Add 0,5% redemption fee to DeFi Pulse Index (DPI)

Product Products
1

[ONGOING DRAFT]

Summary :

Add a 0,5% redemption fee to the DeFi Pulse Index (DPI) in order to :

  • Grow the overall Market cap of the DPI Index by incentivizing people to trade DPI on the secondary market instead of redeeming it for the underlying tokens

  • Grow the overall Trading volume on secondary markets of the DPI Index, thus incentivizing large centralized exchanges to list DPI

  • Retain initial yield farmers by adding even more value to the $INDEX token

  • Fund further developments initiated by the IndexCoop

Abstract :

IndexCoop is willing to grow the DeFi Pulse Index (DPI) to 1% of the underlying DeFi tokens. The current yield farming program helped us bootstrapping early liquidity in the protocol, but we now have to set up sustainable mechanisms that will last without any artificial incentives, and support the growth of our community.

Adding a 0,5% redemption fee is a great way to prevent people from redeeming their tokens, avoiding a reduction of the DeFi Pulse Index (DPI) overall market cap. It is also a way to increase liquidity and volume on the secondary market, thus incentivizing large exchanges to list the DeFi Pulse Index (DPI). It can be considered fair (equal to some other yield related protocols) and is close or equal to what end users are willing to pay in trading fees & slippage, when trading on decentralized secondary markets like Uniswap (0,3% + slippage).

By implementing the 0,5% redemption fee during the initial 60 days yield farming phase, we latently fund our treasury for further developments (0,5% * 13 000 000$ = 65 000$) and avoid a later implementation that could harm our ecosystem once we’ve reached a larger audience.

Finally, by slowly holding more and more DPIs thanks to the redeeming fee, the IndexCoop mechanically aligns its incentives with its customers’ incentives, adding even more trust in an already successful relationship.

Motivation :

There are several other reasons why setting up a redemption fee will benefit the IndexCoop :

  • Add a sustainable funding mechanism to grow our ecosystem, launch new marketing activities and start new developments,

  • Grow the overall Market cap and trading volume of the DeFi Pulse Index (DPI) by incentivizing end users to sell their DPIs on the secondary market instead of redeeming them for the underlying tokens,

  • Retain investors initially attracted by the Yield farming craze, finding even more value in holding $INDEX.

Specification :

When a user redeems his DeFi Pulse Index (DPI) for the underlying tokens, the system automatically takes a cut of 0,5% in native DPIs and send it to the IndexCoop treasury vault.
Proposal from @DarkForestCapital : split the 0,5% in 2 parts so that some of the DPI stays in the pool to increase holdings of other DPI holders, thus incentivizing long term investors.

For :

  • Grow the overall Market cap of the DPI Index by incentivizing people to trade DPI on the secondary market instead of redeeming it for the underlying tokens

  • Grow the overall Trading volume on secondary markets of the DPI Index, thus incentivizing large centralized exchanges to list DPI

  • Retain initial yield farmers by adding even more value to the $INDEX token

  • Fund further developments initiated by the IndexCoop

  • Align IndexCoop objectives with our customers’ objectives (holding DPIs)

  • Easy to implement

  • Doesn’t penalize DPI holders compared to Uniswap trading fee + slippage

Against :

  • Adds another extra cost (only applies if the user definitely wants to redeem the underlying tokens directly)

  • Gas cost might be too high for small amount of DPIs redeemed (could be mitigated if the gas cost is denominated in the DPI itself. Thanks @setoshi)

  • Might introduce asymmetrical mispricing potential, meaning that DPI will more often be underpriced (thanks @fla)

Poll :

Poll
  • Add 0,5% redeeming fee to DPI
  • Do not add any redeeming fee to DPI

0 voters

5 Likes
2

What do you think about doubling down on the incentive to hold, by splitting the 0.5% between treasury and remaining holders? After all the index is designed for long term and we want to reward those who hold for longer. If you know that people selling out will compound your returns it’s another nudge to stay invested.

Ironically the more people are holding the less is raised by a redeeming fee :joy: but it should be made up for buy the streaming fee on balance.

6 Likes
3

Great idea ! Definitely something to think about. Are you thinking about a 50/50 split between DPI holders and The treasury ? It could be a way to replace the current yield farming program in a more sustainable way :ok_hand:

4

This is a really good idea for all the positive reasons you describe. The dev team can discuss how this plays in the roadmap

In terms of mitigating the “against”, gas cost for redeeming could only be a little higher if the fee taken is denominated in the DPI itself. So the gas cost would only be 40-60k more.

6 Likes
5

Could start with 50/50, more important than the split would be to get it in before the end of liquidity mining on DPI!

Once it goes live DFP team should be able to monitor the stats and recommend adjustments to the % and split if necessary, also if the fee is deemed too high the community voice that pretty quickly

1 Like
6

A side effect from this is that arbitrage in one direction will become more expensive.

Purchasing DPI to sell the underlying tokens, in order to push the price up, becomes 0.5% more expensive, resulting in potential persistent underpricing of DPI. To the downside the 0.5% redeem fee prevents arbitrage. For upside arbitrage will function as before as there is no fee for minting DPI.

It introduces asymmetrical mispricing potential, meaning that DPI will more often be underpriced. It’s not that bad though I guess as there will always be gas costs that already affect the arbitrage viability. But arbitrage on the downside will always not be profitable unless the price falls 0.5% more.

6 Likes
7

Exactly. And underpricing allows longer-term holders to essentially buy in at a slight discount before arbitrageurs are able to get at it.

2 Likes
8

Thanks @fla, @DarkForestCapital and @setoshi for your feedbacks ! I’m updating the proposal accordingly.

9

Added a poll to the proposal !

10

Impact on arbitration, was my first thought when I saw the proposal earlier. We make it more expensive for arbitrage, which means when the market drops, the secondary market (uniswap) will drop slightly more before the arbitrage bots kick in.

I do like the proposal, and I think yearn do something similar for some vaults.

I would suggest that we make sure that the change is announced and communicated well in advance of implementation (7 days ?). I don’t want us getting a reputation for surprising our customers / community with new fees.

Saying that I would want to implement it fairly quickly so we capture the DPI withdraws by the Liquidity miners before mid Dec. If 90% of PDI is farming, and the vast majority is only here for the rewards, AUV may drop to $2 M (???).

My final preference would be to funnel all of it into the INDEX treasury. But that just me wanting to build reserves and cash flow. Incentivising DPI holders should happen (I’m one :smiley: ), but lets build some reserves first.

11

This is brilliant! 0.5% is a relatively trivial amount but enough to make people think twice before redeeming and this small amount over time will grow the coffers.

Does adding this functionality require deploying new contracts? I think this would be a good option to have on all future indices if we want to add it to them.

12

Thanks to both of you @Kiba and @overanalyser ! We could split the implementation in 2 phases and start by granting all the collected fees to the treasury vault to make it happen fast, then we could think about a split between the treasury and the other DPI holders (or maybe the liquidity stakers on Uniswap, like with the current liquidity mining program).

13

Interesting idea although it might make the DPI price 0.5% different from underlying assets permanently - but not a huge deal since as opposed to stablecoins, those prices move all the time.
As an $INDEX holder, I would also be interested if holding/staking/using some $INDEX would give me discount on those 0.5%. That would allow $INDEX holders to perform arbitrage on their end.

1 Like
14

Thanks @neozaru. Good idea ! We should discuss the feasibility with the set team @setoshi. How much $INDEX would we have to stake ?

I have a second thought on the permanent mispricing : currently, a DPI holder has two options : sell DPI on Uniswap (0,3% fee + slippage) or redeem the DPI for free. As a consequence, DPI is already mispriced the other way around, and implementing a 0,5% redeeming fee creates a kind of equilibrium between Uniswap and Redeeming DPI for native tokens.

2 Likes
15

Overall +1. It would decrease the velocity of the token potentially, although it might be too early to assess with data what % of token holders would redeem their DPIs. It will be overtime that we’ll be able to know the actual impact of this measure.

Regarding the 0.5% split, I’d suggest to consider using the 0.25% to buyback INDEX tokens, there’s the usual argument in favour of burning the tokens (thus creating inflationary pressure to INDEX price and higher value for token holders).

1 Like
16

A Buy-back program is def attractive as an $INDEX holder. I’m wondering if it’s compatible with a governance mechanism. We could simply send the DPIs to $INDEX stakers. I really like staking payouts denominated in a different currency than the one used to stake.

1 Like
17

Implementing staking, specifically in the context of offering discounts, is a cool idea and doable - though would be a non-trivial amount of implementation. The question is more around the development priorities and at what point in the timeline this makes sense to prioritize.

2 Likes
18

Ok ! I guess we should focus first on funding the War Chest, which may be easier to implement on the short term, and which is definitely the priority here. Once we’re feeling confident about the amount kept in the vault, staking might be implemented, or we can set up some workarounds like airdrops to $INDEX holders depending on their respective holdings.

1 Like
19

No real world ETF has a 0.5% exit fee (0.95%/year is insane as well). There is a reason for that. It’s called competition.

Index should be targeting a bigger market not milking a tiny market and asking for competition.

5 Likes
20

While the thought of capturing an easy $50k is very tempting, Such a fee will effectively put a brake on the liquidity of DPI.

Yes we consider long term buy and holds to be a key ideal client for use, but other financial actors (shorters / arbitrators) will drive substantial volumes (which encourages long term LP’s) and so accelerate the growth of AUV.

I need to do some more research / thinking to get my head around the subject of how all the participants play a role.

2 Likes