How Index Coop is Capitalizing on ETH’s Price Momentum

The Index Coop, a decentralized autonomous organization and leading provider of on-chain structured products, recently announced the launch of the Index Coop CoinDesk ETH Trend Index (cdETI), a tokenized implementation by Index Coop of Coindesks Indices’ ETH trend indicator (ETI). CoinDesk Indices, the publisher of the ETI, sat down with Index Coop’s Head of Product, Allan Gulley, to talk about the DAO’s product strategy and cdETI.

The interview was conducted by CoinDesk Indices and is not associated with CoinDesk editorial.

The Index Coop was one of the first organizations to launch on-chain indices, notably with DPI and MVI. Can you share more about what you’re working on now?

Yes, that’s right. We were early to the on-chain structured product market. Our early products, like DPI and MVI, were thematic baskets of tokens built on Set Protocol, and “diversification” was the simple strategy that we effectively tokenized. We later ventured into more sophisticated structured products, like ETH2x-FLI, that allowed us to tokenize more complex strategies.

Our on-chain indices did well during the bull market, but like everyone else we’ve been building through the bear market so that we can be well positioned as the overall environment improves, as it is now. We’re branching out and experimenting with different automated strategies and on-chain asset classes. We’ll still create index-style products, but the market is signaling that people are interested in earning yield, using leverage, and executing more complex strategies, so we’re responding to those needs as well.

As you know, we launched the Index Coop CoinDesk ETH Trend Index (cdETI). The idea for this product is that it will reduce the volatility from holding ETH by dynamically allocating between WETH and USDC based on CoinDesk Indices’ Ether Trend Indicator, which uses current and historical data to measure momentum in the ETH price.

You mentioned that cdETI aims to reduce some of the volatility associated with holding ETH. How does that work?

A truism in the financial world is that most people are bad at timing the market. With cdETI, we’re tokenizing our implementation of the CoinDesk Indices Ether Trend Indicator so that users can benefit from positive ETH price action while dampening volatility to the downside. This is intended to mitigate the need for users to constantly monitor the market or engage in active trading.

To state it simply, the trend indicator works by comparing recent prices to historical prices using a series of moving averages. When the indicator signals strongly that the direction or strength of ETH price is stalling or falling, the token rebalances from WETH to USDC. When the indicator signals strong positive price momentum, the token reallocates to WETH. ETI levels between these strong indications maintain a 50/50 allocation between WETH and USDC.

By automatically rebalancing between WETH and USDC, cdETI has the potential to capture bullish price movements for token holders while preserving capital during bearish scenarios. As a result, passive holders may maintain their WETH position while having some protection to the downside due to the data-driven methodology under the hood.

Looking ahead, where do you see the on-chain structured product market going in the next year?

One thing I expect to see is the blending of on-chain technology with Web2-style interfaces, platforms and custody solutions. While there are some DeFi purists out there who don’t want on-chain assets anywhere near Web2 platforms, we think there can be productive partnerships between on-chain products and off-chain distributors.

We’ve pursued a number of partnerships with platforms and custodians like Matrixport, BitGo and Copper to give our users as many ways as possible to access our products. It’s imperative that users always have the option to self-custody on-chain products, but for the broader base of users who have different preferences, we want to ensure our products are available to them where they are the most comfortable and convenient.

You sound optimistic about the future of on-chain products, but on-chain products, as of yet, have not captured significant market share. Why do you think that is?

It’s true, the on-chain structured product market is small right now. When we published our industry report in June, the on-chain structured product market made up 0.21% of the overall crypto market with a combined Total Value Locked (TVL) of $2.5bn. At the same time, there was $48.3bn of assets in the DeFi market and $1.19tn in assets in the crypto market.

Why the on-chain structured product market is so small is something we looked at in our white paper. We also recently published an article where we asked six experts in our space this exact question. Several of these experts cited the lack of access to these products, especially in the U.S. where ambiguous and antagonistic regulatory efforts are shutting down many on-chain providers. Many structured products are also not as cost-effective as they should be, especially since most of them are on Ethereum mainnet where transaction costs can be prohibitive for smaller users who may want to dollar cost average in.

As the digital asset market continues to mature, we expect the on-chain structured product sector to grow and gain market share relative to the rest of DeFi. Things have evolved rapidly in the last few years, and we’re optimistic that the next several years will bring regulatory clarity and improved infrastructure for building these products.

What are the advantages to having these product on-chain?

That’s a great question. At the Index Coop we believe that on-chain structured products ultimately create the best user experience. First and foremost, on-chain products are transparent. Users can independently verify the holdings, strategies, and smart contracts supporting our products in real-time. Our products can also be permissionlessly issued with or redeemed for their underlying assets at any time, allowing arbitrageurs to keep their price in line with their net asset value (NAV) and avoiding persistent premiums or discounts commonly observed with off-chain structured products.

We also see security as a selling point for these products. Though there have been a number of high profile hacks in other areas of DeFi, we ultimately expect on-chain products to be extremely secure as the infrastructure is stress tested and audits are performed on a routine basis.

On-chain products also have the potential to be globally accessible. Obviously there are limitations in certain jurisdictions due to regulatory issues, but like many in the DeFi space, we’re excited by the possibility of offering globally-available products that are accessible 24/7 to anyone with an internet connection.

Disclosure:

This content was produced by CoinDesk Indices, Inc. (“CDI”) and not the CoinDesk Editorial team. CDI does not sponsor, endorse, sell, promote or manage any investment offered by any third party that seeks to provide an investment return based on the performance of any index. CoinDesk Indices Disclaimer and Index Coop Disclaimer.