This post is one six exploring the comprehensive overhaul of Compensation and Community Ownership at Index Coop. Whilst each topic is a stand-alone piece, they are interrelated. We recommend reading through the posts in the following order:
- Compensation & Community Ownership - Next Steps
- Retrospective Airdrop to historical contributors
- Dynamic Staking Model
- V2 Fixed Salary Hiring
- Owl Levels (not yet released)
- Flexible Compensation (not yet released)
It is also worth noting that these discussions of airdrop, staking and compensation are occuring in parallel. They are interconnected and can be approved and implemented independently - hold ups in one area does not prevent implementation of another.
The holistic picture of our new Compensation and Community Ownership work was mentioned in the kick off post and is displayed again below.
In “Retrospective airdrop to historical contributors” post, we outlined why building community ownership was vital for Index Coop’s success. In it, we proposed an allocation of 28% of total INDEX circulating supply to go to contributors which is in line with ownership percentages at other DAOs.
The retrospective airdrop goes someway to achieving this, proposing 7% for contributors active in Index Coop from year 0-1. However, this leaves another 21% to be distributed.
This post seeks to address how this ownership distribution could be achieved in the future with the introduction of a “Dynamic Staking Model” (DSM).
The DSM is a forward looking delivery tool and incentive mechanism designed to provide equitable and sustainable contributor-wide token ownership to existing and new contributors. Allocation through the model will be based on impact (as designated by Owl Levels) and “skin in the game” as denoted by INDEX token holdings.
Through the Dynamic Staking Model we aim to distribute 7% community ownership per year, over three years, to those eligible to participate.
For those reading about this subject for the first time, the kick-off post is here.
We are at the frontier of how to build a DAO, and getting token ownership right is one of the most critical questions we face. Fundamentally this proposal seeks to identify the most effective vehicle to deliver a fixed allocation of ownership to contributors each year while promoting long-term holding.
With a topic this important, we must not blindly distribute tokens - instead, we will do so in a sustainable manner designed to benefit the community and INDEX token holders.
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-y3. In our case this is 2.8 million tokens (28% of circulating supply*)
- Allocation retention rate - The % of tokens that are retained by recipients of the Community Allocation and not sold.
*This post does not explore the topic of Total Community Allocation, the rational for which can be explored in Retrospective Airdrop to historical contributors. Instead, it should be seen as the proposal of delivery mechanism by which distribute a target Total Community Allocation.
To ensure our approach is robust we note the following core principles a successful model for Community Ownership would provide.
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
Reward highest impact contributors
- Competition for great people is fierce. As such, we must ensure that our high impact contributors are rewarded sufficiently and retained.
Allocate tokens in a way that minimize INDEX sell pressure
- Index Coop’s continued operations are enabled through the price of the INDEX token. As responsible stewards of the community, we must ensure that any changes minimize the price impact to our token.
Provides flexibility and fairness which guarantees new and existing contributors a fair opportunity to build ownership in the protocol
- We have seen the tension created by an “in” or “out” dynamic with full time compensation packages as the only real path to contributor ownership. We must look to promote community ownership in a scalable way that does not create further disharmony.
Aligns contributors’ incentives with long-term price appreciation of the INDEX token
- Presently, contributors receive more INDEX per month if INDEX prices go down. This is a counterproductive incentive framework. A new ownership system should align all contributors’ incentives with INDEX price appreciation.
Ensuring our approach maximises the Allocation Retention Rate is critical to achieve long term community ownership, to reduce the price impact on INDEX, and to allocate ownership in a fair and equitable way.
Staking is a common feature across the crypto ecosystem. We have taken some core principles of this mechanism, but expanded it to better serve as a delivery vehicle to build robust community participation and increased Community Ownership.
The critical difference to a traditional staking program is that this model is being used to allocate a fixed % of INDEX to contributors each year. Thus, it is only available to contributors and has an APY/return determinant on a contributors’:
- Impact, AND
- Skin in the game
As we know, commitment and contribution take different forms; most commonly, these are categorized under Talent, Treasure and Time. Keeping these elements in mind, we created a model designed to incentivize contributors to increase the quality 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).
2.1 Impact (Owls Levels)
In the model, increased quality contributions, as reflected by higher Owl Levels, is 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. Details on some different options for determining Owl Levels will be explored in a follow up post as part of the compensation & community ownership work.
2.2 Skin in the game (token holdings)
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 which aligns the financial interests of contributors with the INDEX holders at large. Positive community outcomes would lead to a higher token price, which is in turn beneficial to large token holders.
Below is a conceptual representation of how the model could work. Numbers entered are purely for indicative purposes to show how the total Ownership Allocation within a given month changes through the interaction of Owl Levels and Token holdering.
Fig 1 - DSM Monthly Ownership Allocation (table)
As you can see, the desired outcome is for contributors to move toward the lowermost and rightmost position. Noting also that contributors will be eligible for a small amount of Ownership Allocation each quarter, regardless of their token holdings.
Fig 2 - DSM Monthly Ownership Allocation (graph)
Thus, the Dynamic Staking Model (DSM) incentives and rewards all contributors to increase their impact, and “skin in the game”.
Fig 3 - DSM APY from Allocation (table)
Simply considering the absolute INDEX payout masks the attractiveness of the APY available at each cross-section. The below table presents the equivalent APYs for the above table.
Fig 4 - DSM APY from Allocation (graph)
Fig 3 and Fig 4 demonstrate how more impactful owls will earn greater rewards due to their contributions, responsibilities, and assumed risks. As part of the broader “Compensation and Community Ownership” theme, a follow up post will be shared with some alternative mechanism for determining impact and Owl Level.
It is worth noting that whilst those with the lower token holdings receive a very attractive APY which, if they hold, allows them to “catch up” to contributors with greater ownership. However, for Bronze Owls the payout quickly tails off regardless of INDEX token holdings.
This means that the total payout to Bronze Owls will be relatively small in comparison to more impactful Coop members, especially when considering these same Coop members will also have larger token holdings.
The Dynamic Staking rewards are also subjected to a time lock whereby Ownership Allocation, in INDEX, is paid out after 6 months. By subjecting the rewards to a delayed payout, community members are also incentivized to contribute over a longer time frame.
These three elements working together should benefit INDEX by aligning contributor incentives with the community’s long-term success.
Given that this DSM is designed to achieve a community ownership target through generous staking rewards, we anticipate increased demand for both tokens and high leverage positions within the Coop. While this is the exact outcome we target through this model, this may mean we under/over distribute tokens in a given month. Without a process for continual reassessment the model may deviate from the yearly 7% community allocation targeted.
For example, if the number of contributors spikes, it is conceivable that more ownership is allocated than the 7% target. Alternatively, if contributors increase their holding by a greater than expected amount (we have assumed allocation retention rate of 70%) then the model could similarly over allocate in a given year.
To guard against this risk, the model will be reassessed monthly initially, then moving to quarterly, to ensure that distributions are proceeding as expected and that community ownership is evolving as intended.
By determining a Total Community Allocation, and then using the Dynamic Staking Model to deliver a Community Allocation of X% between contributors based on Impact (Owl Levels) and Skin in the game (INDEX holdings) we create a powerful incentive framework.
This will lead to the following first order effect:
- Incentivise and reward contributors to increase their impact
- Incentivize and reward contributors to build their stake in the protocol
- Increase Allocation Retention Rate and so Community Ownership
- Increase Contributor Retention Rate, especially for high impact contributors
In turn, creating the second order effects of:
- Reducing INDEX sell pressure and creating buy pressure from new contributors looking to increase their INDEX holdings
- Makes Index Coop one of the most attractive DeFi projects for top talent looking to build ownership in a protocol.
Whilst predictions are difficult, we are targeting an Allocation Retention Rate of 70% by the end of Y2. This would make the Dynamic Staking Model one of the most efficient mechanisms to distribute Community Ownership that exists, and would greatly benefit all Index Coop stakeholders.
The dynamic element to the model has some nuanced, but powerful benefits that can be demonstrated via some three examples.
Example #1: Contributor who sells airdrop and vested token rewards
A contributor chooses to sell all of the INDEX he has and/or receives. This contributor does not have “skin in the game” or is invested in Index Coop for the long term.
Despite the individual’s high impact level (they are Gold Owl), as their token holdings are low, they receive a much smaller relative allocation than other Gold/Silver Owls who have held their tokens.
Over time, this means that comparable Gold Owls who have chosen to keep their Ownership Allocation will also receive a greater allocation amount in comparison to those who sell.
In this instance, the dynamism of the model has allowed a reallocation of INDEX from contributors who have a high propensity to sell, towards contributors with a high propensity to hold. This is a critical mechanism that underpins this model’s ability to achieve a high Allocation Retention Rate over time.
Example #2: Crypto Winter pt2
The crypto market goes through an extended decline, token prices, including that of INDEX, falls significantly. Under the current Full Time package (625 INDEX per month) the dollar value of rewards drop significantly, and contributing at Index Coop becomes non-competitive. As a result Full Time folks start to leave, selling their INDEX as they go which further drives down price (death spiral).
Under the Dynamic Staking Model, as people exit there would be a declining number of contributors participating in the Dynamic Staking Model. However, as there is a fixed 7% Community allocation each year, this means the remaining contributors would receive a greater percentage of the total allocation as a result. This is especially true if they continue to hold their INDEX tokens or buy more.
This dynamic mechanism would encourage existing contributors to stay, and make Index Coop more appealing for new contributors to join - even during a crypto winter.
Example #3: Index Coop success
Index Coop experiences a period of massive growth, the Dynamic Staking Model draws in a number of highly impactful contributors who purchase INDEX on the open market to gain access to the Ownership Allocation offered within the staking model.
With new contributors joining the DAO, existing contributors have the quantity of Index they get from the Dynamic Staking Model somewhat diluted. However, they would benefit from:
- The positive price impact of having new contributors needing to purchase INDEX to maximise their gain from the staking model
- The positive price impact is created by having high impact contributors supporting the growth of the DAO.
This puts the onus on existing contributors to balance excessive growth of the DAO (which would dilute their rewards) with the benefit of having high value contributors delivering impact and increasing token price appreciation.
This allows the Dynamic Staking Model to create a balanced incentive framework which will readjust, regardless of market conditions. This will support Index Coops long term success in the years to come.
Q1 - “Is this model too complex? Will it require lots of admin or engineering work”
The model takes two inputs, Owl Level and token holdings, and uses it to calculate a vested % of community allocation for the contributors. The relative weight the model places on contributor’s Impact (Owl Level) and skin in the game (token holding) can be adjusted flexibly.
This is plugged manually into a calculator which automatically generates a figure for the INDEX allocation the contributor should receive in a given month.
Practically this can be implemented in a variety of ways, with the most simple being to scan the contributors designated wallet to determine current holdings, through to eventually building out a smart contract module. The more simplistic option will take little to no engineering effort, and some ongoing admin work.
If the proposal receives community buy-in we will share a more detailed post exploring the process of ongoing maintenance of the Dynamic Staking Model. Details on the mechanism for determining Owl Levels will be explored in a follow up post as part of the compensation & community ownership theme.
Q2 - “Why allocate ownership to non-core Bronze and Silver Owls under the DSM”
Bronze and Silver Owls are the next generation of emergent talent DAO, with all Bronze Owls directly supporting Working Groups to deliver impact. Incentivising these Owls with a small allocation of ownership will act as a powerful motivation to get them further involved in the DAO.
Furthermore, competition for talent in this space is fierce, and Bronze and Silver Owls are actively being poached from Index Coop. A continual churn of Bronze and Silver Owls slows our organization down, as building context for contributors takes time.
Finally, the majority of the token allocation will be distributed to Gold/Silver Owls with high Allocation Retention Rates (i.e. the ones who hold). Including Bronze Owls in the reward distribution is a small price to pay for a community united behind the price appreciation of the INDEX token.
Q3 - “I won’t be able to build up my INDEX holding as I have to sell to cover bills”
Under our new compensation structure we have separated “Salary” from “Ownership”. Contributors are expected to be offered a competitive market salary, and use this salary to cover day to day living expenses and bills. The Dynamic Staking Model only explores how to allocate Community Ownership. As a result there is no pressure for Contributors to sell anything they receive from the Dynamic Saking Model.
We expect most contributors to simply hold their INDEX and progressively build their ownership.
Q4 - “How would this impact Full-timers with vesting contracts?
Full Time contributors will also be eligible for the Dynamic Staking Model.
More details of how the FT vesting package interacts with the airdrop, Dynamic Staking Model and Full Time contributions will be provided as the details of element are finalized.
Q5 - “Would it not be easier to just continue using the current “Full Time Vesting Contract Approach”
Despite some adoption in web3, Full Time vesting is a web2 startup concept. At Index Coop, we are defining a new paradigm for how people come together and organize - and people have impact in all sorts of different ways. On this new frontier, new innovation is required to incentivise people and build ownership which moves away from the us/vs them legacy mindset.
The Dynamic Staking Model aligns incentives and ownership in a more fair fashion which feels a better fit for our community.
The Dynamic Staking Model became the web3 best practise for how to build community ownership from launch - and could further cement Index Coop’s position as a market leading in the DAO space.
It provides a flexible, scalable and generous model to attract and retrain contributors and increase Allocation Retention Rate and so build Community Ownership - whilst minimizing sell pressure.
This embarks us, the community, on a path toward real ownership of the DAO we have all built together.
The immediate next step is to gather constructive feedback and questions.
Please share any comments/questions/objections/concerns you have below!