We propose a new model of voting with governance tokens in index products that will unlock the full value of meta-governance and will accrue value to product holders. The fees generated from lending voting power will make governance tokens in index products effortlessly productive for product holders. This yield-generation mechanism is being internally referred to as Executive Productivity.
This change will make Index Coop products more valuable than the sum of the underlying components.
This IIP directs meta-governance utility via tokens held in index products to a vote-lending market. The INDEX token, where meta-governance is currently delegated, will continue to govern at the protocol-level; however, INDEX holders will no longer have meta-governance voting power. Product holders will receive vote-lending proceeds without needing to take action such as staking. The yields will be injected directly into the existing vaults and composability will remain unchanged.
Meta-governance has been a key value proposition for the INDEX token, but it has yet to be a value driver. Governance is the primary utility for many component tokens of index products, but INDEX holders rarely use meta-governance. For example, the following proposals had very high rates of vote apathy:
In fact, the last 28 meta-governance proposals have not reached a quorum of 109,069 INDEX.
These proposals are valuable to someone, but not necessarily INDEX holders. Currently the Meta-Governance Committee votes, absent sufficient interest from INDEX holders. This decision-construct costs Index Coop $7,500/mo, requires operational support, and doesn’t scale as we add more governance tokens to our products.
The current model doesn’t work. It’s prohibitively expensive for vote-borrowers to reach a quorum and win on meta-governance proposals. Even if they do win, it will only sway the primary proposal (e.g., the Uniswap proposal) a small amount. Put simply, we are currently selling meta-governance rights at a price where there is no demand. Worst of all, if there was demand, the value doesn’t accrue to INDEX holders. After the primary proposal is completed, the vote-borrower would sell the INDEX.
That said, there is demand for voting-borrowing. We are just using the wrong model and pricing the meta-governance rights significantly higher than what the market is willing to pay. In short, this utility generates yield for product holders instead of giving it nebulously to INDEX holders that rarely use it.
- Increased index performance (offsets rebalance decay)
- Increased AUM due to voting-market fees (expressed as yield; direct vault injection)
- Increased index product possibilities (governance-driven product creation)
- Decreased overhead costs for the Index Coop DAO
- Token overlap between indices becomes positive-sum
- Virtuous cycle: Vault Yield → AUM → Voting Power → Fee Creation → Vault Yield
- Retain full composability (tokens don’t move from vaults; delegation only)
Index Coop controls a meaningful number of governance tokens inside of our products. These tokens can be used to vote in their respective protocols via meta-governance. The current model is inefficient for both the Index Coop and vote-borrowers (activist). The proposed model will streamline the vote-borrowing process to benefit product holders.
- Activist buys INDEX
- Activist votes on a meta-governance proposal using INDEX
- Meta-Governance Committee executes vote as result of step 2
- Activist sells INDEX
- Activist pays a fee to borrow voting power from the vote-lending market
- Proceeds are returned to the Set Vault to benefit product holders
An activist wants to create a proposal on Uniswap and borrows the required UNI voting power from the vote-lending market for a fee. The proceeds are returned to Index Coop product holders by increasing the quantity of the underlying assets in the respective index product.
While the implementation of an effective market is important, it’s not the subject of this proposal. The north-star of the vote-lending market should be to maximize yield for vote-lenders (i.e., index product holders). Because of this, we aim to ensure that votes are always earning yield so a dynamic market pricing mechanism is preferable to a fixed-price market. Given these considerations, utilizing an existing (e.g., Paladin, Bribe Protocol) or custom-built vote-lending platform will be a consideration.
With this new model, suddenly, owning an index becomes more profitable than holding the underlying assets instead of the other way around.
There are economies of scale in lending voting power. For example, the value of being able to lend 2% of a protocol’s governance token is greater than 2x the value of being able to lend 1%. Additionally, as a product attracts AUM, vote-lending yield will increase, attracting more AUM, further increasing voting power, ad infinitum.
Q: Is vote-buying fair?
A: Vote-buying already happens, but most token-holders are left out of the process. An open vote-lending market will allow token-holders to receive payment for votes that they are indifferent to.
Q: Is it technically feasible?
A: Yes. Through the ‘airdrop module’ on Set vaults, tokens can be sent to the respective vaults and exchanged for the constituent parts. Thanks for the assist on this @ncitron
Q: Why shouldn’t Index Coop get the proceeds directly from vote-lending?
A: Making our index products as good as possible is our mission and this market will help us do that. Plus, Index Coop will reap the benefits of this system. Reinvesting the proceeds back into our products will increase our revenue due to the streaming fee. It will also give our products a competitive advantage because vote-lending is non-linear. As the market grows, we will be able to charge higher rates, leading to index product price appreciation, which will attract more product holders, and will increase our vote-lending capabilities. It’s a beautiful flywheel with built-in network effects.
We understand that while novel and potentially a key value-driver, this is a departure from the current usage of our meta-governance powers. While we believe that this is a more optimal implementation based on our research to-date, we’re keen to solicit feedback and challenge, as well as openly discuss the potential implications of this proposed change.
We will be hosting a presentation and AMA on Tuesday, 18 January 2022 at 21:00 UTC. Please join if you would like a more visual presentation and we will stay on to answer any questions you have.
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