You touch a great point. INDEX should ease the work of arbitrageurs. The mini krash some days ago took hours to be absorbed. Having redeeming fees would make the problem worse as arbitrageurs wouldn’t profit.
The customer want to invest in a token that track the index inside the 0.5% range. That requires arbitrage work.
I got your point. But I also think that we cannot compare what we’re trying to achieve with the traditional ETF world.
In the traditional ETF world, Asset Managers are not aiming at something around 50M Assets Under Vault (AUV), but billions. If we reach our current goal of 1% (which is 50M USD as of today, or 4 times our current under steroids AUV), we’re not even profitable : 0,95% x 0,7 x 50M USD = 332 K of streaming fee. It is not sustainable, and I’m not sure that we want to solely rely on a 10x of underlying tokens to make the protocol profitable.
I don’t think neither that a redeeming fee, that could be considered fair compared with any crypto exchange trading fee or other successfull DeFi projects like YEARN, would be a real issue for arbitragers once they can find some arbs between Uniswap, Binance and Coinbase. And again, let’s take Uniswap as an example : they implemented a 0,3% trading fee - have you ever seen such important trading fees on TradFi exchanges ? No - we’re not playing in the same field.
At the end of the day, either we decide to stay like that, which means that we accept to have goals that are not sustainable, or we raise additional fees (we can waive them afterwards if not necessary) to reach sustainability.
I fully understand your problem of profitability and that the market size is not big enough. As an INDEX holder I agree.
But customers doesn’t care. That’s why asset managers are consolidating. Smaller ones disappear.
50M AUM is not enough for passive investing.
Expect Balancer setting a pool where you earn arbitrage fees soon.
@Sebastien I think we agree with each other 
Maybe we could set up a progressive streaming fee rate based on the AUV (like state taxes for most countries) :
We could also reduce the streaming fee customer per customer based on their respective % of holding in the pool, thus incentivizing whales to join the party.
For your information, YEARN might x4 their fees (ongoing proposal) : https://gov.yearn.finance/t/yip-revamping-fees/7073
Here is the Yearn proposal :
We are still far from the 5% performance fee that they are willing to implement
Thanks, that is good to know.
In some ways that helps us differentiate between Yearn and ourselves:
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.
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
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.
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.
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.
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.
@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
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
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 