TLDR:
- Incentives are powerful mechanisms that spur behaviors between parties. Analysis of incentives can be used to explain and predict the behavior of various parties.
- The current set of incentives (which include zero-sum games) causes misalignment between parties, stifling product progress from being made
- Removing misalignment of incentives and creating new aligned incentives will help generate collaborative and positive-sum behaviors
Why and Goals of Index Coop
Index Coop’s purpose is to accelerate the adoption of a new financial system through making crypto investing easy.
To do this, the Index Coop needs to properly set up incentives as incentives are extremely powerful in shaping party behavior. Setting up the right incentives leads to collaboration, harmony, and a feeling of alignment. Setting up the wrong incentives can lead to undesired behaviors like conflict, anti-competition, lack of desired results.
The goal of this document is to shine a spotlight at the current incentives, explain expected behaviors, how it has causes misalignment, and propose a few possible ways to move forward
Incentive History and Overview
- Index Coop product fee splits are currently split purely by direct revenue generated. This was a naive fee split determined a year ago without significant consideration.
- The original intention of the Methodologists relationship is to partner with parties who have significant domain knowledge, brand, and distribution to launch desirable products.
- The Methodologist Program is rewarded on a monthly basis based on the total revenue generated by products in relation to other products. The program was intended to incite competition with the best methodologists to launch the best products / ideas and generate improved economics for the Index Coop
Situation
- Numerous parties are frustrated that product launches have stalled due to methodologist fee split negotiations haven taken months
- Numerous parties are frustrated that there is lack of collaboration to make the best products - instead there is adversarial behavior between methodologists
- There is frustration from New Methodologists and existing community members that the Methodologist Program (which is intended to incite competition and to encourage competitive products) has not had its intended result and new ideas / parties are being stifled from making progress
Expected Behavior Analysis
The behaviors that various parties have exhibited in the past couple of months can be predicted based on the incentive schemes they operate under:
| Party | Incentive Analysis, Behaviors, and Issues |
|---|---|
|
Investors Incentive: Maximize INDEX price (trade capital for INDEX) |
Expected Behavior -Support and maximize the # successful products launched (with the best brands while tempering economics) & buildout of Index Coop org Analysis -Aligned with Community Members |
|
Community Members Incentive: Maximize INDEX earnings (trade labor for INDEX) |
Expected Behavior -Build capabilities and working groups that support the long-term growth of the Index Coop organization -Protect and prioritize scarce product, engineering, liquidity mining, marketing, and BD resources (including Set Labs product / engineering resources) -Negotiate to maximize Index Coop revenue, costs, and profitability -Incite competition to find the best methodologists, partners, and deal terms for products Analysis -Aligned with Investors -Misaligned with Existing and New Methodologists |
|
Existing Methodologists Incentive: Grow own products to earn fees; Maximize revenue market share to earn INDEX in the methodologist program |
Expected Behavior -Negotiate for maximum fees for their own products (not competitors); Not incentivized to consider Index Coop costs -To maximize fees and methodologist program earnings, push Index Coop community members to spend maximum resources to support their particular products via liquidity mining, marketing, BD, engineering, etc. -Maximize methodologist program earnings by discouraging competitive products from being launched and slowing product development Analysis -Incentivized to stall launching new and competitive products to earn methodologist reward -Not aligned with Community Members on economic considerations due to zero-sum revenue-based fee split |
|
New Methodologists Incentive: Launch and grow own products to earn fees; Grow and maximize revenue market share |
Expected Behavior -To maximize fees and methodologist program capture, aggressively launch new products and encourage Index Coop allocation of resources to support their products Analysis -Incentivized to compete against existing Methodologists in a zero-sum -Not aligned with other Methodologists AND community members |
Diagnosis
-
Methodologists are not aligned with Community Members and Investors - causing conflict:
- Non-Methodologists are Purely Aligned Around $INDEX Appreciation: Most people at IC, investors, etc are aligned around INDEX appreciation which requires launching products, building strong leadership, processes, org structures, etc and are part of trying to do these activities. This also involves maximizing Index Coop revenue, managing costs, improving its profitability, etc.
-
Methodologists Are Motivated to Optimize Their Own Earnings: Methodologists with the fee split are incentivized to make their own products successful. In practice, this leads to desires for methodologists to gather as many resources from the community as possible (marketing, liquidity mining, engineering, product, etc.) without economic changes - which is by definition misaligned from the Index Coop. At the same time, the community is incentivized to pass on as many costs as possible to the methodologist.
- Zero-Sum in terms of IC and Methodologists: Their goals are to ensure as many resources as possible and they want to maximize their fee split with the Index Coop as much as possible
- Revenue vs. gross profit fee splits leads to lack of cost empathy: No incentive to empathize w/ index coop costs and demands, because current incentives are focused on revenue vs. profitability
- Lack of Competition leads to stalemates in economic discussions: Without competition for products, there is no incentive from existing methodologists to improve the economics for Index Coop. They are incentivized to maintain the status quo.
-
The Methodologist Program has Failed to Incite Competition and Generate Positive Outcomes - causing conflict between Existing and New Methodologists:
- Zero-Sum in Terms of Other Methodologists and In-House Products: The methodologist program creates conflict between methodologists and any in-house products that Index Coop may choose to launch itself.
-
Existing Methodologists Boxing Out Other Products: Existing methodologists are incentivized to box out new products to maximize their own earnings. At the same time, existing methodologists cannot by definition claim monopoly on products and thus need to enable new products to launch that are not their own. This may result in negative soft behaviors where existing methodologists may try to prevent significant products from launching.
In practice, there are incentives to prevent new products from launching and from parties to collaborate - which is diametrically opposed to the Index Coop interests - New Methodologists Desiring to Launch Products: New methodologists are incentivized to aggressively launch as many new products so that they can compete for a share of the methodologist program. This has generated significant pressures on Index Coop resources and has caused significant issues in resource allocation and prioritization.
Goal and Strategy
To enable collaboration in a positive-sum manner, launch products, and maximize Index Coop success, it is important to remove misalignment of incentives and create new incentives that generate alignment. If we are able to align on metrics, collaboration and other desirable behaviors will naturally ensue.
Principles / Considerations
- The market is growing and the ultimate prize is winning the market, and there is significant work to be done to build product moats, fix technical issues, and support sustainable economics
- It is paramount to align interests and select the right goals / metrics with incentive programs
- Misalignment can be eradicated by removing zero-sum games within the existing incentive scheme
- Unless there is a deadline and incentives, there will be no urgency to get lasting and effective change / results. Decisions need to be time-gated
- Competition enables the best products to be launched w/ the best economics for the Index Coop
- Rules of fair play must be clearly established so there is no ambiguity with the game rules
- Index Coop must have the agency to decide what is best for itself and launch products that maximize Index Coop matters
- Objective, public, and fair compensation based on risk, inputs, etc. Everyone must justify their work
- Remove agency problems and conflicts of interests. Any time anyone has 2 jobs and expected to do them both well, that should be avoided
- Partnership happens when partners bring something to the table the other cannot do themselves
- If alignment or rules of fair play cannot be reached, then parties may walk away from one another
Crazy Ideas (Potential Solutions)
Note that these are simply ideas for what we can do to move things in a positive direction:
-
Force Timely Decision-Making
- To promote solution-creation, all fees between conflicting parties will be sent to a burn address - instigating direct cost to disagreements
- Pause the methodologist program until incentive issues are solved - which prevents stalling of solutions.
-
Align Methodologist Incentives w/ Index Coop
- [Obvious] Align everyone purely around INDEX price appreciation for those earning equity. DFP does not get a fee split and only gets equity it already has. This way, the entire focus of everyone can be on building the best products that generate revenue for index coop.
- Potential Scenario: DFP gets the entire methodologist program and work collaboratively with Index Coop (including possibly supporting IC internal products); And they get reviewed for performance over time as they vest like a normal employee or founder would at a company
- [Obvious] Make methodologist fee splits post total costs including gas, liquidity mining, marketing, etc. Fee splits are based on contribution margin which take into account major cost factors which include liquidity mining, engineering time, gas costs, etc.
- [Obvious] Align everyone purely around INDEX price appreciation for those earning equity. DFP does not get a fee split and only gets equity it already has. This way, the entire focus of everyone can be on building the best products that generate revenue for index coop.
-
Create Rules of Fair Play
- Index Coop needs to set boundaries and define the methodologist relationship better and how decisions are made. Index Coop should rightly act in its own interests to launch its a diverse set of products from multiple sources, to incite competition to get the best ideas and economics, and to be clear about how it can allocate resources
- It needs to be able to clearly answer questions such as:
- What if a product doesn’t match our product strategy?
- How does competition work?
- How do you weigh brand in launching products? How do you decide which product and partners to go with?
- How does the community think about building in-house / self-branded products? Can we build products w/o dependencies?
- What are analogie we can use to describe Index Coop business activities?
- Government contracts? (Create a job and get bids)
- Store? (provide multiple brands and competition is okay)
Next Steps
As there are significant, deep incentive issues that need to be resolved (that affect relationships between all parties), should we schedule a session to discuss these incentive matters?
Should we schedule a session to discuss these incentive matters?
- Yes
- No
0 voters
