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.
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.
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.
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.
@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.
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.
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