KIP: A BasketDAO of Value

This proposal is inspired by “A Tale of Three Defi Indices” written by Erina Azmi, read that for a holistic view on the index space.

The Intrinsic value of Indices

Passive investing vehicles have held the lion’s share of invested capital since the launch of the S&P 500 roughly 60 years ago. My thesis for how the crypto space will change over the future is that instead of revolutionizing finance as we know it, it will instead become an echo of how traditional markets behave.

Currently, crypto markets are dominated by active investors looking to 100x their “Investments” overnight by buying coins that have little merit beyond appealing to a fool’s unit bias. In contrast, traditional markets have seen ETF’s outperform active strategies such as mutual funds or hedge funds.

In 2020, the global ETF had $7.74 trillion in Assets Under Management (AUM), and its volume is one-third of global equity trading volume.2,3,4 As of April 26th, Defi indices to approximately $370 million TVL, it is reasonable to imagine this figure could reach 1 trillion dollars in the coming years.
The reasoning behind this assumption lies in a combination of my initial thesis for where the crypto space is going and the notion that at different phases of a bull run different coins will outperform. This can be showcased with the following figure.

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Legacy crypto investors are usually responsible for bull runs due to their constant deployment of capital into the market allowing for BTC to pump due to its inelastic supply and demand being reflexive. This in turn is responsible for the leptokurtic nature of BTC. These swings then lead to media attention and retail cash inflows, allowing for higher highs to be achieved.

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Fairweather traders are usually drawn into space after seeing the outsized returns BTC and ETH provided over such a short period. These retail investors are usually misinformed and easily influenced by anyone pretending to have “made it” investing. You can easily identify when the market is being driven by these individuals when coins that have been underperforming during the bull run and are also considered vapourware by legacy investors start to outperform the BTC and ETH. This can be seen in each bull run when DOGE, XRP, or TRX have huge 60% daily swings or when SAFEMOON has become the best performing piece of vapourware since ADA.

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The last breed of traders and in my opinion the most relevant would be the “savvy investor”. These individuals recognize the fact that an active strategy historically underperforms a passive one for most investors and in turn choose annually compounding 8% returns from the S&P over market speculation. These investors typically are reluctant to invest in crypto both due to their lack of understanding of the asset class and due to the vacancy of any accessible passive investing vehicles into the market that satisfies their risk tolerances.

Positioning in Indices

The main takeaway from this is that at different phases of the bull run different types of investors will deploy capital in what they view as a savvy investment. It’s hard to determine what the next hot narrative of this bull run will be, ETH killers, L2 scaling, Defi, Meme coins, etc. But one thing is can be said with certainty, the breed of investors interested in passive investing has yet to deploy any of their capital into the market, this can be seen by both the relatively low TVL of index protocols compared to their Defi projects and the low market cap of their governance tokens for these protocols. Given this information, the question goes from trying to predict the next narrative to patiently waiting for the passive investors to gain an interest in crypto and capitalizing on this by front running them into these protocols.

Acquiring BasketDAO

In my opinion, the technology built for BasketDAO has the potential to play an integral role when passive investors allocate capital into the crypto market. This idea is based on several factors, its UI of simple and easy to approach, BDI has a 0% management fee and accrues yield on its constituents, and finally, the Bask governance token both entitles stakers to a % of the yield earned from its indices and allows control over which coins go into each basket this power will then be transferred to Rook.

User Experience

What I consider to be an overlooked aspect of BasketDao is its simple UI. There has been a countless example where a product gains market shares not because it offers a superior product or lower costs but instead it has a UI has been approachable and easy to understand. This can be seen with Apple which consistently offers inferior hardware at an inflated price, but it still holds the largest market share in cellphones because of its software and how intuitive it is to use. A crypto native example of this could be the rise and fall of Ether Delta. In the infancy of Defi, one of the earliest inceptions of token swaps was Etherdelta, an orderbook based AMM. These types of Dex’s offered arguably more information for the trader with a graph displaying historical token prices but then when Hayden Adams forked Bancor to create Uniswap the rest was history; the gamification of investing is crucial in attracting new capital by allowing investors to not feel overwhelmed when using Defi.

BasketDao Index

BDI has undergone 2 rebalances since its inception from its parent project DPI. The ethos of these rebalances where to orphan BDI from the undiversified allocations made in DPI due to the centralized nature of the governing body that determines the constituents of DPI.

The purpose of indices is to provide attractive returns concerning the level of risk an investor is willing to bear. If you calculate the Sortino ratio of DPI since its inception to that of a Montecarlo optimized portfolio based on the efficient frontier consisting of only ETH and BTC you find that it is detrimental to hold any position in DPI both concerning the returns since its inception alongside the higher level of risk investors take on. It is important to note that there are only 8 months of data to support this conclusion, nevertheless, it is better to know the data and acknowledge its limitation the to outright ignore it. Things become much clearer when you compare BDI to DPI, DPI charges a .95% management fee annually for its rebalancing which takes away from the potential returns made by the index, conversely what makes BDI such an attractive product over DPI is the fact that its constituents are staked Defi lending platforms to accrue yield which in turn eliminates the purpose of a management fee but also redistributes 70% of the yield to the index indicating that BDI should always outperform DPI. The other 30% of this yield then goes to BASK stakers, what makes this proposition so attractive is that fact that if indexes on defi gain only a fraction of the market share that indices have in the traditional markets BASK holders would theoretically be entitled to 30% of the yield for a protocol with a conservative TVL of over 100 billion and with only 100 000 BASK tokens in existence its safe to assume the wealth transfer to BASK holders will be akin to buying BTC at under 1$.

Bask Money Index

BMI is an index of interest-bearing USD stable coin exposure, initially made up of yVault tokens from Yearn. The goal of this product is to serve as a low-risk savings account to put your stable coins into to secure reliable yield when you don’t want to have market exposure while also minimizing counterparty risk through composing BMI of different stable coins and depositing in varying vaults. The macro value of this product is its inception under the same project. This allows for a seamless transition from market exposure into stable coins depending on market sentiment.

BasketDAO today

As of October 2021, the bask governance token has been trading at a low of about 10$ per token totaling a market cap of about 600 000$ based on circulating supply. This project has an all-star cast of advisors consisting of 0xMaki, Darren Lau, and Calvin Chu that would then become formal advisors to Keeper DAO upon the merge of the projects. The Basket DAO team consists of three engineers who have shown competency in building complex products. This could serve as expanding KeeperDAO’s talent pool beyond just MEV and adding manpower in building projects proposed through governance. Currently, BDI has a market cap of 7 million, expanding the governance powers of rook through the horizontal expansion of the KD product suit will help cement its role as a big player in the Defi space. Finally, this acquisition will also bring a breath of partnership to KD due to the existing partnerships form by the BasketDAO devs. These defi partnerships can then be leveraged to strengthen the efficacy of the coordination game.

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Specifications

I propose that we approach the BasketDAO team with an offer to onboard them as engineers to integrate the Basket Dao tech onto the Keeper Dao platform. All existing Bask will then become worthless as Rook is used to governing the rebalance and an opportunity for Bask holders will be presented to burn their bask for rook at a ratio of 20:1 with a cap for 2 Rook per wallet. Conditionally, wallets that are not linked with institutional investment firms will not be eligible for this conversion.

Limitations

If the BasketDAO devs are against this proposal, then this idea is dead in the water. If either 0xMaki or Calvin Chu don’t want to acknowledge their roles as supervisors post-acquisition, there is little we can do. Darren Lau has confirmed he would. If the buyout from KD is too low and the developers want more funds, then the risk/reward of this venture loses its appeal.

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