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:
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What to do with streaming fees (to INDEX stakers or accrue in treasury)
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How do we afford monthly contribution rewards and keep $INDEX ‘proof of work’
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Should we diversify the treasury, into what, and how often should we rebalance
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Should we create a safety module similar to AAVE, which sells $INDEX in the event of a protocol failure from a token within DPI
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:
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Develop a contract to convert streaming fees to ETH and deposit into smart treasury
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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
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Incorporate any feedback into a proposal with voting on configurables, ready to generate an IIP
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Calculate BAL rewards and confirm cutoff for deployment fees to be reimbursed
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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
