Introducing: The High Yield ETH Index (hyETH)

The High Yield ETH Index is designed to track and gain exposure to some of the highest ETH-denominated yields available within the DeFi ecosystem. Tokenisation of these strategies abstracts away the complexity, management, and need for continual monitoring and trading for users.
This article will break down the following

• The benefits of hyETH
• The source of yield for hyETH
• The methodology for hyETH
• The Risks of hyETH
• The Fees of hyETH
• How to get hyETH

What are the benefits of hyETH?

The primary advantage of holding hyETH is its potential to outperform ETH with higher yields. Additionally, hyETH abstracts the complexity of DeFi by offering an objective methodology which filters out noise and focuses on sustainable opportunities. Monthly rebalancing ensures users access the latest high-yield opportunities without having to research every new protocol and asset in order to analyse the risks and rewards.

Where does the yield come from?

In this section we will look into the assets that make up hyETH, how the protocols work in principle and how the yield is derived.

Understanding where the yield comes from in any financial situation is critical. Below we will go through each of the proposed initial components. When new components are added to the product, Index Coop will announce them and explain where the yield comes from.

To begin with, we will look at the Pendle components; but first we need to understand staking, liquid staking, and restaking.

Staking involves validators locking up their ETH to secure the Ethereum network, earning a portion of block rewards and transaction fees in return. However, failure to fulfill duties or malicious behaviour may result in penalties, known as slashing, where a portion or all of the stake is burned.

Liquid staking services, like Lido and Rocket Pool, offer users liquid staking tokens (LSTs) in exchange for deposited ETH. These tokens enable holders to redeem their ETH, which is used by validators. Staking rewards are passed to LST holders after the staking protocol collects a small commission.

Restaking, pioneered by EigenLayer, expands the utility of staked ETH beyond network security. Liquid restaking tokens can be used to secure other distributed systems like oracles, bridges, or sidechains through Actively Validated Services (AVS). Stakers can pledge assets to protocols needing immediate economic security, taking on more risk for greater rewards.

Similar to staking protocols issuing liquid staking tokens as deposit receipts, restaking protocols also provide liquid restaking tokens (LRTs). These tokens enable flexibility and liquidity for staked assets as well as participation in restaking opportunities.

Pendle

Pendle protocol facilitates yield speculation through two tokens: Principal Tokens (PTs) and Yield Tokens (YTs).

PTs offer a fixed yield by locking assets for set durations at a discount, akin to zero coupon bonds. YTs provide variable yields, benefiting holders if the average yield surpasses the fixed rate on PTs.

hyETH utilises Pendle to secure high fixed yields on Liquid Restaking Tokens (LRTs) while the market speculates on variable yields through PTs.

Additionally, YT holders receive extra economic value, such as potential airdrops. Increased speculation on YTs boosts fixed yields via PTs.

Instadapp 

Instadapp takes Lido stETH (an LST) and uses it as collateral on borrowing protocols such as Aave to borrow ETH. The ETH is then used to buy more stETH which again is used as collateral to borrow more ETH. As long as the cost of borrowing ETH is lower than the staking yield on the LST with enough margin to cover transaction costs this strategy known as leveraged staking or looping remains profitable. Instadapp ETH v2 is similar to icETH by The Index Coop, though it supports multiple borrowing protocols and higher leverage ratios.

Across

Across is a cross-chain bridging protocol that offers swift asset transfers between networks, bypassing the delays of traditional bridging methods. For example, users can bridge assets like ETH and USDC between Ethereum Mainnet and Arbitrum or from Arbitrum to Base without the need for lengthy withdrawal and deposit processes. Across charges a fee for its services but also provides users with the opportunity to earn a share of these fees by providing liquidity to the protocol. The Across hyETH component represents WETH liquidity, which earns a share of these fees.

How are components and strategies selected? (Methodology)

hyETH targets ETH yield opportunities greater than 4.00% higher than the staking rate, as defined by 30d APY from dsETH. To be included, strategies must have the following attributes:

• Strategies must be listed on DeFi Llama Yield Rankings 8 denominated in ETH, available on Ethereum, and have the attribute of “no IL.”
• Strategies must have at least 5,000 ETH in TVL.
• Strategies must have a 30d APY at least 400 bp higher than the backward-looking APR of dsETH.
• Strategies must not have locking mechanisms or caps.
• Strategies with fixed terms must mature at least three months from the rebalance date; the initial composition may have a shorter duration due to the timing of the formal product launch.
• Strategies must be compatible with Index Protocol and not require additional engineering work to make it compatible with the SetToken. Index Coop may take on additional engineering work to make a strategy compatible, but it is not obligated to do so.
• Strategies must be separate from aggregators or actively managed.
• No protocol can account for more than three strategies or 60% of the composition.
• Protocols underpinning these strategies must be open-source and have published audits.
• All airdrops and rewards will be absorbed into the token and realised as yield by token holders.
• All fixed yield positions will be held to maturity, and yield will be based on the current APY, not the 30-day average APY.

The composition will consist of the top five strategies, ordered by TVL, that meet these criteria; the included strategies will be weighted equally. A maximum of five strategies will be included at any given time. hyETH will be rebalanced monthly to reflect the most current strategies in the composition. The product will not be rebalanced if there is no necessary recomposition (i.e., added or removed component). If any components are added or removed, the resulting rebalance will be executed via auction. If a component remains in the composition and its weight is between 17.5% and 22.5% of the index, it will not be reweighted.

Risks

As with any product offering higher yields, the associated risk is increased as well. hyETH is a higher-risk product than say dsETH. hyETH has significantly more smart contract and protocol risks due to the number of times ETH is staked, restaked, deposited and/or looped through multiple protocols.

We cover additional risks associated with hyETH in our article: Understanding Indicative APY vs Realised ROI.

Fees

hyETH will have an annualised streaming fee of 0.95%. There will be no fees to mint or redeem.

How to get hyETH

hyETH is available (to non-restricted persons) via The Index Coop App.

Check out our hyETH FAQ for any additional questions.