication for buying and selling cryptocurrencies can be complex, and vary by region. We recommend speaking with a tax advisor to understand your unique circumstances with regard to taxes within your country.
Who created and currently manages DPI?
The DeFi Pulse Index was created by Index Coop in collaboration with DeFi Pulse and Set Protocol.
Index Coop is a decentralized autonomous organization (DAO) that exists to create and maintain crypto-native structured products built on DeFi asset management primitives. As a DAO, Index Coop is governed by its community members. Members use the $INDEX token to propose and vote on new products, the allocation of the treasury, and the future direction of the DAO. Index Coop has had a variety of successful products to-date, including: the DeFi Pulse Index, the Metaverse Index, and a 2x leveraged products suite.
DeFi Pulse is the methodologist behind $DPI. You can find the latest analytics and rankings of DeFi protocols on their site. Their rankings track the total value locked (TVL) into the smart contracts of popular DeFi applications and protocols. Additionally, they curate The DeFi List, a collection of the best resources in DeFi, and DeFi Pulse Farmer, a newsletter covering the latest news and opportunities in DeFi.
Set Protocol is an Ethereum-native DeFi primitive that leverages existing Open Finance protocols to facilitate the bundling of crypto-assets into fully collateralized baskets, which are represented as ERC20 tokens on the Ethereum blockchain. These Set tokens act as structured products that represent the methodologists’ strategy.
How does it work?
The DeFi Pulse Index is a digital asset index designed to track tokens’ performance within the DeFi industry. The index is weighted based on the value of each token’s circulating supply. The DeFi Pulse Index aims to track projects in DeFi that have significant usage and show a commitment to ongoing maintenance and development.
Constituent Inclusion
The DeFi Pulse Index has a collection of inclusion criteria composed of four dimensions. Two dimensions are used to evaluate the token’s characteristics, one dimension is used to assess the project’s characteristics, and one is used to evaluate the protocol’s characteristics. The inclusion criteria are the basis for selecting which tokens will be included in the index.
To be included, tokens must be available on Ethereum and associated with a DeFi dapp. There are additional inclusion criteria that factor in supply/issuance, user safety characteristics, and protocol traction to ensure that only the highest-quality tokens are included.
Rebalancing
Rebalancing is performed during the third week of each month. At that time, any tokens that meet the criteria are added, and any that fail to meet the criteria are dropped from the index. All tokens are capped at 25% of the total allocation to ensure diversification across a range of assets.
5 reason that make DPI unique
$DPI is particularly unique for the following reasons:
1. Structured Product
As discussed above, $DPI is a structured product for the emerging DeFi sub-asset class on the Ethereum blockchain. Because it is a bundled crypto-asset, you effectively own all of the underlying tokens. This means you can redeem your units of $DPI for the underlying tokens at any time on the TokenSets site. This is a feature of traditional structured products that is typically reserved only for large, institutional investors.
2. Easy to Buy
You can easily trade fiat currency for an Index Coop product directly from your web3 wallet. Popular wallet choices for purchasing Index Coop products include Argent, Dharma, Metamask, or Rainbow. With each of these wallets, you can connect to your bank account or debit card, which allows you to exchange fiat currencies directly for Index Coop products.
Alternatively, you can buy $DPI from a DEX like Uniswap or Sushiswap. Liquidity for $DPI on layer 2 will be added shortly, at which point transactions will require less gas.
Finally, it is possible to buy $DPI directly from the Index Coop or TokenSets.
3. Permissionless
As an Ethereum-based crypto-asset, $DPI is permissionless and decentralized. This means anyone in the world with an Internet connection can purchase and hold it. This makes $DPI more accessible than traditional finance structured products while maintaining and improving upon some of the structured products' core features. You can read more about the benefits of $DPI versus traditional finance equivalents here.
4. Community-Managed
Even though the exact methodology of $DPI is managed by DeFi Pulse, the Index Coop community is in charge of the various management decisions around the product. Anyone can participate in these decisions by being an active member of the Index Coop community. If you are interested in participating, join our Discord.
5. Token Productivity
$DPI is a structured product, but it can also be used productively throughout DeFi since it is a crypto-asset. Here are a few of the productive opportunities in DeFi available to holders of $DPI:
- Liquidity provision (LP): Becoming a market maker by providing $DPI and $ETH liquidity for trading activity on a DEX like Uniswap or Sushiswap in exchange for a portion of the trading fees.
- Yield farming: Staking your LP position in a platform to earn an additional yield. For example, you can stake your $DPI/$ETH LP tokens on indexcoop.com for ~10% yield.
- Borrowing and Lending: Providing lending collateral for borrowing demand on platforms like CREAM Finance and Alpha Homora V2. This provides you with a stream of interest from borrowers.
- Collateral Debt Position (CDP): Taking a loan against $DPI in stablecoins and using the stablecoins to farm yields.
What are the risks?
As with all investments, $DPI is subject to market risk. $DPI will fluctuate in price as the underlying tokens are bought and sold. This means it is possible to lose your initial investment.
In addition to market risk, $DPI has smart contract risk. This is common for all tokens built on the Ethereum network. Smart contract risk stems from the potential for exploits or bugs in the code. However, Set Protocol has been audited by OpenZeppelin and ABDK consulting, and every line of smart contract code is open source. While this doesn’t eliminate the potential of a hack, it does mean many people from external auditing firms and technical members of the community have reviewed the code, mitigating some of the risk.
As with any Ethereum project, there are infrastructural risks that may result in illiquidity. When the Ethereum network is clogged during periods of intense volatility, an asset may lose its liquidity since transactions cannot be processed, and the cost of processing may be prohibitive.
Finally, since crypto is so new and there isn’t currently much government oversight, there is a regulatory oversight risk. For example, a regulation deeming $DPI a security in a country like the United States could result in potential price and/or liquidity impacts.
How Do You Buy DPI?
There are three main ways to buy $DPI:
- You can exchange fiat currencies directly for an Index Coop product via an Ethereum wallet
- Use a decentralized exchange to trade another cryptocurrency for an Index Coop product
- Or, buy it on a centralized exchange, like Gemini
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.
You shall not purchase or otherwise acquire our restricted token products if you are: a citizen, resident (tax or otherwise), and/or green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (defined as a U.S. person), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. persons, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized).
