$CGI Liquidity mining - a suggestion

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$CGI liquidity mining - a suggestion

This isn’t a formal proposal yet, not even close, just an idea and a few polls to get a feel for peoples opinions on $CGI and liquidity mining (you could say I’m obsessed by the subject).

It is my understanding is that the $CGI fee split was agreed on the basis that INDEXcoop would not be providing massive liquidity mining support for $CGI. This is due to the market strategy being based on OTC / Exchange issue sales to institutions / DAOs/ Whales etc rather than on-chain sales.

I fully understand the logic behind this, I support it, and I don’t want to change it.

However, as coinshares are focusing on OTC sales, and are paying market makers to provide the initial uniswap liquidity, there is unlikely to be a further budget for on-chain liquidity mining.

When I see the circulating market cap settle at $500 K, and the Uniswap liquidity at ~$500 K, I’m a little sad and I start thinking about what could be possible.

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So, what can we do to kick CGI a kick without changing the agreements around $CGI? :thinking:

I would like to suggest the following for the coop to consider:

  • The coop extends an interest free credit line (value TBC) of INDEX tokens to be used for liquidity mining $CGI.
  • The loan would be denominated in $USD at the start of the agreement based on a 20 day TWAP [Currently $22.79].
  • The loan would be repaid using the initial streaming fees due to coinshares. i.e. Coinshares would not receive any income from $CGI until the loan had been paid back in full.

In some ways, it’s an exercise in accounting wizardry, moving numbers from one place to another. However, many people familiar with corporations will realise that such approaches can be useful.

At $100 M AUV, and 0.36% steaming fee, $CGI would generate $360,000 pa to coinshares (and $240,00 to the coop). So a $100,000 loan would take ~100 days to pay back.

In the long run, the net cost to the coup would be zero. It could result in earlier issuance of INDEX tokens (which would depress the price). It would help diversify our treasury (we would effectively be selling INDEX for ETH, wBTC and wDLGD).

That is the basic idea.

Coop contribiutions

The coop could decide to support the liquidity mining (i.e by selling the INDEX at a discount / including the coop streaming fee in the repayment calculations so both the coop and coinshares are repaying the debt). However, the simplest implementation is that we sell at market price (20 day TWAP) and expect repayment in full.

I would say that if the INDEX is sold at market price, then the coop would have no voice in how the tokens are deployed (uni / Sushi / balancer / Loopring etc). Likewise, if we decided to add coop INDEX tokens to the programme, we would expect to have a say in the implementation.

I would expect that, depending on the LM campaign, the coop may be asked to provide technical support for the implementation - e.g. staking contracts and website interface as per the DPI farms.

LM campaign size

So, how big a programme would we be talking about? I don’t think we need to duplicate the massive DPI campaign.

If we consider a 120-day campaign for $200,000 total:

  1. $100 k for 30 days (~145 INDEX per day @ $22.8)
  2. $ 50k for 30 days
  3. $ 35k for 30 days
  4. $ 15k for 30 days

If the market settles at 25% APY on the farm, then we could expect $4.9 M liquidity in the initial 30 days (and $2.5 M AUV). As the rewards taper the liquidity would drop, but hopefully, trading fees would grow and there is always the chance that INDEX price increases.

Ideally, this should have a defined strategy, that can be shared at the time of launch.

Some temperature check polls

I’ve prepared some polls to see what people think. If we get a consensus, and @mcgpetch agrees, I would propose an IIP based on Michaels preferences.

All polls are multiple options, please tick any AND all that you would find acceptable:

Extend a line of INDEX credit to coinshares for the first call on steaming fees from $CGI:
  • For
  • Against

0 voters

If agreed, the coop would offer the following for liquidity mining
  • Upto $500,000
  • Upto $250,000
  • Upto $100,000
  • Upto $50,000

0 voters

What terms should we offer the tokens?
  • 20 day TWAP, but INDEXcoop will use our share of the streaming fees to help repay the loan (effective coinshares and the coop are going 60:40 split on the liquidity mining in line with the fee split) - coop would expect input into liquidity mining.
  • 20 day TWAP with 10% discount as INDEX coop recognise that the liquidity mining is to our ultimate benefit.
  • 20 day TWAP with 0% interest.
  • 20 Day TWAP with 5% interest.

0 voters

Final comments
I have discussed this idea with @mcgpetch and he is interested in it, however, there is no commitment (either way) at this time. If Michael wants to proceed we’ll prepare an IIP based on the discussions and polls.

3 Likes
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Instead of a loan, a less complicated approach here would be to adjust the fee split and run a traditional program with some understanding from our side how much we would be willing to invest here given the LM program you are suggesting above and the one @BigSky7 is working on with Badger.

Couldn’t undo my vote so just voted for all of them for now.

2 Likes
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I don’t think that renegotiating the fee split could be easier than this idea.

The loan is a short term agreement that effectively diverts some of coinshares future income into a liquidity mining programme. This would obviously need agreement within coinshares (and so is not guaranteed) as it does impact the immediate cash flow from $CGI. Whether the loan and liquidity mining is cost effective for coinshares is something that Michael will have to consider (as I expect has has coinshares KPI’s to meet).

Renegotiating the fee split has much longer-term implications. It would effectively re-open the DG2 process within the coop, and is likely to face much more scrutiny within coinshares.

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What are the advantages of this compared to my other debt proposal?

This seems much more complicated in terms of coordinating parties and consensus on top of not being extensible to other coop products, doesnt bring new money into our ecosystem (just shuffles internally as you said), and can’t be automated via smart contract since usage of debt is at Coinshares discretion.

1 Like
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Maybe @verto0912 or @Matthew_Graham have thoughts here given their fee menu work. [Not sure if that is still going on!]

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If I understand your suggestion it for the coop to become a significant liquidity provider for our products, So we take on the LP risks, but enjoy the trading fee income. In some ways it’s a continuation of the smart treasury idea - we want market liquidity for INDEX for our customers, so we create it using a mix of INDEX reserves and ETH from the streaming fee.

This makes sense, and as extended to our products it ensure that there is always some liquidity for our products. (I have commented that having some reserves that aren’t our products / in an AMM pool with out products could be considered a good black swan contingency, but thats not a reason not to have the majority of our reserves as Liquidity).

The trick is how we get to that point in terms of assets:

  1. We can sell INDEX for the product and ETH - Impacts INDEX price
  2. We accumulate the streaming fees / sell some of the streaming fees for ETH - Takes time to build a diversified reserve.
  3. Borrow (based on INDEX as collateral).

My instinct is to avoid borrowing from others, but that doesn’t mean that it’s not the most capital efficient / cost effective way.

The other advantage of actually lending INDEX to use in LM is that we distribute INDEX to LP’s.

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Yes you are correct on all accounts. My proposal specifically addresses your question of “how do we get to that point in terms of assets:?”. We get a line of credit from Iron Bank and withdraw stablecoins to put into CGI/ETH.

In my opinion this is the best option possible because we can turn a profit while also making our products more usable. Double bonus is we can put up DPI from treasury as collateral (if Iron Bank asks for some instead of no collateral) which lets apps like Alpha Homora use it in leveraged DPI/ETH farming further solidifying DPIs prominence in the DeFi ecosystem.

If you look at my napkin math, its way cheaper than paying INDEX for liquidity mining (my calculation assumes an interest rate 10x higher than current market).

Lets assume a pretty bad interest rate of 30% APY (current is ~3%), we can take out a $40M stablecoin loan, add that to DPI/ETH pool, and still be paying the same $1M / month as today with almost the exact same amount of liquidity ($40M vs $48M now).

If INDEX distribution is a concern, this actually lets us get INDEX to a more diverse crowd than just LPs by freeing up capital for another creative challenge, full-time hires, CEX listings, etc.

The only LP risk is if both CGI and ETH dont increase in USD price faster than interest rate which should be taken into account but over any significant time horizon is a small probability.

2 Likes
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I love how this idea is not a plain vanilla and we are thinking outside the box. I have a few thoughts on first glance. The Streaming Fee rate discussion occurs prior Decision Gate 1, we probably need to give consideration to having a high level the launch process thought out. But things change, innovation is not static. However, I am not really a fan of going back to a methodologist asking to modify something that is already agreed, that is probably my personal views coming through. My reasoning is mainly two points:

a) Personally I think it could be slow process
b) I don’t think it is a good look, it opens pandora’s box a little here
c) If I was a methodologist interacting with IC, I would need to consider it a risk before entering a deal

That said the space is innovating and who knows what options exist a few months from now. So maybe, I am a bit behind the times with this view.

Nevertheless, I see no issue with either methodologist or IC implementing some kind of incentive program off their own back. I believe we are doing this on FLI and even now with DPI, DFP has the option to contribute but is electing not. So point remains, IC can go forward independent of the methodologist.

CGI has appeal as being crypto winter proof with the gold component. I also think the risk profile of CGI as a product compared to INDEX tokens is lower. INDEX is a small market cap, has low circulating supply, price volatility is high and I would not say it is a store of value relative to Gold, BTC and ETH.

I think the Iron Bank has a few requirements to be eligible - I’m not sure if INDEX makes the cut, but I’m not well informed here. What I do think, is we could use the Treasury to purchase CGI add it as liquidity and then try use the LP token as collateral at Iron Bank.

a) Index add liquidity to CGI-wETH pool receive fees
b) Reduces slippage for better user experience
c) CGI-wETH LP Token used as collateral (low risk profile, should have lower interest rate) at Iron Bank
d) Use stable coins as working capital and as treasury diversification
e) Use an equivalent amount of INDEX from Treasury to incentive LP on CGI-wETH

Sounds complicated - it is not really. Loan terms are better with low risk stable assets. CGI is better than INDEX. The outcome is fee income, deeper pool, some diversification of treasury, IC has stable coins to use and we get INDEX into the market. The fees help pay the loan back. If fees are 15% p.a like DPI and the loan is less than 15% (probably won’t be) there may be free carry.

Index Coop has every day operating costs in USD plus contributors who want to be reimbursed in USD. We can use any stable coin balance to buy back INDEX and use that to fund LM incentives. For the purpose of this the option would create a price floor on INDEX and help maintain the APY.

I’m all for trying stuff and if this works, we have some lessons from it and we grow, then this could literally pave the way for other Indices. Although, CGI has the lowest risk profile, so we probably use that as collateral each time. I think that might be a IC versus competitors unique advantage we just unlock.

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thanks @overanalyser, I’m generally supportive of adding some incentives for CGI so it’s good to have the discussion.

I agree with not renegotiating the fee arrangement, unless, of course, it’s the preferred option for CoinShares.

We will be posting the Methodologist Fee Menu today and it can help inform the conversation.

It’s nice to be conceptually discussing the Iron Bank but it’d be great to actually know if this option is even available to us. My understanding is that you need to be whitelisted for Iron Bank and the last I heard, Cream weren’t accepting new applications beyond the initial set of whitelisted protocols to begin with. So perhaps this should be explored first.

@overanalyser, correct me if I’m wrong, but under your proposal, we are giving CoinShares a $100k loan (which will be repaid) and kicking in another $100k of liquidity mining incentives from the Coop? So it’s effectively a 50:50 effort at liquidity. In the methodologist fee menu that @Matthew_Graham and I are working on, that would suggest an extra 5% of the streaming fee going to the Coop. Not saying we should be changing the fee arrangement at all, but just to give some context.

Assuming we do want to do LM incentives for CGI, it would be my preference to consider what we are trying to achieve. Is $4.9m pool sufficient? Does it provide the desirable user experience (aka slippage) to the target demographic? We again end up in the conversation about the strategic framework for LM and how we determine these variables.

To sum up, I support some incentives for CGI. Need more info & discussion on the best mechanism.

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The basic idea is that we provide a $100 k loan and it is paid back in full. No jet cost to the coop (other than the time value of INDEX which I would consider close to zero for the coop).

We could decide to allocate some funds to the LM, but we could leave it all to Coinshares.

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But you proposed a $200k LM program? If the loan is just $100k, where are the other $100k coming from?

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Ah. Sorry.

Both the $100 k and $200 k are examples of what we could do. I picked 100 k loan as I thought it would be simpler to understand. 200 k will take twice as long to pay back.

I would expect the process to look like:

  1. The coop can decide how much we want to offer and what on terms.
  2. Coinshares consider what they want to do, how much they want to borrow for the proposed terms (which could be less than the coop offers).
  3. We draft an IIP to set the details and the coop votes on it.
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clarifying point: we wouldnt be adding CGI LP as collateral directly to Iron Bank, they dont have any LP tokens except y3crv which is a stablecoin. We would deposit CGI LP into an escrow contract controlled by Cream and Index teams that would be liquidated if we were unable to pay the loan (slightly different it should be clear what exactly is involved). I also want to clarify that Iron Bank is completely separate protocol from Cream, Iron bank is a whitelisted protocol-to-protocol under collateralized bank where as Cream is consumer app accessible to anyone like aave or compound.

Why would we sell index AND take out a loan to keep in stables? Why not kill two birds with one stone and use the loan to provide liquidity which is way simpler and has higher profit potential?

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Good to be looking at this and will be interesting to see how Coinshares view it.

@overanalyser regarding the voting, it seems multiple selections are allowed:
edited to remove screenshot of who voted.