Index Products: A Glossary of Terms

Net Asset Value (NAV): NAV determines the value of the assets held by the structured product. Indices maintain a NAV (equal to the weighted average of the underlying tokens) close to the market price thanks to arbitrage bots that will take advantage of any price discrepancies by minting or redeeming index tokens and trading the underlying components. A premium or discount to the NAV occurs when the market price of an index token rises above or falls below its NAV. If the market price is higher than the NAV, the index is said to be trading at a “premium”. If the price is lower, it is trading at a “discount”. Ideally the NAV should follow closely with the market price.

Here is the all time market price and NAV of $DPI with minimal deviation:

Streaming fee: The streaming fee is an annualized fee (similar to expense ratio for traditional structured products) on the total market cap of an Index set that may be accrued at any time. For example, let’s say an Index set is created with a 2% streaming fee. After 6 months, the creator may claim 1% of the total market cap of the Index set as fees.

Minting fee: Fee levied when you mint new units of index token from your underlying tokens of the index set or a single asset such as ETH, BTC, USDC through basic or flash minting respectively

Redemption fee: Fee levied when you redeem either the underlying tokens of the index set or a single asset such as ETH, BTC, USDC from your index set token through basic or fash minting respectively

$DPI has a streaming fee of 95bps, which is split 70/30 between Index Cooperative (66.5bps) and the methodologist, DeFi Pulse (28.5bps).

FLI charges a streaming fee of 195bps, which is split 60/40 between Index Cooperative (117bps) and the methodologist, DeFi Pulse (78bps) and a mint & redemption fee of 0.1%, which is similarly split 60/40. This is less expensive than other products on the market:

MVI has a streaming fee of 95bps. The full 95bps goes to the Index Cooperative Treasury.

BED has a streaming fee of 0.25 %, which is split 50/50 between Index Cooperative and Bankless, the methodologist for BED

Total Value Locked (TVL): A metric used to describe the aggregate value of assets locked in a protocol or protocols, while AUM is used for assets managed by a single protocol or organization.

Methodologist: Index Methodologists are data providers who publish research and data on compelling Index strategies. In an analogy to traditional finance an Index methodologist would be similar to State Street which provides data on the S&P 500 composition while the Index Coop would be similar to Vanguard which licenses & implements the S&P 500 in its Vanguard S&P 500 ETF product.

Index Coop partners with the best-in-class methodologies for its products such as Bankless DAO and DeFi Pulse. We rely on our robust governance structure and employ stringent selection criteria to onboard the methodologists.

Metagovernance refers to the ability for $INDEX token holders to vote on governance proposals for other protocols. Meta-governance is a super-power that empowers you to have a say in the governance of DeFi protocols within $DPI.Currently available for $DPI only, tokens held within the $DPI index such as UNI COMP and YFI can be used to vote on governance of their respective proposals of these protocols. Within $DPI, the metagovernance process is limited to Uniswap, Compound, YFI, Balancer and AAVE.

Rebalancing is the process of buying or selling assets to return your portfolio to a target weighting. When one asset is outperforming the other, its weighting in the portfolio grows, potentially exposing a portfolio to more risk than they would like. Periodically, the portfolio will need to be rebalanced back to the target weightings, locking in gains and reinvesting into underperforming assets.

Index Coop products, including $DPI, $MVI, $DATA and $BED, all use Set Protocol’s infrastructure to automatically rebalance the portfolio of assets in line with their defined methodologies on a monthly basis. Unlike the traditional finance world where users’ structured products are rebalanced by fund managers on behalf of their clients, in DeFi this process is done automatically using smart contracts. This means that the process is decentralized, reduces over-exposure to an asset and since gas costs for rebalancing are handled by Index Coop and Set, it helps maximize your return.

Arbitrage: Sometimes shortened to ‘arb’, arbitrage is the process of simultaneous buying and selling of an asset in different markets or in derivative forms in order to take advantage of differing prices. For example, selling at a higher price on one exchange while at the same time buying the same asset on another exchange where the price is lower. This activity is often carried out by bots, especially in established markets.

Slippage is the difference between an expected trade price and that which is executed. Slippage can either be positive or negative, depending on the direction of price change. Low liquidity can cause increased slippage, which is why larger orders tend to face higher slippage. A way for large purchases of $DPI to avoid slippage is to mint/issue the token directly. This is done using the exchange mint/redeem functionality called flash minting that can be accessed through tokensets.com.

Impermanent loss (IL): Impermanent loss is a loss that funds are exposed to when they are in a liquidity pool. This loss typically occurs when the ratio of the tokens in the liquidity pool becomes uneven. However, impermanent loss isn’t realized until the tokens are withdrawn from the liquidity pool.

Since Index Coop indices are not AMM based, there’s no impermanent loss. IL results in AMM-based products selling winners to buy losers. This means assuming a similar asset allocation to the index set, the product would likely underperform the index set over time.

Please note that the above applies only when you are simply holding the index set token. If you take part in liquidity mining, you will still be susceptible to IL.

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