Betting on DeFi? What Is DPI and Why Would You Want It?
DPI (DeFi Pulse Index) is an indexing solution that provides exposure to DeFi (Decentralised Finance), thereby removing the necessity of choosing individual DeFi protocols.
What Is a TokenSet Index Set?
Although relatively new, an Index Set can be considered to be a crypto alternative to ETFs in traditional finance. Fidelity defines ETFs as:
“Funds that issue shares, which are traded on a stock exchange. ETFs cover a broad range of asset classes and can give exposure to specific markets, sectors or investment strategies. Many ETFs track an index in order to provide this return.”
With the exponential growth of products created within crypto, it is becoming overwhelming to decide what to use and where to invest. Index Sets are a solution to this problem as they can provide exposure to specific markets, sectors or investment strategies while also being traded on DEXs (Decentralised Exchanges).
What is DPI?
DPI is a capitalisation-weighted Index Set managed by DeFi Pulse on TokenSets with strict criteria and methodology to determine the inclusion or exclusion of DeFi assets within the Set. The Set is dynamic as it may rebalance to reflect up-to-date market conditions. If the Set does rebalance, it will be decided on the third week of the month, with the rebalancing occurring at the start of the following month. All changes will be published in advance to notify DPI holders.
The Inclusion Criteria for DPI:
The strict criteria and methodology to determine the inclusion or exclusion of DeFi assets within the Set is as follows:
“The token must be listed on Ethereum.
All tokens must be bearer assets.
Tokens held by the index may not be wrapped or synthetic tokens.
Tokens held by the index may not represent options or futures.
Tokens held by the index may not represent physical world assets.
Tokens held by the index may not represent claims to other tokens on blockchains other than Ethereum.
The dApp associated with the token must be listed on DeFi Pulse
The dApp associated with the token must be launched and functional for at least 180 days before its associated token may be included in the index.
The token must be freely circulating for at least 30 days before it is included in the index.
The token supply must be reasonably predictable over the next 5 years.
The current circulating token supply must be at least 5% of the projected token supply in 5 years.
The dApp, token, and founding team must be widely considered legitimate.
The dApp and token follow best practices concerning the security and safety of the protocol and post-incident management. Alternatively, a token may qualify if 1) the associated dApp and token has been unchanged & operational for a significant time without a security incident, 2) the identity of the developer(s) of the dApp and token is publicly known and is considered to be a security expert, or 3) the dApp and token undergo sufficient community-led audits before changes in the dApp or token are pushed to production.
The dApp associated with the token must be sufficiently decentralized through multi-signature contracts of several community members or be entirely controlled through the voting of token holders.
The dApp associated with the token must be directly related to Decentralized Finance (“DeFi”) as a lending platform, exchange, synthetic asset platform, prediction market, cross-chain service provider, asset management platform, options platform, futures platform, or other relevant services.
Each position is weighted by its relative circulating market cap to other positions in the index.”
Is the Inclusion Criteria Sufficient?
It is my opinion that the inclusion criteria of DPI are more than sufficient. Firstly, searching DeFi Pulse which tracks DeFi protocols within cryptocurrency, all but one are on the Ethereum network (BTC lightning network ranked 31). Therefore, ensuring that the DeFi tokens included in DPI are on Ethereum is essential to gain exposure to DeFi. I also suspect that having the tokens listed on Ethereum makes creating and maintaining DPI easier.
I am also particularly interested in the construction criteria of DPI as this provides the Index with its value. The tokens must be bearer assets, that means the holders of DPI are entitled to the ownership and benefits of the tokens included within the Index. Furthermore, DPI only contains tokens and not synthetic assets or derivative products. That ensures that the value of DPI is dependant through the value of the tokens rather than financial mechanisms. As the Index is capitalisation-weighted, the assets included correspond to their position within the market, that ensures through the free market only the top tokens are included in DPI. Holding DPI thus provides essential exposure to the market leaders within DeFi if they change, the Index reflects this.
The tokenomics, which is the study of the token economy of a project, will influence the decision to invest or not. Within the inclusion criteria of DPI, the tokenomics of DeFi tokens is clear. The supply of tokens must be reasonably predictable over the next five years, which means that the price of DPI won’t suffer from unexpected price changes caused by the dilution of individual tokens.
Finally, security is a factor to consider in any projects inclusion. In the past year, there have been several notable security breaches or rug-pulls in DeFi (Find links for both). To eliminate this risk, the tokens within DPI need a legitimate product which has been scrutinised and implements best practice. The team behind the project needs to be respected in the community for their work, with a great example being Hayden Adams, the creator of Uniswap. The project also needs to be sufficiently decentralised. That is important to ensure that a minority doesn’t control the voting rights of the project which could substantially influence the direction of the token in the future. All these elements result in the tokens included in DPI are secure and avoids unnecessary risk for holders.
What Is the Contents Of DPI?
- 0.24503 AAVE that makes 24.17% of the Index. AAVE is an open-source and non-custodial liquidity protocol for earning interest on deposits and borrowing assets.
- 4.38787 UNI that makes 19.84% of the Index. Uniswap is a decentralized protocol for automated liquidity provision on Ethereum.
- 2.78228 SYNX that makes 18.19% of the Index. Synthetix is the backbone for derivatives trading in DeFi, allowing anyone, anywhere to gain on-chain exposure to a vast range of assets.
- 0.018425 MKR that makes 10.11% of the Index. MakerDAO is the protocol behind DAI. Dai is a stable, decentralized currency that does not discriminate.
- 0.083686 COMP that makes 7.75% of the Index. Compound is a decentralized blockchain protocol that allows users to lend or borrow selected cryptocurrencies. It establishes money markets by pooling assets together and algorithmically setting interest rates based on supply and demand of assets.
- 0.000612 YFI that makes 7.40% of the Index. Yearn Finance is a suite of products in DeFi that provides lending aggregation, yield generation, and insurance on the Ethereum blockchain.
- 25.411611 LRC that makes 4.30% of the Index. Loopring is an Ethereum zkRollup protocol — a type of layer 2 scaling solution. Layer 2s are an environment that sits above Ethereum, where transaction throughput can be increased, and transaction cost can be decreased. From a user’s POV, that means faster, cheaper, gas-free(‘gas’ or ‘Ether’ is what is used to complete transactions in Ethereum) transactions. Importantly, zkRollups maintain the complete self-custodial security guarantees of Ethereum.
- 17.961612 REN that makes 4.19% of the Index. Ren Protocol is a permissionless and trustless protocol that allows users to transfer tokens across different blockchains. Ren’s core product, RenVM, is focused on building an interoperability solution for DeFi.
- 4.085416 KNC that makes 2.17% of the Index. Kyber Network is a decentralized exchange that provides on-chain liquidity that applies to any application, enabling value exchange to be performed seamlessly between different ERC20 tokens.
- 0.216928 BAL that makes 1.88% of the Index. Balancer is a protocol for programmable liquidity
How to Purchase DPI
DPI can be purchased through a DEX, for example, Uniswap with DPIs contract being: 0x1494CA1F11D487c2bBe4543E90080AeBa4BA3C2b However, the safest and most secure way is through TokenSets website which I shall now demonstrate.
Please note the steps outlined may have changed since this guide was produced.
How Does Purchasing DPI Compare to Buying Each Token Separately?
When buying DPI, there is a small premium to pay for the Index. However, this fee is significantly lower than the amount of gas required if you were buying each asset within the Index separately. Although purchasing the individual assets will enable greater flexibility in the weighting, the premium for this is difficult to justify as the purpose of DPI is to provide exposure to DeFi in a wider portfolio.
Is DPI Worth the Investment?
I discovered DPI while I was researching what DeFi tokens to invest in. I believe that DeFi will continue to grow as the innovation and creation that is being demonstrated in this space is incredible. I didn’t have any exposure to DeFi and I struggled to select individual projects. DPI provided me with the exposure that I desired without having to work out weightings. The alternatives, for example, Enzyme Finance failed to attract my attention as the options limited my exposure to many of the assets that I had researched.
I wrote this piece for anyone interested in DeFi and is unsure where to invest. I think the solution that DPI has created is ideal for that. However, do your research to determine if DPI is for you.
If you have any questions, please comment below this post or connect with me on LinkedIn at https://www.linkedin.com/in/wilsonedwardc/
Legal Disclaimer: I am not a financial advisor. The advice here given is not financial advice even though my excitement might make it look like such.
For The Curious Mind
Here is a great podcast discussing DeFi and DPI by Bankless and their guest Anthony Sassano the Product Marketing Manager at Set Protocol.
I have also attached another podcast with the co-founder and CEO of Set Protocol Felix Feng discussing other products by the Set Protocol.