BED INDEX Proposal

[Airbayer]

Basic Summary

The following is a proposal to invest $1M-$5M into the Bankless BED Index in an effort to diversify the Uniswap DAO’s treasury. The long-term goal of diversification is to provide financial balance to the organization’s balance sheets, enabling more security and potentially less volatility for the DAO’s overall financial well-being.

The BED is an index, created by Bankless and Index Coop, that represents crypto’s most investable assets, 33.3% BTC, 33.3% ETH, and 33.3% DeFi Pulse Index (DPI).

Motivation

The main purpose for purchasing BED is to help diversify Uniswap’s treasury, which is almost entirely held in UNI, while also helping drive Uniswap’s adoption through the marketing campaign highlighted below.

Buying the BED index can strengthen the partnership between Uniswap, Index Coop, and Bankless DAO. In return Bankless DAO, recognized for their educational content and their cultural influence over the industry, will manage a marketing campaign with Uniswap to help the community understand the insides and out of the Uniswap Protocol.

The partnership with Bankless could increase Uniswap awareness and adoption in the DeFi ecosystem. Bankless DAO is an inventive and leading edge DAO, mixing on-chain and off-chain initiatives.

By holding BED Token, Uniswap’s treasury can have diversified exposure to DeFi (DPI), the lowest risk crypto asset (BTC), and the upside in the broader Ethereum ecosystem (ETH). BED is a vehicle that captures equal-weighted upside from the most promising use cases and themes in crypto: store of value, programmable money, and decentralized finance. It also automatically rebalances to keep an even exposure ratio over the long term.

Bankless DAO is proposing a small initial amount ($1-5M) that could be increased in the future as the community becomes more comfortable with holding this asset.

How it works

The BED index is rebalanced on the first Friday of each calendar month, using the most liquid trading pairs. To date, this has been primarily through Uniswap V3. The fund is rebalanced in accordance with its underlying index.

The BED Index is maintained monthly in two phases:

• Determination Phase: Takes place during the fourth week of the month. It is the phase when the changes needed for the next reconstitution are determined.

• Reconstitution Phase: Following publication of the determination phase outcome, the index composition will change to the new weights on the first Friday of the following month. I.e components will be added or removed.

Risk Analysis

Smart Contract Risk:

BED uses Set Protocol smart contracts that were audited by OpenZeppelin in September, 2020.

Despite its recent launch on 07/21/2021, BED has fewer smart contract risks because it uses the contracts from Set Protocol.

Counterparty Risk:

BED holders have no governance influence on Index Coop or the protocol within the index. The BED Index utilizes the TokenSets V2 smart contract that has privileged roles in many of the contracts.

There is a multisig responsible for initiating rebalances, performing meta-governance, and adding or removing new protocol functionality. The index does not have the ability to arbitrarily move underlying assets, mint tokens, etc. The signers are currently members of the Set team with the intention to add Index Coop community signers over time. While the multisig can’t arbitrarily move assets, it theoretically could rebalance assets into a fake token. The mitigating factors for these risks are the Set Labs, Bankless and individuals personal reputation.

Liquidity Risk:

Minting and redeeming BED represent the primary market of the indices (ie BTC, ETH, and DPI), but many users can buy and sell indices on the secondary markets. 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.

However, as BED holders have the option to mint/redeem the underlying tokens within BED, it draws on the liquidity of the underlying assets and also allows for any deviation from NAV to be arbitraged away by traders. So liquidity goes beyond the secondary market for BED.

Market Risk:

As BED is a basket of tokens, it is likely to have less volatility than the component assets by themselves.We recommend reducing exposure to market risk by investing a small amount of 1 million USD to 5 million USD to begin.

Specification

BED can be purchased via Set Protocol.

There is the potential for a joint Bankless, Index Coop and Uniswap deployment on Uniswap rewards and potentially other opportunities. More on this as information comes to hand.

Additionally, Bankless DAO can execute on a marketing campaign on Twitter and other means not limited to a potential giveaway such as the gleam campaign, CTAs in the Bankless DAO newsletter dedicated to the approval of the BED Index and a podcast episode on Crypto Sapiens dedicated to Uniswap.

Seeking Feedback

We would like to gather feedback from the community about this post and invite the community to discuss how BED purchase could benefit Uniswap.

We firmly believe that treasury diversification is becoming increasingly important for DAOs, Uniswap being one of them. By purchasing BED for the Uniswap treasury, the DAO gets broader exposure to growth in the crypto ecosystem and minimizes their downside risk of the UNI token.

Disclaimer: The content reflected in the above text does not amount to any financial advice for commercial or non-commercial purposes. Bankless DAO is not a registered investment, legal or tax advisor or broker/dealer in any jurisdiction. All Investment financial topics and the information therein are personal opinions. The above mentioned content is only meant as educational material for general awareness. Bankless DAO is not liable for any loss or damage caused by actions taken by the reader/user based on the above mentioned content/information.

• Yes
• No

[Buckerino]

I like the diversification part, but given UNI´s major correlation to both ETH, BTC, and the DeFi Pulse Index I dont see the benefits. How would the portfolio be diversified if we invest ínto other cryptos which are inherently the driver of our native token?

[Naught]

@Airbayer

The BED is an index, created by Bankless and Index Coop, that represents crypto’s most investable assets, 33.3% BTC, 33.3% ETH, and 33.3% DeFi Pulse Index (DPI).

The top 6 assets in the DPI component of the BED index is composed of:

UNI at 25.24% allocation

AAVE at 19.49% allocation

MKR at 10.88% allocation

SUSHI at 9.98% allocation

COMP at 8.68% allocation

SNX at 7.73% allocation

Source: DPI https://www.indexcoop.com/dpi

I do agree that UNI is very correlated to the composition of this index. I think it is a good idea to think about how UNI can diversify the treasury, I am not sure if this is the best way to go about it.

The main motivation provided in the proposal:

“Buying the BED index can strengthen the partnership between Uniswap, Index Coop, and Bankless DAO. In return Bankless DAO, recognized for their educational content and their cultural influence over the industry, will manage a marketing campaign with Uniswap to help the community understand the insides and out of the Uniswap Protocol.”

I watch bankless podcast, and Uniswap has provided sponsorship of many of its episodes. Do you see the buying of the BED index as a further way of signaling support? How do bankless podcast members benefit from this purchase? Why not purchase a basket of index’s vs just BED? Will this proposal increase engagement with UNI governance, or uniswap as a protocol?

My main concern is that UNI is a governance token; which has seen very low participation and utility. Is this the right moment to be diversifying, and selling UNI onto the market without much need for the UNI token?

[Airbayer]

I do believe buying the bed index is a further way of signaling support for bankless and now is the right time to invest in the bed index. Bankless dao’s only benefit is a streaming of .125% annualized over a year. As an example lets say uniswap buys 1 million usd worth of bed index, the revenue going to bankless is $1,250 over a span of a year.

Buying the baskets of the index like a balancer pool is a less feasible option. For 2 main reasons:

1. Trading fees
2. Manual rebalancing - the BED Index is rebalanced monthly.
   An excellent post done by crypto texan from index coop takes an in depth look as to why balancer is less effective compared to the bed Index link:https://twitter.com/Crypto_Texan/status/1442280400559095818?s=20

For the marketing campaign aspect yes, Uniswap is the largest defi protocol out there so we want drive more consumers to the defi community. Community engagement does increase for a protocol if the bed index is purchased. UMA Protocol whom purchase 1m dollars worth of the bed index back in September have mentioned a significant increase in community engagement.

Marketing Campaign detail listed below:

Substack: Subscribers: 6,081
Average total views Rollup: 4,300-4,600 Link click rate: 1-2% average
Medium articles: Average views: 300-600 30d average views: 122/day
Twitter: Followers: 14,900 Impressions: 5,000-13,000
Additional Stats can also be accessed here as well in the summarized document: it can be accessed through here the stats BED Campaign summary - Google Docs

Newsletter preview is included here:Bankless DAO Weekly Rollup #19 | September 10 - Bankless DAO

Podcast episode: Bankless DAO cannot determine who is available to go on the Bankless HQ podcast however the DAO can have uniswap on our crypto sapiens podcast which is on spotify and twitter spaces!

I really appreciate your feedback! Airbayer

[brustkern]

True, UNI is generally correlated with the underlying assets in the BED Index.

But diversifying your treasury is like adding ballast to your ship. You have your propulsion systems – let’s say the nuclear reactor that powers the aircraft carrier – and you have your ballast that keeps the ship upright. Your propulsion systems are all the creative energy that goes into making UNI great. The ballast in the hull is made up of the admittedly boring strategic governance moves you make to create a bulwork of defenses, such as diversifying the treasury.

If UNI somehow tanks, even for a day, the ballast you’ve created through a diversified treasury will help keep the ship upright in the storm. This is what I would call the defensive motivation, which is clearlly wise.

Now, BED is still small, so we can’t provide you with truly enterprise class ballast systems yet. We’re working on that.

Which brings me to point #2. Your supoprt of the BED Index allows it to grow. As BED grows, so does our ability to provide UNI with a much deeper, and potentially more diversified, pool of capital and assets as ballast for your ship. This is what I would call the solidarity motivation, which is also highly valid.

Finally, Airbayer is right about the vlaue we can bring as a trusted marketing and media org. I believe this is a very real near-term value that shouldn’t be overlooked.

Back to the correlation question: by choosing the BED as part of its diversification strategy, UNI would be banking some coin against the chance that there may be a disruption in the marketplace in UNI’s disfavor. IMO it’s a wise call, and in this case a pretty small allocation.

[Buckerino]

You have good points, but…Im not convinced its worth the effort truly. If the UNI treasury would diversify, it would make more sense to diversify into tokens which are not correlated at all.

Like @Naught said, the UNI token is a fleeting hull as of now as it is. Selling it further down the line just to achieve little (or next to none) diversification/marketing effect is probably not the most efficient use of 1-5 million USD in UNI tokens.

I remain unconvinced.

If the whole purpose is marketing, then I´d advise doing 100K worth of buying and market it around as much as possible.

[Buckerino]

Im sorry, but those marketing stats are truly underwhelming to say the least for the amount spent.

[brustkern]

Airbayer mentioned that the amount received by Bankelss from this transaction would be $1250 after twelve months in the BED. Is that the “amount spent” you’re referring to? Perhpas I’m missing something, but that seems like a pretty solid quid pro quo.

[brustkern]

Which basket of tokens would you suggest are totally undiversified from UNI? I view at this as insurance against uncorrelated fluctuations in UNI pricing vis-a-vis its peers and major protocols. Do you agree this is a worthwhile goal?

[Buckerino]

No, Im referring to the “amount spent” as the purchase amount - purchasing 1M of something means we will have to SELL 1M worth of UNI tokens. This means that the token itself will lose value - the entire treasury will lose value as a direct result of the action.

Despite the treasury being large, the liquidity is not equal. 1-5M purchases can have more price impact than you think.

We have seen it with the DeFi Fund when 15M worth of UNI was sold…There are consequences to such actions. Would it be worth the cost? Most likely not in my opinion.

[Buckerino]

No, I do not because this is provably not insurance.

Diversification is not an easy task in the crypto world and should not be treated lightly. Its a gargantuous task which requires research to see what is truly worth the opportunity cost. I do not believe the answer is as simple as divesting into the majors + DeFi index.

Let´s take a theoretical scenario in regards to the opportunity cost:

Imagine the UNI treasury has two options to choose from when it comes down to spending 1-5M worth of UNI tokens - either diversify into the majors + DeFi Index

or

Run its own VC team using the funds from the treasury and participate in seed rounds of other upcoming protocols.

Whats better for the UNI token holders, Uniswap protocol, and the other stakeholders?

This is just a trivial example of illustrating opportunity costs. Both represent a divestment from the native token in the treasury into other coins/tokens. Both have price implications for the token itself. Marketing is also included in both of them. Do you see what Im trying to say? It´s not a simple problem to solve.

Now, Im not saying the idea to diversify is wrong. It´s quite needed in fact, but it needs to be true diversification. Something which is not correlated to the UNI token, is worth the price impact, and has a marketing potential as well. Despite the best efforts, and I DO believe Airbayer has honest intentions, this proposal arguably ticks only one of the things on the list.

[Marc_INDEX]

Hey, my name is Marc. I am from Index. Excited to be here! Thank you for the thoughtful feedback.

As you may know Index is behind the DPI component of BED and helps facilitate the Bankless Vision on BED.

Some great points have already been made on the diversification benefits of BED and the marketing potential of the partnership with Bankless. Also, this would further the relationship with Index.

Index and Uniswap already have a great relationship as UNI is the largest holding in DPI and Uniswap V3 is our primary liquidity provider for our strategies. In TVL of Uniswap pools, ETH2x-FLI is 16th and DPI is 37th.

Index is one of the largest and most active communities in the ecosystem. We are excited at the potential prospect of strengthening our ties through BED as well as leveraging our expertise in other treasury areas.

I’ll try to address a couple of your excellent points as best I can. It looks like the main three are: Correlation, implementation (selling/buying), and benefit to the community.

Correlation/Diversification:

You make a great point that “Diversification…(is) a gargantuous task.”

It’s something that as we speak to more and more treasuries, we are learning just how big a task it is. These conversations will be the foundations of building stronger protocols and a healthy environment for all.

Obviously – UNI is highly Correlated to ETH, WBTC and DPI. But that’s a good thing.

We believe, as I think you do, that Web3 is just now hitting its stride. The aim is not to diversify those returns away with true “non-correlating assets.” The goal is to provide the Uniswap treasury with broader diversification, non-native holdings that can be used as needed, and participation in other protocols.

Broader diversification comes from two areas.

1. Exposure to WBTC – Uniswap is heavily dependent on revenue generated from the Ethereum ecosystem. Exposure to an alternative protocol could limit volatility if there was an Ethereum specific negative event.

2. Exposure to ETH and DPI – Like many treasuries Uniswap is largely composed of native tokens. Replacing a small portion of UNI with ETH and DPI could be a benefit in the event of a Uniswap specific downturn. However, if that unlikely event never occurs, the correlation to UNI pays off because you continue to have a growth asset that performs like UNI.
   It was mentioned in one of your responses about purchasing (addressed later) that if the treasury had to:

“SELL 1M worth of UNI tokens. This means that the token itself will lose value - the entire treasury will lose value as a direct result of the action. Despite the treasury being large, the liquidity is not equal. 1-5M purchases can have more price impact than you think.”

This highlights a need for all treasuries. What would be sold if funds were needed quickly? If Uniswap had an issue and needed to sell treasury funds, its likely UNI is already down. A further large sale from the treasury could potentially have a large and likely negative impact.

Think of BED as your UNI proxy token that can be the first thing sold when needed. And feel free to sell when needed! It won’t hurt our feelings, or the price. BED is new and as such currently has limited liquidity, however, like DPI, it can be broken down to its base components which have deep liquidity and can be sold with minimal slippage.

Lastly, it was brought up if Uniswap would be better off “Run its own VC team using the funds from the treasury and participate in seed rounds of other upcoming protocols”
The DPI component allows you to participate in 17 protocols. Some “established” (in crypto time) and some more up and coming, all curated by the DeFi authority Defi Pulse.

Implementation:

The concern about price impact to UNI to sell and buy BED is a common one – even if the benefits make sense, how do you limit token price impact? This is also a benefit of partnering with Index. We have accomplished several large buys and have the experience and connections to assist in this process. If we get this process further down the line. We will make sure to have an implementation process that will cause minimal impact.

In the past we have done Bonded Curves (requires Chainlink), used our market-making partners, direct swaps, paired with outside investors, or have done smaller systematic buys.

What I hope the outcome of this dialog is to determine if diversification is wise, and if so, how much would be meaningful to your community?

From there, we will work together to find the best way to implement. We would only go ahead once we have a solution to your wanted amount that would have minimal impact on UNI.

Lets continue to conversation, please let us know how we can help!

[jonsnow]

First of all, no need to diversify, because ultimately UNI in treasury should go to the community. The Treasury is for holder diversification for governance purposes not act as an financial resource.

[angyts]

Treasury Diversification can provide more resilience to the protocol. Not that we should pursue diversification mindlessly.

But if we thought about the history of the ethereum foundation. If they diversified their portfolio at the start, (instead of only holding ETH and running out of ETH), they might have been able to achieve their goals earlier.

In any case, indeed the treasury is for the purpose of governance, but not only that. We have shown that the Uni grants can be a force to be reckoned with.

[claytonroche-UMA]

Hello - Clayton from UMA. I played a role in UMA’s choice to invest in the BED index. I saw it not only as a way to diversify the treasury, but also to build a stronger relationship with BanklessDAO and signal to the wider space that we support their initiatives.

Ultimately, at this request size of 1-5M, this is not so much as to spend a long time debating because it’s a trivial amount dollar speaking. I think it would be a good test amount before going in for $100M – And do a good job at solidifying the relationship between Uniswap and BanklessDAO.

[welovecolors]

Showing the support to BanklessDAO is an important move for Uniswap because they are inspiring more participation in DeFi space which in turn, turns into more Uniswap users. Pie gets bigger.

Another stat, according to Forefront…
$BANK is the most widely held social token with over 3,955 holders

If the numbers on the marketing stats are not impressive, you have to consider the quality versus quantity. Bankless people are passionate / highly targeted to groups that are engaged with already in DeFi. Uniswap should keep a strong connection with Bankless.

My additional suggestion would be to add to this a commitment that BanklessDAO in collaboration with Uniswap could come up a solid training program on how to use Uniswap V3.

[jonsnow]

There are more ways to show partnership with bankless than writing a check. If Bankless community has a good specific project that want a grant, they should make a proposal. Asking millions to increase its own index AUM is not a good use of UNI. UNI Treasury is just a temporary place to store unlocked UNI token and it is not to serve as financial resource. The primary goal of treasury is to distribute token not to provide financial support to the community. No need to manage it as a sort of “endowment fund”. Thus, “diversifying” its assets is pointless.

[jonsnow]

If we need a few millions to buy “good relationship”, it is not a meaningful relationship. Not worth it.

[Naught]

After my initial response above; I have thought about models of diversifying. I do like how straight forward this proposal is and achieve’s a simple goal without a making UNI created commitee. Perhaps the proposer could clarify on the implimentation? Would a smart contract be voted and executed that direct’s a swap of the treasury funds on uniswap? My overall position on this proposal is Neutral, but I would be for if enough traction was gained. My main reasoning is:

1. it opens the door to other idea’s of the treasury in building out assets, supporting ETH, and collecting crypto history: such as UNI treasury branching into ETH staking or even blue chip NFT buying.

2. The ask amount is not much compared to the overall treasury holdings and would not impact the UNI market too much. However, it would be great if UNI itself had more utlility to absorb these types of expenditures.

[Deep9]

So everyone thinks diversifying is a good idea. Since this proposal is suggesting BED, and I think having an index is a good idea, I’m for it. If someone else proposes another asset, great we can review that one too.