Adopt a Smart Treasury

Summary

Propose the Index Coop deploys a ‘Smart Treasury’ Balancer pool to resolve a number of key questions around our treasury and tokenomics while improving the value proposition of holding INDEX. The proposal recommends we begin with an experimental amount of liquidity to allow for data capture and learning, before scaling it up to become a larger part of our treasury if successful.

Motivation

There are a number of open questions within the Coop at the moment relating to the use of our treasury and $INDEX tokenomics in General. These include:

A few weeks back I stumbled across this blog from Joel Monegro at placeholder (venture capital), while searching for a compromise around what to do with streaming fees. The contents of the post are nicely summarised by this diagram.

The image depicts a ‘buy back and make’ model, which looks fairly similar to the Index Flywheel. This got me thinking if it would be possible to apply the flywheel as in the diagram above. Turns out, over at Balancer they took this idea and ran with it, creating the possibility for something known as Smart Treasury. This is simply a balancer smart pool where only a single ‘controller’ contract can add/withdraw liquidity, in reality for the Index Coop this means we can pay our streaming fees into the pool via ETH and withdraw outgoings as INDEX. So with some slight modifications, we end up with this:

Currently the Index Coop receives roughly $30k/month in fees just from $DPI, and spends a similar amount to reward the community for their contributions. If this took place instead through a Smart Treasury pool it would give us the following advantages:

Real time treasury status - simply view the pool and related transactions in Balancer UI

Increased liquidity for INDEX - adds another option to obtain INDEX, arbitrageurs maintain the pool balance and pay trading fees for doing so, which grows treasury holdings

(Bonus) treasury accrues BAL tokens which can be sold and reinvested into $INDEX

Streaming fees automatically buy-back $INDEX - when fees > rewards (expectation as more products launch that eventually fees >> rewards) this is the equivalent to constant market buying of $INDEX

(Bonus) this is a non taxable way to reward $INDEX holders with price appreciation, as opposed to paying streaming fees to stakers, which is taxable when fees are claimed.

Treasury diversification - built in diversification and constant rebalancing to maintain ratio

INDEX token sustainability - as we market buy $INDEX, keeping it in the Treasury, it preserves our ability to continue rewarding contributors into the future.

Abstract

Implementing this proposal would involve the creation of a balancer smart pool that only a whitelisted controller contract (multi-sig) can interact with. Think of it as a middleman between our static treasury and this new dynamic treasury pool. Given the results of Lemonade’s questionnaire on the subject of treasury diversification, I think we should look to deploy an 85/15 INDEX/ETH pool with enough funds to cover 6 months of reward contributions plus sufficient liquidity to enable arbitrage trades. This should be in the region of $500k total.

We will be able to monitor the performance of the pool and determine slippage, trading fees and Balancer rewards. The data can be used to project if this is worthwhile scaling up and adopting on a permanent basis, as well as how to best adjust the trading fee parameter for optimal growth.

The main assumption behind adopting a smart treasury is that streaming fees will outgrow payments to contributors over time (currently roughly equal each month), providing increased buying pressure to INDEX in the pool. The assumption is supported by the upcoming launches of Coinshares, Token Terminal and now the Pulse inc. FLI index. When coupled with the increasing interest in DeFi and projected TVL over the next 18-24 months, it looks likely that streaming fees will far outpace outgoing INDEX. If this is not the case it is still possible to change the swap fee and pause swapping altogether to protect against sub-optimal conditions.

Another indirect advantage of this approach is that with streaming fees effectively being routed toward INDEX holders, we can focus on building out a governance portal and rewarding participants in INDEX without fear of diluting or reducing token value.

Specification

Weight: 85/15 INDEX/ETH
Initial liquidity: $500k
Cost: development (minimal), deployment fees are reimbursed provided we fund the treasury with enough liquidity (amount TBC)
Scope of work:

  • Develop a contract to convert streaming fees to ETH and deposit into smart treasury

  • Deploy and fund a Configurable Rights pool through Balancer GUI, with following settings (these can’t be switched on/off after deployment)

canPauseSwapping - used to prevent trading in the pool

canChangeSwapFee - used as a tuneable to encourage/discourage trading

canChangeWeights - not configurable

canAddRemoveTokens- not configurable

canWhitelistLPs - required to enable buybacks

canChangeCap- not configurable

Next Steps

  • Incorporate any feedback into a proposal with voting on configurables, ready to generate an IIP

  • Calculate BAL rewards and confirm cutoff for deployment fees to be reimbursed

  • Reach out to Idle finance, understand the benefits and drawbacks of this approach

Open questions to consider when providing feedback

Stablecoin or ETH?
Percentage split?
What to do with the balancer tokens?

Prior Work

Sanity check with Balancer team
@Dylan confirmed scope of work
Used the buy back and make simulator to play with the numbers

Big up to @LemonadeAlpha for the treasury questionnaire and to @verto0912 for the intro to the Balancer team and proofreading!

Further Reading

14 Likes

Great proposal.

I like ETH and the percentage split you describe. Unsure on best answer to the what to do with balancer tokens qu yet. Will come back.

Strong +1.

2 Likes

I think adopting the ‘buyback and make’ model via Balancer smart treasury is a perfect move for the Coop.

As @DarkForestCapital highlighted, it solves many issues for us. If I had to pick one I’m most excited about it would be the indirect value accrual to the $INDEX token.

Thinking about the parameters some more, maybe we should consider enabling canChangeWeights and canAddRemoveTokens.

The reason being the launch of the CGCI-LV index. My understanding of the mechanics might be flawed but bear with me. The Coop will receive fees in CGCI-LV index token. If redeemed for the components, WBTC and ETH could be deposited into the Smart Treasury (further diversification + trading against utility) and gold can be held on our balance sheet aka Treasury (instead of a stablecoin, for example).

Perhaps this goes beyond the scope of the initial experiment though. But if we disable those parameters then we won’t be able to enable them in the future, if we progress this idea from an experiment to full-time set up for our Treasury.

To answer your questions:

  • ETH (which stablecoin would we do? Balancer doesn’t support USDT, which leaves either USDC (centralised) or Dai (peg volatility)).
  • I would do 80/20 or 75/25. Something to keep in mind - BAL rewards are calculated using several factors. One of them is the Ratio Factor. The further a pool deviates from a 50/50 set up, the lower the Ratio Factor. Just an FYI, we are obviously not doing this for BAL rewards.
  • So certain BAL pairs are highly incentivised. Last time I checked it was BAL/ETH, BAL/WBTC, BAL/UDSC and BAL/DAI. 50/50 pools yield 80%, 80%, 88% and 95% respectively. As such, I would dump BAL rewards into one of these pools via one-side liquidity provisioning.

Great work on this @DarkForestCapital!

5 Likes

Great stuff @DarkForestCapital, I love most of this idea.

To answer your open questions, I think the questionnaire points towards a will for ETH and for 10-30%.
Personally, I think it would be cool to sell the $BAL and buyback $INDEX with that.

Hate to beat a dead horse, but I’m pretty staunchly opposed to spending our income (streaming fee) on buying back $INDEX. While it saves a user in potential tax liability, imo it is far less of a sure thing for value accrual than simply rewarding INDEX holders with the same fee.

Is that part necessary to make this proposal work?

I would argue that we could utilize a smart treasury or just simply Balancer system w/o buyback and make, and hit on the majority of points above.

Edit: After discussing further with @DarkForestCapital I am leaning towards support of this configuration.

In the long term, I am keen on delivering streaming fees to $INDEX holders

3 Likes

Yeah, this is a great proposal! I am bothered by not being able to nail down good parameters but they will most likely change over time and be best calibrated by getting it running. I second @verto0912 on ETH and the ratios, while, for the BAL rewards, BAL/DAI seems both in the spirit of DeFi and the best for returns.

I hope there can be a technical blog on this to share in the future :slight_smile:

2 Likes

From a technical perspective, it seems like this can be done in a no-code manner outside of deployments (assuming the Configurable Rights pool requires no coding on our end).

More specifically:

  • Develop a contract to convert streaming fees to ETH and deposit into smart treasury: As a MVP, we could do this manually on a monthly basis - selling DPI for ETH and then depositing. Over time, we could have these automated.
  • Deploy and fund a Configurable Rights pool through Balancer GUI, with following settings (these can’t be switched on/off after deployment): Assuming this can be done on the UI and the owner is simply the Index Coop Multisig, this should be pretty straightforward and easy to do.
4 Likes