The Future Of Finance Fund (FFF)
Author: Dr Laurence E. Day
Summary: A formal proposal to the Sigma program for a meta-index comprising WETH, WBTC, DEFI5, DEGEN and CC10.
We’ve been thinking for a while about how to create an ETF that would appeal to your ‘first-time’ crypto investor: those that are interested in exposure to Bitcoin and Ether along with the nascent DeFi market, but don’t know where to start. The type of person who wishes to allocate part of their portfolio to crypto and holds a Vanguard, but can only name two members of the latter.
Having listened to community feedback about the desire for a ‘blue chip’ product that provides exposure to BTC and ETH as well as containing more than a maximum of ten constituent assets, it makes sense to start bundling our ETFs together.
The FFF - as proposed - is a five-member index, minimising both IL within the host Balancer pool and the gas costs associated with minting it. However, were it to be deployed at the time of writing, the FFF would provide indirect exposure to 22 tokens, due to the fact that three of the five members are themselves indices (with a theoretical maximum of 32, given zero overlap between any of the component indices, and all components being 10-member indices).
As an aside, the core team of Indexed is currently working on implementing controllers that would enable yield-farming ETFs - as part of this proposal we suggest phasing out the DEGEN component in favour of such an ETF that focuses on stablecoin farming once the latter is live.
We propose weighting the FFF by fixing the allocation of both WETH and BTC to 20% each, and utilising the square-root fully-diluted market capitalisation methodology for the remaining three components. In this way, more conservative holders have a 40% exposure to the two largest crypto-assets currently in existence, whilst providing passively managed exposure to:
- A heavily concentrated, large-cap decentralised finance index (DEFI5),
- A medium-large-cap index covering significant Ethereum protocols (CC10), and
- A smaller, riskier index of growth bets across Ethereum (DEGEN)
At the time of writing, the FDVs of the three indices listed above would lead to the following weightings within the FFF:
DEFI5 23.88% DEGEN 18.58% CC10 17.54% WBTC 20.00% WETH 20.00%
This would produce an ETF with a 40% focus on ‘pure’ crypto assets (the ones you know from the news), approximately 40% covering large/medium-cap DeFi protocols, and the remainder as smaller shots with a greater chance of upside, to be phased out in favour of a yield-bearing component in due time.
Per the above weightings, and bearing in mind that the constituent assets of three of the five components are subject to their own internal weighting shifts and asset lists (which may drop the exposure to a given token if it appears in multiple indices but is thereafter removed from one, e.g. COMP), the ‘true’ underlying exposure of FFF at the time of writing (bearing in mind that CC10 is currently phasing in ZRX) is:
WETH 20.00% WBTC 20.00% UNI 12.94% CRV 6.90% AAVE 5.81% COMP 5.10% SNX 5.04% LINK 3.90% RUNE 2.86% REN 2.43% RSR 2.36% 1INCH 1.84% OCEAN 1.83% ALPHA 1.51% MIR 1.38% BADGER 1.37% POLS 1.19% UMA 1.12% MKR 1.07% YFI 0.82% OMG 0.31% ZRX 0.25%
As with other Sigma pools, a circuit breaker will monitor the fundamentals of the underlying assets, halting swaps within the underlying pool in the event of excessive (≥10%) shifts in either the token price or total supply from one block to the next as a security measure, although given the nature of the components, these are very unlikely to happen after sufficient liquidity is reached within the FFF pool. Circuit breaks can be lifted by approved addresses belonging to members of the Sigma committee.
As is the case for all of our existing products, reindexing will occur after three weekly reweightings. Notably, reweighting and reindexing will also be occurring within the non-wrapped components, keeping target weights on track at multiple points.
The FFF will not contain a wider ‘candidate list’ of assets beyond WETH, WBTC, CC10, DEFI5 and DEGEN. Three indices is ‘enough’ to cover our needs, and should Indexed products be released in future that are better fits (i.e. the above reference to a yield-farming component in lieu of DEGEN) in the view of the Sigma committee, we shall simply hot-swap one index in for the other. WETH and WBTC would not - and should not - be removed.
We will target an initial price of US$100 for the FFF token (in line with a ‘real’ index initialisation). During the bootstrapping phase, 100 tokens will be crowdfunded to reach a total value of US$10,000. Once this value is reached, the pool will be deployed, giving anyone the ability to mint new FFF tokens.
We’re not particularly married to the pegged amounts of WBTC and WETH here - we believe they should be substantial, but not at the cost of drowning out everything else. As such, 40% across both of the assets in total is probably sufficient.