A simple solution for getting your friends and family into Crypto

This is an educational guide to Index Coop and Bankless crypto index product BED.

The purpose of index products is to create an easy, hands off and efficient way to invest in a basket of diversified investments. Index Coop is on a mission to be the largest provider of structured decentralized finance products and has partnered with Bankless, a leading educational resource on open finance, to launch BED — an index product that gives new crypto users a way to invest in a “bankless” revolution thesis.

The bankless thesis focuses on crypto as providing a viable alternative to today’s analog banks and banking infrastructure. This new option of self-sovereign money and banking, is supported by a world where private keys act as money and code makes that money programmable.

What is the BED Index?

BED stands for Bitcoin, Ethereum, and DeFi. These are considered the essential components of the open finance or bankless revolution. It is based on the thesis that each of these holdings capture the upside of three investment crypto themes, in equal weight:

  • Bitcoin — the “digital gold” or store of value
  • Ethereum — programmable money
  • DeFi — decentralized finance

What Problem does BED Solve?

BED aims to be a product for crypto beginners to onboard into crypto exposure without needing to execute multiple transactions on multiple platforms, incur high expenses from rising “gas” costs (like a processing fee on the network), or actively monitor the market to rebalance allocations.

Why Would You Want to Buy BED?

If you are looking for a simple, one-stop-shop for exposure to a bet on assets that allow for independent banking. Some of the benefits:

Bankless 101

Provides crypto exposure for beginners through easy access to the biggest themes in the bankless thesis (Bitcoin, Ethereum and decentralized finance).

Passive

Allocations are managed and monitored monthly to maintain equal weighting through rebalancing to prevent concentration.

Cost-Efficient

Transactions are bundles or socialized to distribute the gas cost and make the process of rebalancing more cost efficient.

Why Wouldn’t You Want to Buy BED?

BED is a simple strategy– the initial weighting, rebalancing cadence, necessary characteristics for inclusion, exclusion, addition, or deletion, etc. are set by the partner and in this case it is a basic equal weighting.

Someone who is already holding many of these assets already or has the sophistication to understand how to do the rebalance and active attention to the markets to know when to do so, may not be interested in purchasing BED.

One of the challenges for a beginner audience is that investing in BED requires you download a wallet like Metamask or Rainbow and then buy the BED token on Uniswap or Rainbow’s Swap function. It isn’t currently available on more common centralized exchanges like Coinbase, Binance, or Gemini. This experience should improve with lower fee onboarding utilizing L2 networks in the future.

Who Created and Currently Manages BED?

BED is a collaboration between Bankless (the originators who have now gifted the methodology to Bankless DAO) and Index Coop, and created using Set Protocol infrastructure.

Bankless is a content studio founded by Ryan Sean Adams and David Hoffman. It is one of the leading sources of DeFi education, awareness and insights. Bankless generates content via multiple channels (podcasts, newsletter, twitter, and YouTube channel) focused on education on how to live a life without banks.

Index Coop is a decentralized autonomous organization (DAO) that exists to create and maintain crypto-native structured products built on DeFi asset management primitives. Index partners with other projects (like Bankless) to create structured tokens or strategy tokens that follow a methodology that is proposed and led by the partner and voted on by the Index Coop members. As a DAO, Index Coop is governed by its community members. Members use the $INDEX token to propose and vote on new products, the allocation of the treasury, and the future direction of the DAO. Index Coop has launched a variety of structured DeFi products to-date, including: the DeFi Pulse Index, the Metaverse Index, a 2x leveraged products suite (ETH and BTC), and a Data Economy Index. Index Coop products are built using Set Protocol’s infrastructure.

Set Protocol is an Ethereum-native DeFi primitive that leverages existing Open Finance protocols to facilitate the bundling of crypto-assets into fully collateralized baskets, which are represented as ERC20 tokens on the Ethereum blockchain. These Set tokens act as structured products that represent the methodologists’ strategy.

What are the Fees and how are they distributed?

BED charges a 0.25% fee which is split 50–50 between Bankless and Index Coop.

Note that Index Coop also charges a 0.95% fee on their DPI product which has a 33% allocation in BED. As a result, the total effective fee collected for BED is 0.57% (0.12% Bankless, 0.35% Index Coop, 0.10% DFP).

Fees are charged for the management of the index products and split with partners who are incentivized to help grow and promote the product with their audience.

How does the BED Index work?

  • Scope: The index includes the top three investable assets with real usage and large capitalizations around the theme of blockchain: BTC, ETH, DeFi (DPI).
  • Weighting: Neutral construction, equal weight 33% wBTC*, 33% wETH*, 33% DPI (see DPI rebalance history here)
  • Rebalancing: First Friday of every month

*Note: wBTC and wETH means “wrapped” Bitcoin and Ethereum. When a token is wrapped into a Set Token using Set Protocol the price of that wrapped token can deviate from what the actual underlying value of the real token is since it is traded on a secondary market. As a result the market price can deviate from the net asset value (the actual value if you were to unwrap and redeem that token). Index Coop uses a third-party arbitrage bot network to try and manage this spread and keep the price as close to the net asset value as possible.

Rationale for Component Inclusion

  • $ETH (~$200b) is economic bandwidth and the reserve asset of DeFi, so a heavy focus on ETH makes sense for any initial investment in decentralized finance. This is an investment in ETH as a store-of-value, commodity, and capital asset.
  • $BTC (~$1T) is the largest cap crypto money and currently a reserve asset of crypto banks. Some exposure is essential, but too much means an underweight position in DeFi. Having a portion in BTC with monthly rebalances captures some of the benefit of the volatility vs ETH.
  • $DPI (Components = ~$30b) DeFi is growing and a carefully curated set of DeFi money protocols with massive potential, and use of monthly rebalances captures the volatility.

You can read the full details of the methodology, market requirements, technical requirements, and safety requirements in this article here.

What are the risks?

Here are some risks to consider. This is not an exhaustive list.

Market Risk

As with all investments, BED is subject to market risk. BED will fluctuate in price as the underlying tokens are bought and sold. This means it is possible to lose your initial investment.

Regulatory Risk

Crypto Index Tokens are described as structured tokens or strategy tokens. There is no strong legal classification for most of these tokens and there is no confirmation from the SEC that it is not a security. For example, a regulation deeming BED a security in a country like the United States could result in potential price and/or liquidity impacts.

Technical Risk

BED has smart contract risk, common for any token built on the Ethereum network. Although Set Protocol has been audited by OpenZeppelin and ABDK consulting, the code is open source so there is potential for hacks, exploits or bugs in the code. The fund vault is also managed by a multisig, meaning a number of users composed of Index Coop representatives must approve transactions. Bankless (the methodologists for BED) has full autonomy over the methodology and can change the determination and rebalancing cadence at will. They do not have the ability to execute the rebalance given the multisig structure mentioned above — which gives some protection in case of bad actors.

Although Index follows a set of transparent rules to assess tokens for inclusion and removal the documentation and automation of processes are still underway and being built. For example, a documented process of how apps with hacks or exploits are handled (criteria for removal), a public space to store and verify audit reviews, automated rebalancing vs. manual multisig process etc.

How do you buy BED?

The index is represented by a fully collateralized ERC20 token and is available for purchase on Uniswap v3, Index Coop, and TokenSets. For more information check out the article on “How to Buy Index Coop Products”

Disclaimer:

This is not financial advice. Bankless DAO is not a registered investment, legal or tax advisor or broker/dealer All Investment financial opinions expressed by Bankless DAO are from the personal research and experience of the owner of the DAO and are intended as educational material.