Crypto Gloss

Index Coop

Index Coop applies the ETF model to DeFi: just as Vanguard creates the S&P 500 index fund so investors can own a diversified slice of US equities without picking individual stocks, Index Coop creates on-chain index products so DeFi users can gain diversified exposure to DeFi protocols, Ethereum staking, or other themes without managing multiple individual positions. The organization is structured as a DAO — INDEX token holders govern which indices to create, how to weight them, and how to rebalance them — with the actual product engineering running on Set Protocol’s infrastructure for tokenized portfolios. What makes Index Coop distinctive is the synthesis of investment product design (choosing meaningful indices with defensible construction methodologies) with DeFi native implementation (every product is a standard ERC-20 token that can be traded, held, used as collateral, or integrated into other DeFi protocols). The DeFi Pulse Index (DPI) became the benchmark DeFi index — the on-chain analogue of what QQQ is to tech stocks or XLF is to financials — and remains the most widely cited gauge of the DeFi sector’s health.

Key Facts

  • Founded: 2020 by DeFi Pulse and Set Protocol
  • Governance token: INDEX
  • Infrastructure: Set Protocol (tokenized portfolio smart contracts)
  • Products: DPI (DeFi Pulse Index), dsETH (Diversified Staked ETH), cdETH, MVI (Metaverse Index), BED (Bankless ETH/DeFi/BTC Index), icETH (Interest Compounding ETH), GMI (Bankless DeFi Innovation Index)
  • Total AUM: Peak ~$500M (2021); reduced significantly in bear market
  • Revenue model: Streaming management fee (0.95% annually on most products) + entry/exit fees on structured leverage products

Products

The protocol’s products are described below.

DPI: DeFi Pulse Index

The flagship product. DPI is a cap-weighted index of leading Ethereum DeFi tokens:

Construction methodology:

  • Eligible assets: ERC-20 tokens for projects with core protocol smart contracts on Ethereum mainnet; must be listed on DeFi Pulse; minimum liquidity and market cap thresholds
  • Weighting: Square root of market cap (reduces concentration vs. pure market cap weighting — prevents one or two dominant tokens from comprising 80%+ of the index)
  • Rebalancing: Monthly — tokens added or removed based on updated eligibility; weights adjusted based on new market caps

Historical top holdings (at various times, weightings changed monthly):

  • AAVE, COMP, UNI, MKR, SNX, CRV, YFI, SUSHI, BAL, LRC

What DPI expresses: Owning DPI is a bet on the DeFi sector as a whole, not any individual protocol — similar to how owning QQQ expresses a bet on technology without betting on Apple vs. Microsoft specifically.

Use in DeFi:

  • DPI accepted as collateral in MakerDAO (mint DAI against DPI)
  • DPI tradeable on Uniswap and major DEXs
  • DPI used as benchmark in DeFi performance analyses

dsETH: Diversified Staked ETH Index

The LST diversification product. Addresses Ethereum’s liquid staking concentration risk (Lido’s 30%+ dominance):

Basket: Equal-weighted basket of stETH, rETH, cbETH, and other approved LSTs

Yield: Earns the average staking yield across all included LSTs

Rebalancing: Quarterly — adds newly eligible LSTs as the market develops

Positioning: For ETH stakers who want validator diversification but not the complexity of managing multiple LST positions. Similar concept to Reserve Protocol’s ETH+.

icETH: Interest Compounding ETH

The leverage product. icETH is a structured token representing ETH staking yield with leverage:

  • Uses stETH (Lido liquid staking) as collateral → borrows ETH from Aave → stakes borrowed ETH → receives more stETH → repeat
  • Net effect: ~2.5x leveraged exposure to ETH staking yield spread (stETH yield minus Aave borrow rate)
  • Risk: If Aave borrow rate > stETH yield (has happened during rate spikes), the strategy earns negative net yield

MVI: Metaverse Index

Cap-weighted index of metaverse-adjacent tokens: MANA (Decentraland), SAND (The Sandbox), AXS (Axie Infinity), ENJ, and similar. Represents thematic exposure to virtual worlds during the metaverse investment thesis (2021–2022).

Set Protocol: The Infrastructure Layer

Index Coop products are built on Set Protocol, which provides:

TokenSets: Smart contracts that hold a basket of ERC-20 tokens and issue a single “Set” token representing proportional ownership of the basket

Rebalancing: Set Protocol’s rebalancing mechanism allows basket composition to change without requiring each individual holder to rebalance manually — the protocol rebalances at the contract level

Composability: Each TokenSet is itself a standard ERC-20, fully composable with other DeFi protocols (can be added to AMM pools, used as collateral, wrapped in other structures)

Non-custodial: Users hold their own Set tokens; Set Protocol smart contracts hold the underlying assets; no third-party custodian needed

Index Coop DAO Structure

The following sections cover this in detail.

Governance

INDEX token holders govern:

  • Which new index products to create
  • Construction methodology for existing indices (what’s eligible, how to weight)
  • Fee structures (streaming management fee rates, entry/exit fees)
  • Treasury management (Index Coop holds significant INDEX token treasury)

Workstreams

Index Coop operates via structured “pods” or workstreams:

  • Analytics: Builds and maintains data dashboards for index performance
  • Product Engineering: Works with Set Protocol on product development
  • Growth: Business development, protocol integrations, exchange listings
  • Finance: Treasury management, contributor compensation

Revenue Distribution

Revenue (streaming fees on AUM) goes to:

  • Index Coop DAO treasury (funding operations and development)
  • Partial distribution discussed in governance for INDEX token holders (not yet fully implemented as of early 2024)

Market Context: DeFi Index Products vs. Traditional Index Investing

The protocol’s products are described below.

The Promise

Traditional index investing (Bogle’s Vanguard model) revolutionized investing by reducing management fees from 1-2% (active management) to 0.03-0.1% (index ETFs) and improving average investor outcomes. Can the same be done for DeFi?

Arguments for DeFi indices:

  • Crypto is volatile — diversification reduces single-protocol blowup risk
  • Most retail investors cannot meaningfully evaluate individual DeFi protocols
  • DPI beat most individual DeFi protocol tokens on a risk-adjusted basis in 2021

The Reality: DeFi Index Challenges

Bear market performance: During 2022, DPI fell ~90% (along with all DeFi tokens). This is not a critique of the index methodology — it’s that DeFi tokens themselves collapsed.

Sector concentration: DeFi remains correlated — when crypto broadly falls, all DeFi falls together, limiting the diversification benefit of DPI vs. individual protocols in bear markets.

Fee structure: 0.95% annual streaming fee is substantial compared to Vanguard’s 0.03%. This is justified by the rebalancing complexity and smart contract overhead, but compresses relative returns vs. holding individual tokens directly.

Oracle/smart contract risk: Holding DPI means trusting Set Protocol smart contracts on top of all the individual underlying protocol risks.

Related Terms

Sources

  1. “DeFi Index Performance: DPI vs. Individual Protocol Token Returns (2021-2023) — A Three-Year Risk-Adjusted Comparison” — Delphi Digital / Messari (2023).
  1. “Set Protocol Smart Contract Architecture: TokenSets, Rebalancing Mechanisms, and Smart Contract Risk Analysis” — Set Protocol / Trail of Bits Audit (2022).
  1. “DAO-Managed Index Products: How Index Coop’s Governance Model Compares to TradFi ETF Management and UCITS Fund Structures” — Blockchain Capital Research (2023).
  1. “icETH Performance Analysis: The Economics of Leveraged ETH Staking and Why It Lost Money During 2022 Rate Spikes” — Delphi Digital (2022).
  1. “DeFi Index Market: Competition Between Index Coop, Alongside Finance, and Protocol-Native Index Products” — Messari Research (2023).