On 22 October as part of Index 2.0, the Compensation and Community Ownership group published a post outlining a path forward to address the challenges our community faces around talent attraction, retention, and community ownership.
Since sharing these posts we have received a range of caring and considered feedback from the Community, Investors, and Set.
This post provides a condensed summary (okay we tried!) of an updated V2 framework that covers the following core components of our compensation and community ownership work:
To ensure our approach is robust, we note the following core principles a successful model for Community Ownership needs to respect.
Reward high impact contributors and leaders
- Competition for great people is white-hot. We must ensure that our high impact contributors are rewarded sufficiently and retained
Provide flexibility and fairness guaranteeing new and existing contributors a fair opportunity to build ownership in the protocol
- We have seen the tension created by an “in” or “out” mindset when full-time compensation packages are the only meaningful path to contributor ownership. We must look to promote community ownership in a scalable, open and (as far as possible) permissionless way that unites contributors of all stripes
Align contributors’ incentives with long-term price appreciation of the INDEX token
- Presently, contributors receive more INDEX per month if INDEX prices depreciate. This is a counterproductive incentive framework that rewards contributors if INDEX price goes down. A new ownership system should align all contributors’ incentives with INDEX price appreciation
Incentivise contributors to hold INDEX
- To achieve sustainable community ownership, distributing tokens is not enough; we need to encourage contributors to hold their INDEX tokens
Allocate tokens in a way that does not impede INDEX price discovery
- Index Coop’s continued operations are enabled through the value of the INDEX token. As responsible stewards of the community, we must ensure that any changes we implement avoid under sell pressure to ensure a sustainable INDEX price.
We received a broad range of feedback on the original proposals, both in public and private. Several common themes emerged:
- Total Community Allocation felt too high (y1-y4)
- Compensation may not adequately incentivize leadership and/or highest impact core contributors
- Compensation may not encourage a long-term mindset (i.e. through lack of long-term vesting)
- Challenge as to whether the community had “earned” such a generous community allocation - and whether Index Coop needed to demonstrate more success before contributors receive significant community ownership.
- Airdrop % allocation felt too high (y0-y1)
- Airdrop would not adequately reward active contributors fairly in comparison to those who are no longer active
- The new compensation framework, especially the airdrop, unfairly treats existing full-time contributors. This was primarily due to the fact that those on full-time packages would receive a smaller airdrop package and would face worse liquidity profiles on their FT package in comparison to the airdrop.
Dynamic Staking Model
- The Dynamic Staking Model was too complex, especially for new hires who require some certainty when considering whether to accept an offer.
Based on this feedback, we would like to present the following V2 revised compensation and community ownership model for consideration.
- 1.5% of total supply to cover historic contribution from Y0-Y1
- 5% of total supply to be ring-fenced for future distribution in Y1 (starting Jan 2022)
- 16% of total supply to be targeted for community distribution over Y2, Y3, Y4 etc. With the amount allocated to be determined by the Index Council each year based on current market conditions, treasury health etc.
By moving away from a fixed yearly ownership distribution (i.e. Y2=4%, Y3=4%) towards a target overall percentage of 16% for years 2+, we feel better equipped to achieve long term community ownership whilst retaining the flexibility to adapt and readjust as we go.
This 16% could be used to compensate contributors, and/or our community at large (i.e. holders of our products).
|Mechanism||Years covered||% Allocation||Rewarded for||Vesting||Max Vesting (when final vesting of community ownership is achieved)|
|Airdrop||Y0-Y1||1.5%||$ earnt as contributor since genesis||Linear unlock over 6 months. No vesting requirement (i.e., no requirement to be an active contributor to earn the airdrop)||July 2022 (6 months)|
|Dynamic Staking Model (DSM)||Y1||5%||Owl Level & INDEX ownership||Reward for a given month vest in full after 6-month cliff (i.e., a requirement to continue being an active contributor in order to earn the reward)||July 2023 (1 year and 6 months)|
|Dynamic Staking Model (DSM)||Y2+||16%||Owl Level & INDEX ownership||Reward for a given month vest in full after 6-month cliff (i.e., a requirement to continue being an active contributor in order to earn the reward)||July 2023 (1 year and 6 months)|
The timeline for when community allocation is received is a pivotal topic for success. In Web 2, vesting contracts have traditionally been used as “Golden Handcuffs” to incentivize long term alignment and retention.
We apply a similar principle to how we deliver community ownership under this model:
- Under the Dynamic Staking Model, rewards earned in a given month will vest in full after 6 months and be distributed only if the contributor remained active within the community during that time. This means rewards earned in Jan 2022 via the DSM will be awarded in July 2022 if the contributor is still active.
- Under the 1.5% community airdrop, we are proposing that the reward amount unlock linearly over 6 months. Vesting requirements of rewards from the airdrop will only be applied for those currently on FT contracts, to prevent receipt of airdrop and jumping to another opportunity
- If a contributor ceases all activity with Index Coop - as defined as two months of no rewards from normal contribution - they will not earn any further rewards through the DSM and will also forfeit any of their unvested tokens
The forward-looking Dynamic Staking Model encourages contributors’ long term commitment to Index Coop and will provide a powerful incentive for retention. The airdrop acknowledges past contributors for value created and makes up for a failure by Index Coop to increase ownership for many high impact contributors who should have been transitioned onto a Full Time package many months ago (and have been patiently waiting whilst we figure all of this out).
By having the DSM rewards start after the airdrop rewards have been paid, we reduce sell pressure of INDEX and incentivise contributors to keep their airdrop rewards to build additional ownership and thus earn more through the Dynamic Staking Model.
The below diagram helps illustrate how this works in practice. It also helps us understand that under the current proposal, due to time lock and vesting, contributors would not be able to receive airdrop rewards and Dynamic Staking Model rewards simultaneously.
A= Airdrop linear unlock
D = Reward vested for Dynamic Staking Model (after 6 months)
Similarly, if a contributor ceased to be active within Index Coop in November 2022, they would forgo 6 months of Dynamic Staking Model rewards earned during their time working at Index Coop. This introduces a powerful incentive for contributors to commit to the long term at Index Coop.
In contrast to our existing Full Time package, the DSM is more generous for any contributors looking to stay with Index Coop over the longer time horizon of 2+ years. It is significantly less generous for contributors looking to leave in the next 18 months or earlier.
As such it provides more incentive for longer-term alignment than our current FT packages. It is also more transparent and permissionless - anyone can become an Owl Level, hold INDEX in their wallet and engage with the DSM over years without having to deal with HR or some compensation committee ever.
In many ways, the vesting mechanism of the DSM could be seen as an adaptation of a more traditional multi-year vesting contract with a 6 month cliff.
A detailed explanation of the Dynamic Staking Model can be found here. A summary is provided below.
The ability to build sustainable community ownership is based on:
- Total Community Allocation - The number of tokens we aim to deliver to the community to cover y0-y4.
- Allocation retention rate - The % of tokens that are retained by recipients and which are not sold.
The Dynamic Staking Model (DSM) is designed to deliver a fixed % of INDEX to contributors each year. It is only available to white list contributors with a minimum Owl Level of Bronze and has an APY/return determined by a contributors’:
- Impact (Owl Level)
- Tokens held in wallet
As we know, commitment and contribution take different forms; most commonly, these are categorized under Talent, Treasure and Time. We have created a model designed to incentivize contributors to increase the impact of their participation (talent), while at the same time incentivizing them to increase their ownership of INDEX tokens (treasure) over a longer time frame (time).
In the model, more impactful contributions, as reflected by higher Owl Levels, are rewarded by a higher staking reward. The rationale behind this mechanism is that meaningful contributions receive a higher Owl Level (impact tier) and so should receive a greater reward.
At the same time, a higher financial commitment to Index through large token holdings (skin in the game) is also rewarded. This concept is one that aligns the financial interests of contributors with those of INDEX holders at large. Let’s incentivize Owls to hold their stock in the family business, so to speak.
More details and worked examples of the dynamic staking model are shown here. In summary, the DSM is effective at building community ownership because it rewards contributors whose incentives are most aligned with the overall community. It does this by:
- Providing an attractive APY which incentivizes contributors to hold INDEX (increases allocation retention rate)
- Over time distributing a greater % of ownership to contributors who have a higher propensity to hold vs sell (gives more INDEX to those with the highest allocation retention rate)
We propose the following reward breakdown through the Dynamic Staking Model to achieve a target y1 community allocation of 5% (i.e. starting in Jan 2022).
The figures provided here are illustrative based on several assumptions (below) which will likely be subject to change
- Number of contributors at each Owl Levels
- Average token holding by Owl Level
Fig 1 - Revised DSM Monthly Ownership Allocation (table)
The table below shows the monthly reward breakdown based on Owl Level and INDEX Holdings across 5 Owl Levels categories.
As you can see, a change from the previous model has been the inclusion of a fixed standard INDEX stipend regardless of holdings. This was done to provide greater clarity and transparency to new hires on the fixed INDEX reward they receive.
Furthermore, including the categories of “Neon” and “Gold+” allows us the flexibility to further incentivise high impact contributors and leaders at INDEX Coop. Those who go through our new “Priority Hiring Process” will receive an increase in their fixed allocation of INDEX to reward their long term commitment and focus on Index Coop.
We anticipate current Index Coop “Full Timers” being moved onto the higher fixed INDEX allocation and additionally gaining access to the DSMs flexible reward based on token holdings.
We also want to make clear some new hires might be offered a different fixed monthly allocation of INDEX to the ones displayed above. This is to ensure the model can still provide flexibility to recruit top talent.
How monthly community allocation interacts with Owl Level and Token Holdings can be seen below.
This mechanism creates an attractive APY for all contributors across the spectrum. It encourages contributors to hold their tokens and ensures long term a community allocation will be distributed to those with the highest propensity to hold, versus those with the highest propensity to sell.
This will enable the Dynamic Staking Model to achieve a higher Allocation Retention Rates than any other ownership allocation mechanism currently seen in web3.
We encourage you to experiment with this Dynamic Staking Rewards tool to get an estimation of the rewards you could anticipate based on your own Owl Level and INDEX holdings. Again, we want to note that the reward levels proposed here are only indicative and may be subject to change.
We hope the updates to the Dynamic Staking Model captured above, addresses several of the major feedback points for this model, namely:
- The DSM is confusing and doesn’t provide stability for new hires
- The DSM doesn’t incentivize long term contributors
- The DSM doesn’t adequately reward the highest impact contributors and leaders
We also wanted to address several other considered challenges below:
Dynamic Staking Model creates a “hard cliff” after Y5 when it is discontinued
- We are providing a fixed allocation via the DSM of “5%” only in year 1. The remaining 16% will be allocated flexibility over Y2+ based on market conditions and/or treasury health. Index Coop will retain the flexibility to adjust DSM rewards, parameters and yearly community allocation target throughout the program to guarantee flexibility and ensure the model is sustainable and driving the right outcomes.
Can the Dynamic Staking Model be gamed once third party borrowing markets for INDEX are created
- These types of borrowing markets for INDEX do not currently exist, so there is no immediate risk to the model. However, over time they are likely to emerge
- Thus, we propose over the next 6 months the DSM transitions to a "closed system”. This means that after 6 months only INDEX earned through the DSM, or which has previously been deposited in a custom-built Staking Module will count towards the total INDEX holdings.
- This transition does not impact the integrity of the DSM as it will still serve its core purpose, incentivising ownership (INDEX) retention. However, it will negate the threat of medium-to-long term gaming via INDEX lending/borrowing markets.
The Dynamic Staking Model provides an effective forward-looking way to align incentives of contributors with the broader community, attract and retain talented contributors, and build sustainable community ownership.
However, it does not address a historic failure to build ownership among contributors. Since genesis, less than 2% of ownership has been delivered to the community at large, with many vital contributors having negligible ownership in Index Coop despite their impact and importance to the Coop.
Below we can see a summary of the initial token distribution along with vesting periods, highlighting when ownership becomes liquid. As can be seen below a large proportion of the initial token supply was distributed to liquidity incentives and airdrops to early holders and LP positions. Set, DFP and other investors have captured almost 47% of total supply.
The initial allocation per the medium article published here shows 70% intended for the ‘community’ and 30% to founders, the below table highlights a significant mismatch in that initial allocation.
Retroactive airdrops to early contributors are not a form of wealth redistribution - it’s actually a late payment for wealth that was in fact created by contributors, especially as the airdrop more powerfully rewards contributors that are still active. This late payment helps quickly increase long-term, high-value contributors’ INDEX holdings, to use in the DSM, and lessen their attraction to external opportunities over the 6 month period before the first DSM rewards vest.
The calculation for the airdrop is guided by:
- The 1.5% of total $INDEX mentioned above which the airdrop will distribute
- A contributor’s value contributed to the Coop in the first year, as measured in USD value of $INDEX they cumulatively received from October 2020 to December 2021. We then add 75% USD on top for contributors who are still active (as defined by receiving rewards (or impression mining rewards) in two of Oct, Nov and Dec ‘21).
- First year starts Oct ‘21 as very little rewards were earned in Oct ‘20
- A contributor’s personal participation in the airdrop will equal:
If you’d contributed A. $100k of value in the first year, the community had contributed, B. $1m of value and C. total payout via the airdrop is 1.5% out of 10,000,000 tokens the model would deliver you the following tokens:
(A. $100,000 / B. $1,000,000) X (C. 1.5% X 10,000,000) = 15,000 $INDEX
Once the rewards for December have been finalised, we will share an updated model which shows the final airdrop amount contributors would expect to receive. The general distribution logic before special situations is discussed and potentially catered for, below.
Given that: i) the airdrop is now 1.5% not 7%, ii) we have added an active/inactive lookup in the airdrop model, iii) we have increased the fixed INDEX allocation in the DSM and iv) we have increased the overall rewards from the DSM, we propose “Full Timers” (still active, logically) are eligible to receive the airdrop in full.
An individual’s airdrop will be received monthly over six months with no requirement to maintain active status. Contributors active and inactive are eligible for their airdrop tokens over six months. Given the airdrop is substantially smaller now, with an active/inactive lookup in the model, we think this distribution logic is fair.
- Reduction in the community airdrop from 7% to 1.5% of total allocation
- Changed payout details to make the airdrop payout over a period of 6 months, after which point the rewards from the Dynamic Staking Model will come into effect
- Lookup for active/inactive in the model, to reward contributors still here
- Inclusion of impression mining into rewards
- Full Time contributors will receive their airdrop in full, with no reductions or additional vesting terms.
The final aspect of the proposed Compensation and Community ownership work was an updated set of Priority Hiring Guidelines. This should be seen as a minor improvement, not a comprehensive overhaul of the Full Time Hiring Guidelines. More details of our “Priority Hiring” guidelines can be read here.
In summary, the Priority Hiring Guidelines seeks to identify the highest leverage contributors and/or most strategically important roles at Index Coop and provide them with a competitive salary and compensation package to retain them for long via:
- Fixed yearly salaries
- Fixed Owl Level, and so INDEX allocation per month
- Priority hires also get access to the Dynamic Staking Model like all other contributors
Simply put, some contributors need long term employment stability and a fixed yearly salary. In web3’s competitive labour market, failure for Index Coop to provide this stability would be a major oversight. Thus, the need for Priority Hiring Guidelines.
Based on feedback, we have moved away from the term “Full Time” and embraced the fact that contributors may participate in multiple DAOs - and that is ok. However, there is an expectation that everyone who goes through the “priority hiring” process will be primarily focused on Index Coop.
Those working across many other DAOs in a more flexible way will find the flexible compensation framework more suitable to their changing situation. It is important to highlight that those under the flexible hiring framework can still expect to receive significant rewards for value delivered.
With the creation of the Index Council on November 30th, the order of prioritising for contributors and positions to go through “Priority Hiring” will be determined by the Index Council.
Treasury disclaimer - Finance Nest to the best of its ability has provided an estimate of the potential future balances and with unknown costs is unable to provide a detailed picture of the next 12 -18 months. We are working with members of the DAO to create a more detailed budget and cashflow forecast that will be presented in due course.
We invited Finance Nest to review this proposal to provide feedback on its financial viability. Taking into account expected future costs and also the DAO’s current and future reserves balance
If this proposal were to pass, non-earmarked reserves would total 379,747 INDEX and $4,727,000 USDC. In addition to this, Index Coop would also have a ring-fenced warchest of 1,500,000 INDEX and further $5,000,000 in USDC to be maintained in the event we have to deploy a significant amount of capital in the future.
Current treasury balance
The below table does not include Index coop product streaming fee balances at the start of November these totalled approx $2.7m
|Current Balance||$INDEX||USDC reserves|
|Treasury Balance November 1st 2021||1,856,561||$9,727,000|
|INDEX to release in vesting contracts||2,273,186||n/a|
|Total treasury holding||4,129,747||$9,727,000|
|Earmarked reserves||$INDEX||USDC reserves|
|Treasury minimum balance (15% total supply, warchest)||1,500,000||$5,000,000|
|Y0-Y1 Airdrop community allocation (1.5%)||150,000||na|
|Y1 Dynamic Staking Model community allocation (5%)||500,000||na|
|Y2+ Dynamic Staking Model community allocation (16%)||1,600,000||na|
|Non-earmarked reserves (remaining balance)||379,747||$4,727,000|
It is also important to highlight again, the “Y2+ Dynamic Staking Model community allocation of 16%” will be delivered flexibly, and allocation in a given year will be decided by the Index Council with input from Finance Nest factoring in market conditions, treasury health etc. This will provide Index Coop the flexibility to ensure its long term longevity…
Originally this proposal had suggested some percentage of the Community Ownership would be unlocked once a series of ambition KPI were reached. However, in the face of some budgetary uncertainty, and to reduce complexity, we have now removed this recommendation from the proposal.
We do not want to close the door entirely on KPI options, rather keep the concept but not commit with this group, and handoff work that’s been done to the Index Council to consider at a later date.
We will seek to take this proposal through IIP to signal a directional commitment to the Dynamic Staking Model, Airdrop and Priority Hiring Guidelines.
After this, we will go heavily into the implementation specifics with Engineering WG. We want to note that there are various ways in which the proposal above can be implemented with greater or lesser degrees of complexity.
The implementation approach will not materially impact the mechanisms as proposed.
|V2 Priority Hiring||Effective immediate|
|Dynamic Staking Model||Jan 31st|
A summary of the changes for current FT folks is provided here.
The immediate next step is to gather constructive feedback and questions before hopefully moving towards IIP.
Please share your constructive feedback below.
- I support this proposal progressing to IIP
- I do not support this proposal progressing to IIP