Introducing the Money Market Index ($icSMMT)

The Money Market Index ($icSMMT) is an index token of the top stablecoins distributed across variable-rate, peer-to-peer, and fixed-rate lending positions on Ethereum main net. Within the index, USDC, DAI, and USDT are deposited into the most battle-tested money market protocols: Morpho, Notional, Aave v2, and Compound. The composition is defined by a methodology that sets equal weights for each stablecoin and determines which protocols to deposit to based on historical rate data.

In this post, you will learn:

• The Basics of the Money Market Index token
• The Methodology for the Money Market Index token

The Basics‍

The Money Market Index token is built on Index Protocol, a good-faith fork of Set Protocol v2. Therefore, icSMMT will use the same battle-tested infrastructure as other Index Coop products like $DPI, $icETH, and $dsETH. More information on Index Protocol can be found in the docs.

At launch, the Money Market Index will be composed of six underlying positions: Morpho-Aave USDC (maUSDC), Morpho-Aave DAI (maDAI), Morpho-Aave USDT (maUSDT), Morpho-Compound USDT (mcUSDT), Notional fUSDC (wfUSDC), Notional fDAI (wfDAI). Each position represents a deposit to a specific lending market via ERC-4626 vaults, leveraging the composability of the underlying protocols rather than relying on secondary market liquidity for the deposit tokens. This architecture also enables the icSMMT token to be “re-pricing” or reflect interest earned in the gradual appreciation of the token price. Each stablecoin is distributed across the two protocols that have the highest historical lending rates for that particular stablecoin (more information on the methodology towards the end of this article).

Based on backtest data, icSMMT token holders can expect an APR of 2-4% in real yield terms. Any incentives that accrue to the underlying positions will be reinvested in the index, which may result in a boost to the expected APR. You can track current and historical analytics for the Money Market Index on the dedicated Dune dashboard.

There are 4 major benefits of the Money Market Index token:

1. Stablecoin diversification
2. Strategy diversification
3. Protocol diversification
4. Ease of use

Stablecoin Diversification

‍Every stablecoin has unique risks and many stablecoins share systemic risks, as evidenced by de-peg events and other historical anomalies. Onchain actors, especially those managing large balances, benefit from diversifying their stablecoin position and mitigating the associated risks. The Money Market Index token provides a balanced basket of stablecoins that enforces strict inclusion criteria, limiting the index to the lowest-risk stablecoins.

Strategy Diversification

‍In the same way that actors benefit from stablecoin diversification, they also benefit from diversifying the strategies used for earning lending yield. Under the hood, icSMMT token holders earn three types of lending yield: peer-to-peer rates, variable rates, and fixed rates. Peer-to-peer rates are earned on Morpho deposits that are matched with borrowers, resulting in a higher interest rate than the underlying money market; if a deposit cannot be matched with a borrower, it flows through to the underlying money market (ex. Aave v2, Compound) where it earns the prevailing variable rate. Fixed rates are earned by lending on Notional v2 or effectively buying fCash positions.

Because icSMMT token holders earn a weighted average of these lending rates, they experience less interest rate volatility compared to individual positions (or even a subset of the underlying positions). The result is a steadier stream if lending yield that accrues to the price of the index token, abstracting away the complexity and rate volatility of the underlying protocols.

Protocol Diversification

‍In addition to stablecoin and strategy diversification, the Money Market Index enables token holders to mitigate risks associated with individual protocols and their associated smart contracts. Distributing stablecoins across multiple protocols prevents a user from being completely wiped out if an exploit were to occur in one particular protocol. This concept of Value at Risk (VaR) is integral to the Money Market Index methodology, and protocol exposure is limited to a maximum of 50% for the index.

It is important to note that a token holder’s entire position is at risk if Index Protocol were exploited because it acts as an aggregation layer on top of the underlying protocols. However, security is the top priority for the Index Coop, and Index Protocol (and its predecessor: Set Protocol) has never been exploited. You can find more information about Index Protocol security and audits here.

Ease of Use

The Money Market Index token provides a simple way to access sustainable stablecoin yields.

Easy access - the Money Market Index can initially be purchased through the Index Coop app via Flash Mint. This eliminates the need for users to individually procure all of the components to mint icSMMT themselves, resulting in significant gas savings.

Passive holding - the Money Market Index allows users to simply buy the token and let interest accrue over time, without requiring any additional effort or involvement. This can be a convenient, hands-off way to earn real yield on stablecoins.

Auto rebalancing - adjusting the allocations of different assets within the Money Market Index maintains the desired balance and tracks the methodology over time. Token holders do not pay any gas fees when a rebalance is performed or fCash positions are rolled forward.

Evergreen index - the exact constituents of the Money Market Index will evolve over time according to the methodology. This allows the index to adapt to market conditions and continue to offer long-term value to holders as onchain money markets evolve.

Understanding the Methodology

The objective of the Money Market Index is to enable token holders to access sustainable stablecoin yields through a single token by building on the most battle-tested money market protocols.

For a stablecoin to be included in the index, it must meet the following criteria:

• stablecoins must be available on Ethereum main net
• stablecoins must have a minimum market cap of $100 million
• stablecoins must have an overall score of 2 or less according to the Product Indicitave Risk Framework

For money market protocols to be included, they must meet the following criteria:

• protocols must have a minimum of $25 million in TVL on main net
• protocols must have an overall score of 1 or less according to the Product Indicitave Risk Framework
• protocols must be audited by security professionals
• protocols must have a bug bounty program
• protocols must be open source
• protocols must be in operation for a minimum of six months in order for the DeFi community to arrive at a consensus regarding its safety
• protocols must have a minimum of 180 days worth of independently verifiable APY data for comparative analysis

Stablecoins that pass the inclusion criteria are equally weighted within the index, resulting in a balanced composition of USDC, DAI, and USDT at launch. Distribution across protocols is determined by comparing Base APYs using a 180 DMA for all protocols that meet the inclusion criteria; this measurement excludes incentives or non-stablecoin rewards in order to determine “real yield” per position. Each stablecoin is then split evenly between the two highest-yielding positions across two distinct protocols.

The Money Market Index will be rebalanced on a quarterly basis in line with Notional fCash maturities. Analysis will be performed before each rebalance to determine if new stablecoins or money market protocols are eligible for inclusion according to the methodology.‍

Fees

The Money Market Index will have a streaming fee of 0.15% (15 bps) directed to the Index Coop, and no mint or redeem fees.

How to Mint / Redeem:

Non-restricted persons can Flash Mint and Redeem Money Market Index tokens in the Index Coop App.

Please note that the high gas cost of minting the Money Market Index will affect the overall return. It is recommended that users reference this issuance calculator for estimating gas costs and determining breakeven points.

The Index Coop will not be providing DEX liquidity due to high gas costs associated with minting the token and maintaining an LP position; however, third parties are free to provide liquidity for the token permissionlessly. The Index Coop is also investing in low-cost access points for this token in the future.

More Resources 

• Read the forum post
• Index Protocol explainer
• Review the analytics dashboard on Dune

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