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

Thanks, that is good to know.

In some ways that helps us differentiate between Yearn and ourselves:

  • Yearn a actively managed, high fee, long term yield capture on USD / BTC / ETH
  • INDEXcoop could decide to focus low cost exposure to underlying assets.

While one of our customers is long term small retail, short term trading (with associated arbitrage / minting and splitting DPI) could actually become our unique selling point and grow AUV and build us into DeFi infrastructure.

If arb is such a big deal can’t we just set up a Coop keeper that does the arb ourselves and puts the profits into the treasury? With the market being so small we could setup a secondary DPI/ETH staking pool that farms arb instead of INDEX. That’s definitely a more time consuming, long-term answer to some of the issues mentioned but I don’t see a downside besides the commitment.

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Nice. i had never thought of that.

Running our own arb bot basically removes the redemption fee for our own arb. So our arb bot can work on thiner margins so we capture more value.

I think the fee penalises traders, who may be important makers of the ecosystem.

But certainly something to think about

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True it still pushes traders away. Instead of running our own arb bot would it make sense to make an open pool and “sponsor” the public arb bot with a % of redemption fees? Traders get to participate and have a higher profit margin than if they arb on their own and it still dissuades anyone from exiting a DPI position. Since the redemption fee is in $DPI, the coop itself could add funds to the pool so we are earning arb and getting back some of the sponsorship money. Or we could add funds and defer rewards to other pool participants.

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I think that’s great, those fees can help to reduce fees from AUV (up to 0% maybe).

That would be a killer product for long term holders. I would go as far as 1% redeeming fee.

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Love this idea! In the traditional finance world, trading firms like Jane Street make a killing doing creation/redemption arbs.

This type of incentive could be really good for providing a service and providing long-term sustainability for the Index Coop

My main concern is how do we prevent front-running so we don’t get rekt on every arb transaction. We’ll definitely get beat by bots on the Uniswap leg and they may or may not beat us on the index redemption/minting leg too depending on how they analyze the tx. Best case scenario is we have more capital and there is still an arb opportunity left after all of that but it will definitely eat into profitability.

Also would we want to whitelist addresses to avoid the 0.5% fee? If we can whitelist this arb pool then it makes calculating additional rewards to send them way easier.

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Another idea is that we could do a 0.1% discount to issuing/minting the DPI to incentivize people to come in. Essentially the Index Coop pays for it and makes it back when redemption happens.

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@setoshi I was actually thinking about the same thing: incentivizing people who mint DPI by allowing them to claim some $INDEX tokens. But would it be some arbitrary number of $INDEX (let’s say 1 per DPI minted, and up to X $INDEX total) or do we want to set up an oracle to calculate the discount (seems to be overkill) ? I wanted to discuss this in another proposal but we can include it into this one if people like the idea.

Yes, that’s the idea, so up to a 0.5-1% tracking error, only Index Coop can economically do the arb and take the fees.

There are pro and cons.

@setoshi Would these minting discounts and redemption fees be part of the IndexManagerModule your team proposed?

No, it would be an upgraded IssuanceModule. Right now, it uses the “BasicIssuanceModule” and there would be a modified one that can charge fees

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One thing i thought of: One risk of the redeem fee is that there is a higher barrier to entry for market makers doing arbitrages on the yields (if/when it is listed on lending protocols). Thus, it may be important to be careful about what the percentage fee is.

It could also be interesting to shift some of the redeem fee into minting. E.g. 0.1% mint fee, 0.2% redeem fee. This still incentivizes premium to be lower for long term holders to get in secondary markets, while capturing mint volume which is 10x bigger than redeem volume. Most users are only buying off Uniswap (and paying a 0.3% swap fee) vs minting the components directly - so we’re only taxing the arb bots that mint / redeem.

So far, there’s been ~264k DPI that has been mint / redeemed. More than 230k of that is mint volume. Assuming a 0.1% mint fee, that’s 230 DPI or $18k fees to the Coop at current prices already.

For comparison, WBTC mint / redeem fees are 0.2% each way. Wrapped, a new initiative charges 0.25% on mint, 0.5% on redeem (an arm and a leg…). Tether charges 0.1% on mint and redeem, and is the most widely used stablecoin.

Risk is obviously might reduce liquidity, but as long as we make DPI useful, lending, options, potentially yDPI vault etc, we can keep this risk low

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Let’s pause a little bit this proposal as we’re discussing more important things regarding the index itself. We’ll discuss this in few weeks/months once we’ve reached our 1% goal :rocket:

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Worth reviving this discussion based on some observations on mint/redeem transactions the last 2 weeks. There is strong evidence for volume based fees to be the primary value accrual mechanism which would allow the Coop to significantly cut DPI streaming fees for customers.

Basically it’ll shift value accrual to charging arbitrageurs a tax and charging end customers a lower streaming fee vs charging end customers a high streaming fee. To end customers of DPI, they will see a lower streaming fee, and continue to trade on Uniswap (which collects a 0.3% LP fee) with minimal impact.

Based on the volume this weekend, at a 10 bps mint and 10 bps redeem fee, the Coop would have generated $2k in fees (25k DPI * $80 DPI price * 0.1%) in 1 day. Assuming the same daily volume, that’s $60k in monthly fees, compared to the $10k in estimated streaming fees per month. Of course, volume numbers could vary widely and the fees could be toggled.

This is an example of what fees INDEX would pulled in the last 30 days with various mint / redeem fee parameters:

Additionally, arb bots such as this one capture ~3 ETH per ~$200k or around 5-15 bps of the transaction amount. It even makes sense for INDEX to run an arb bot at 0 spread with the mint/redeem fee, which means better prices for customers. And if the bot uses KeeperDAO liquidity pools proposed in this post, the Coop can mine ROOK tokens as well.

What it could look like:

  1. Cut streaming fees to less than 50 bps
  2. Introduce a 0.1% mint and 0.1% redeem fee (parameters to be discussed)
  3. Run an INDEX arb bot using KeeperDAO liquidity at 0 spread

Curious to hear more thoughts here.

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I’m very pro an issuance/redemption fee, as it also provides the following benefits:

  • Volume-based monetization: Similar to WBTC and other asset issuance protocols (which charge 0.2%+ on mint/redeems), this primarily affects market makers (which typically mints/redeems when there is a spread). And agreed w/ @richard that the fee generation potential could be much larger than streaming fees. The previous concern is that entry/exit fees could dissuade the carry trade, but that is less of a worry if we are doing intrinsic productivity.
  • Increasing user retention: This improves user retention if net fees are lower and only benefits end users (as most do not mint/redeem themselves).

That said, I think this would be a huge boon to sustainability that doesn’t hurt end users.

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+1 I think this makes a lot of sense

Whereas before we were deciding subjectively on the best course of action, we now have some data to back up the decision and it looks good.

This type of fee seems to work on Set products and I was in support when it was first proposed, especially if part of the exit fee is recycled to those still holding. However, it’s worth bearing in mind that the liquidity mining adds a caveat as token holder behaviour may change after that period ends. For example I imagine the people left holding DPI afterward will be stickier, and so velocity of DPI will reduce making the mint/redeem fee less valuable.

I’d personally feel more comfortable waiting to see what the data shows after a month with no incentives to hold DPI besides integrations with Maker/Yearn/AAVE plus any work we complete on the intrinsic side. Let the token stand on it’s own and see what works best. Plus we wouldn’t be introducing this before the end of LM as it would be pretty unfair on LP’s and isn’t aligned with Index Coop values so can afford to wait a little.

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Just came upon this article and wanted to drop it here - as it provides solid background on how entry/exit fees can affect liquidity / pricing for end users.

https://seekingalpha.com/article/4251694-how-hidden-etf-transaction-costs-make-billions-for-market-makers

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