ARC: Add support for DeFi Pulse Index (DPI)

Hello Aave community :wave:

We from Index Coop would like to ask for your support in listing DPI as a collateral asset.

References

What is the link between the author of the AIP and the Asset?

I go by Lemonade Alpha and I am a core contributor for Index Coop.

Provide a brief high-level overview of the project and the token

DeFi Pulse Index is a basket of 13 popular DeFi tokens available on Ethereum. The methodologist behind DPI is Pulse, Inc, creators of DeFi Pulse. The criteria for token selection can be found here. DPI is the most popular DeFi index product with ~$130m AUM.

DPI is built on top of Set Protocol and managed by Index Coop. Index Coop is a decentralized and autonomous asset manager governed, maintained, and upgraded by INDEX token holders.

Explain positioning of token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

DPI would make an excellent fit for collateral in the Aave ecosystem because it allows for a large pool of dormant capital (>$100m in unincentivized DPI AUM) to find a productive use. Additionally:

  • Significant Borrow Demand: There is significant desire from whales to lend out the DeFi Pulse index and to use the DPI as collateral to borrow stablecoins for farming, going leveraged long/short, and implementing structured products (e.g. carry trade).

  • Low Volatility: Because indices are a basket of tokens, they represent less volatility than the component assets by themselves

  • Efficient Sector Representation: Adding an index as collateral also gives exposure to all the component tokens while only having to add in a single token, thus saving gas in Aave’s system

  • Liquidity via Primary and Secondary Markets: Minting and redeeming represent the primary market of the indices, but many users can buy and sell indices on the secondary markets - mostly Uniswap. The price on the secondary markets are kept at Net Asset Value (the market value of all the underlying components) through a network of market makers that redeem the tokens when price is below NAV and vice versa.

How is the asset currently used?

Currenlty, DPI is available for collateral in CREAM and can be used to provide liquidity on Uniswap (eligible for INDEX rewards).

Emission schedule

DPI is minted and redeemed by arbitrageurs who are reacting to fluctuations in demand. DPI may also be minted for the purpose of investment and likewise redeemed for the purpose of divestment via an exchange-issue process.

Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

Mkt Cap: $125,692,235
24 hr Volume: $12,944,962

Social channels data (Size of communities, activity on Github)

Twitter: 13.7k
Discord

Contracts date of deployments, number of transactions, number of holders for tokens

  • 9, Sept 2020
  • 96,997 Transfers
  • 11,473

Security Considerations

Smart Contract Risk

Set’s V2 contracts have had upwards of $200M locked and have been live for 6 months.

V2 Smart Contract Audits:

Counterparty Risk

DPI is the first index product released by Set Protocol and has been functioning securely since its launch in September. Anyone can permissionlessly issue the DPI token by depositing the underlying component tokens and can redeem the DPI token for the underlying components.

Only the Index Cooperative is able to make decisions regarding the index composition and the rebalancing process. Governance over the Index Cooperative is decentralized with the community making critical system decisions.

In the current version of V2, rebalances do not have any lockup times so that does not pose a risk.

Market Risk

DPI is backed by the component ERC20 assets leading to exposure to the market risks of the underlying tokens. Because DPI is a basket of tokens, the volatility of the DPI is significantly less than each individual token as seen in this graph below:

Set Market Risk Parameter Considerations

DPI price will be derived from the prices of the underlying components. Rebalancing happens once a month where weights and the underlying assets can change and as a result, oracles must be available for the assets that are added.

The liquidation process can happen in two ways. Liquidators need to liquidate on Aave and then either sell DPI on the Uniswap market or redeem the underlying assets and then sell them.

The Concourse team has an open source version of an arbitrage bot that mints and redeems automatically. It is possible to build a liquidation bot that does the mint/redeem and liquidate function on Aave in 1 transaction.

Proposed Interest Rate Model

We derived the variables of the interest rate model based on the rates DPI’s component assets have on the main Aave market. Slight adjustments were made to reflect the lower volatility of DPI due to it being a basket product and the Set market being a segregated market.

Utilization Optimal Base Slope 1 Slope 2
50% 0% 7% 200%

Proposed DPI Risk Parameters

DPI risk parameter values were also derived from referencing the values for DPI’s component assets. Adjustments were made for lower volatility of the DPI, multiple liquidation models (Uniswap and redeeming), and segregated markets were taken into consideration.

LTV Security Margin Liquidation Threshold Liquidation Bonus
50% 5% 60% 10%
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Thanks a lot for your proposal.

Unless you already have the 80k AAVE proposal power, feel free to edit your post to mention your delegation campaign address or your Aave community representative delegate so the community can support your proposal with proposal power delegation.

To the best of my Current Knowledge, DPI asset doesn’t have a Chainlink Price feed yet, this will be needed if this proposal reaches the AIP-ready State.

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Hey Mark :wave: Greg from Set Protocol & Index Coop here!

Small note to add here :slightly_smiling_face: DPI indeed does have a Chainlink price feed: Etherscan.

14 Likes

Thanks. I’m in support.
DPI has a track record and most of its constituents are blue-chips that are already in Aave.

Glad to hear ChainLink integration is done

Concerns:
-Adds to systemic risk (objective: tokensets contracts, subjective: sanity of index management decisions), but I suppose this can be mitigated as outlined per the OP.
-Liquidation: would Aave be able to promptly liquidate DPI collateral in case of a market crisis when there’s no liquidity on secondary markets? Redemption of DPI on Set means additional costs to the liquidators which may make it economically inexpedient for them to engage in. Would love to see the track record of the Concourse arb bot. LTV of 50% makes sense with the above in mind.

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Hey AAVE fam! BigSky from Index Coop here. We are really excited to see this proposal moving forward. Adding $DPI as collateral will be a huge win for both protocols.

This is a good question - do you see liquidations as $DPI > ETH or $DPI > Components > ETH? In my eyes adding that extra step is not necessary but I may be missing something. At the end of the day - the DPI <> ETH LP on Uniswap is >$60 million and the underlying tokens are all highly liquid. This should lower liquidation concerns.

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Thanks for your detailed proposal @LemonadeAlpha. I really like the idea of adapting the Concourse arbitrage bot for liquidations/redeems

Could you elaborate on DPIs Token (& Protocol) permissions (minting) and upgradability. Is there a multisig? What can it do? Who are the signers?

I was also wondering what is the security margin parameter? is it the reserve factor?

Do you have some technical and financial analysis on DPI to support the parameter calibration :owl:

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Thanks for the questions @Alex_BertoG :raised_hands: taking those one at a time:

  1. Is there a multisig? Yes
  2. What can it do? The multisig is responsible for initiating rebalances, performing meta-governance, adding / removing new protocol functionality (e.g. intrinsic productivity). It does not have the ability to arbitrarily move underlying assets, mint tokens, etc.
  3. Who are the signers? The signers are currently members of the Set team with the intention to add Index Coop community signers over time.
  4. I was also wondering what is the security margin parameter? is it the reserve factor? Set Protocol took inspiration from the Uniswap market documentation, where they utilize a security margin which is added to the loan to value and liquidation threshold to further protect the protocol.

Please lemme know what further questions come up!

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DPI

The DeFi Pulse Index (DPI) is an index product managed by Index Coop. At the time of writing there are 324,355 DPI in circulation. DPI was audited by OpenZeppelin in September of 2020, launched early October 2020, and has over 111,000 user transactions.

DPI Smart Contract Risk: C-

DPI was audited by OpenZeppelin in September of 2020, launched early October 2020, and has over 111,000 user transactions.

DPI Counterparty Risk: C

DPI is a product whereby holders of DPI have no metagovernance influence on Index Coop or the protocol within the index. DPI trades on the ethereum network and inherits the trust of the network much like USDC. DPI has over 12,055 holders and the DPI-ETH pool is Uniswap’s 17th largest at $90M. Anyone can Mint, Trade and Redeem DPI.

The DPI utilises TokenSets V2 smart contract has been audited by Open Zeppelin audit [September 4th, 2020] which identified privilege roles in many of the contracts. The key findings are highlighted below:

  • The Controller contract has an owner that chooses the contracts that comprise the system. This includes all of the modules, resources and the factories that can be used to make Sets.
  • The IntegrationRegistry tracks third party integrations that can be used in the system. It also has an owner that can add, remove and edit the integrations as desired.
  • The PriceOracle has a list of oracles and adapters that can be used to retrieve third party prices. It also has an owner role that can choose the supported oracles, adapters and price pairs.

DPI Market Risk: B-

DPI’s price tracks the Net Asset Value of the underlying assets, by holding a basket of protocol tokens the volatility of a single asset is dampened. This is reflected by DPI having a standard deviation of 5.75% since exception compared to ETH and AAVE which has a standard deviation of 5.03% and 7.79% respectively over the same time period (03/10/2021 to 01/05/2021). When considering liquidity, the average daily trading volume is $7.19M, based on over a trailing 90 day trading period. However, DPI holders have the option to mint/redeem the underlying tokens within DPI which draws on the liquidity of the underlying assets and also allows for any deviation from NAV to be arbitraged away by traders.

30 Day Average Daily Volume: $7.29M
90 Day Average Daily Volume: $7.19M
1 week Normalised Volatility: 0.05379
1 month Normalised Volatility: 0.05535
3 month Normalised Volatility: 0.05035
6 month Normalised Volatility: 0.05812
1 year Normalised Volatility: 0.05845

Risk Parameters:

LTV 60%
Liquidation Threshold 70%
Liquidation Bonus 10%
Reserve Factor 20%

UOptimal 50%
R_0 0%
R_s1 7%
R_s2 200%

Aave - DPI Listing Risk Assesment.pdf (27.9 KB)

10 Likes

While the multisig can’t arbitrarily move assets, it theoretically could rebalance assets into a fake token. My understanding is, if control of the multisig is compromised all funds could be drained from DPI (let me know if this is incorrect!)

Hi Aave Community :wave:

I am glad to announce Index Coop has created a proposal power delegation address to get DPI listed on Aave V2.

For AAVE holders that would like to show support for listing DPI on Aave, please delegate your proposal powers to the following address.

Add DPI as collateral to Aave V2: 0x1870D5Be439E3cB1aeCFf581d6572066e5098eAA

Thank you in advance for your support :)

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Hey. Good iniative. It could help to verify yourself via twitter so it shows up on the main page!

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Hi Aave Community :wave:

Index Coop create a PR for listing DPI and it can be found on Github here. We would be greatly appreciated if we can get some feedback on the PR and then we can proceed to start preparing the AIP.

If we need to present the AIP & PR together for Aave’s review, please do let us know and we can proceed with the AIP. Looking forward to receiving feedback from the Aave team. :slight_smile:

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Hey Monet! Punia here from IC and Set. What you’ve described is correct, we’re aware of it, and are looking into reducing that risk with timelocks and other potential solutions.

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Hi @MatthewGraham
PRs for AIPs are all in this folder Pull requests · aave/aip · GitHub
You can look at the work done for other asset listings AIPs in the folder, for example, the current RAI proposal that is beeing voted on

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Thanks for your great proposal, I just hope it finds a way of fast execution!

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Hi @Alex_BertoG

We have updated our PR and the parameters can be found here and the AIP description here.

We are really looking forward to using DPI on Aave V2 Markets.

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Blockchain at Berkeley is in strong support of adding DPI as a collateral asset - excited to see how Index Coop will continue to contribute to the Aave ecosystem!

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I’d be more in support of adding DPI to the AMM market. It has good liquidity and in my opinion the AMM market is a better fit for index like derivatives.

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Hi @Emilio

If DPI was added on Aave V2, then Index Coop has the ability to create DPI2x-FLI. A product like this could generate substantial TVL for Aave. ETH2x-FLI is a $46M product during a quiet period in the market and was a $130M product during mid May 2021. This is a sizeable amount of TVL upside for Aave to miss out on. There is a first mover advantage for capturing future opportunities here and we would love for Aave to grab that opportunity with both hands :slight_smile:

We have an active snapshot poll happening today, finishing midnight 23/07/2021.

https://snapshot.org/#/aave.eth/proposal/QmaxUK1TejG5YQ1wpjSt8qTqdDNQsDu3JAx8Mr51MArmYR

It would be greatly appreciated if people can show support for getting DPI listed as collateral on Aave by heading across and voting in favour of the proposal.

4 Likes

Thanks @MatthewGraham, why wouldn’t the DPI2x be possible on the AMM market? Afaik to do that you would need to borrow stablecoins and marketbuy the underlying index assets to mint more DPI for additional leverage. The AMM market has decent liquidity and will for sure grow substantially as more demand is generated (it had a total of > 50M in stablecoins when its TVL was 500M). I personally don’t feel comfortable adding more collaterals to the Aave main market right now, because borrowing power on additional assets greatly increases the systemic risk and i would prefer until the next protocol iteration is out to expand on collateral types for the main market (next protocol iteration will have a lot of risk management features).

With that said, i see the AMM market as the perfect place to bootstrap liquidity (btw, there is a proposal up to add the DPI/ETH/WBTC balancer V2 shares on the AMM market, here Renew the AMM Market assets)

4 Likes