DRAFT: IIP-XYZ: Meta-Governance 2.0: Executive Productivity

[mel.eth]

IIP Number: 135
Title: Meta-Governance 2.0: Executive Productivity
Status: Proposed
Author(s): @anthonyb.eth @mel.eth
Created: 14 January 2022

Simple Summary

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.

Abstract

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.

Motivation

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:

• [AAVE-54] – 4.97k INDEX; 17 votes
• [BIP 82] – 2.62k INDEX; 9 votes
• [YIP-65] – 11.03k INDEX; 22 votes

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.

Outcomes

• 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)

Specification

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.

Current Model

1. Activist buys INDEX
2. Activist votes on a meta-governance proposal using INDEX
3. Meta-Governance Committee executes vote as result of step 2
4. Activist sells INDEX

Proposed Model

1. Activist pays a fee to borrow voting power from the vote-lending market
2. Proceeds are returned to the Set Vault to benefit product holders

Example

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.

Vote Lending Market Dynamics

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.

Flywheel

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.

FAQs

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.

Next Steps

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.

Copyright

‌Copyright and related rights waived via CC0.

[Matthew_Graham]

Hi @mel.eth

This is a pretty interesting and novel idea. At first glance, I was wondering.

Question 1.
16,766 DPI holders
$1m in gas at $60 per airdrop transaction cost to send
$136M TVL in DPI

How much yield do you think this will generate ?
The ROI is -0.793% APY per airdrop from gas, so this needs to generate 0.793% and distribute proceeds once per year to break even.

Question 2.
Can you please share a link to the vote-lending market ?

Question 3.
What if we boosted the metagovernance power of Index Coop and made it more attractive, as in made Index Coop the meta-governator of defi?
I’d buy INDEX for that.

Check this out as an idea. Consolidation small bag holders governance influence to make a difference.

Alunara

[mel.eth]

No airdrop mentioned here, it’s a direct injection into the vaults; your units of DPI would get more valuable, the unit supply would remain constant. Voodoo.

[anthonyb.eth]

Hi @Matthew_Graham,

1. There would only be one transaction from fees generated > set vault. The yield would increase the underlying collateral during the rebalance. The “airdrop module” would allow funds to be sent to the DPI contract and then distributed to DPI holders without action. It would just be incorporated as collateral. I hope that helps clarify.

2. Here are two existing vote-lending markets:

@mel.eth

Given these considerations, utilizing an existing (e.g., Paladin, Bribe Protocol) or custom-built vote-lending platform will be a consideration.

But, it is possible that we may want to build our own.

3. I’m not quite sure how that is different than what we have today. Because you need to win both meta-governance and the primary proposal (e.g. Uniswap proposal) it is much more expensive to borrow voting power which makes it a less attractive option for potential voter-borrowers. To be sure your money isn’t wasted, you need to hold 50% of the voting power in INDEX, and then you have to hope Index’s meta-gov power tips you over the top on the vote you really care about. It creates a much more efficient market if you disentangle the meta-gov from INDEX.

As for consolidating small voters, that would be awesome! This would make that much more accessible and we might even see small, activist DAOs spun up to utilize the vote-lending market to make proposals!

[mel.eth]

We cleaned up these diagrams we’d used when roughing this out. Sorry for rough nature, hope this helps with the mechanics.

[mrvls_brkfst]

This proposal is really impressive in avoiding the need for a new token, boosting the value of IC indexes, and improving cost dynamics. All of my ideas around value proposition seem satisfied. It seems a shame to lose the meta-gov power from the Index token, but it has failed to get good traction, so perhaps its time is up.

I stumble though, this very strongly supports plutocracy. And, I don’t believe it is sufficient to say vote buying already happens.

Though it is very difficult, and so far illusive, can there not be another way? One in line with our IC vision of creating decentralized financial products that unlock prosperity for everyone – not just the rich who can afford to buy votes to shape protocols in their favour.

A mechanism, perhaps, that channels voting power to the active voters, those who stay the course, those who have a voting record. Over time and with more votes, the more of the voting power share you accumulate. A qualitative aspect could be applied by valuing how in line with sentiment a voting history is. Something along these lines may be needed to avoid flash-loan voting.

I realise that does not address income. And I have no clear thoughts in that regard right in this moment, except, in a rather nebulous sense, that the value of an index should increase at least in part because the protocols within it are having proposals voted on in a way that boosts their protocol token’s value. The health of the overall system will be where long-term value takes root and grows.

[oneski22]

While I am supportive in trying to unlock the meta-governance value of the Index token. I strongly believe this is the wrong way to go about this.

1. Any fee return directly to the index (DPI, MVI etc) would be intrinsic productivity and damage much of the work @Metfanmike and the IB team have done over the past year in achieving exchange listing, legal opinions and institutional adoption.

2. The $INDEX token already presents a governance attack vector against several of the underlying DAOs included in our various indexes. Drawing attention to that fact may galvanize those communities to promote alternative products without such active voting management, or change their governance entirely, removing value from the $INDEX token.

3. This should not be down at the protocol level, as we have seen with various other flywheels, CRV’s bribes aren’t done by CRV, they are external. Convex’s bribes are external (generally through Votium), Tokemak’s bribes are external (generally through Votemak). There is a project in development to help INDEX holders unlock this bribe value but for the sake of neutrality this shouldn’t be done by INDEX as its sole focus should be crafting and maintaining great products.

[anthonyb.eth]

I agree with pretty much everything you said.

We believe there is a model out there that can accomplish decentralization and value accrual for product holders.

For example, a Sybil-resistant quadratic voting system could be implemented into the market to protect against these things.

We welcome suggestions and we’re hopeful that we get ideas from the community on a market design that is good for users, the community, and the ecosystem at large.

[anthonyb.eth]

Hey @oneski22,

@oneski22

• Any fee return directly to the index (DPI, MVI etc) would be intrinsic productivity and damage much of the work @Metfanmike and the IB team have done over the past year in achieving exchange listing, legal opinions and institutional adoption.

This is a really interesting perspective and something we hadn’t fully considered. That said, if we can make our products better, it’s my opinion we should do so. We need to find a way to work with exchanges and institutions, but we can’t be held captive to their demands. Hopefully there is an implementation that allows us to make our products better AND satisfy the institutions’s lawyers.

@oneski22

Drawing attention to that fact may galvanize those communities to promote alternative products without such active voting management, or change their governance entirely, removing value from the $INDEX token.

I don’t see how this would remove value from the INDEX token. Mega-governance currently provides no value for the INDEX Token. Maybe I misunderstood you’re point.

3. Yep, we agree that this might be better than off as a sub-dao or by partnering with another platform.

Thanks for the thoughtful reply!

[oneski22]

@anthonyb.eth

This is a really interesting perspective and something we hadn’t fully considered. That said, if we can make our products better, it’s my opinion we should do so. We need to find a way to work with exchanges and institutions, but we can’t be held captive to their demands. Hopefully there is an implementation that allows us to make our products better AND satisfy the institutions’s lawyers.

Not to open the productivity can of worms, but its the same reason I am strongly against swapping SUSHI for xSUSHI, Aave for stkAAVE and COMP for cCOMP etc in DPI. It makes DPI much closer to a security per present regulations and would relegate our products exclusively for a crypto native audience, causing us to fail our mission of making products “simple, safe and accessible”.

@anthonyb.eth

I don’t see how this would remove value from the INDEX token. Mega-governance currently provides no value for the INDEX Token. Maybe I misunderstood you’re point.

Tribe bought 1% of the INDEX supply to push through the FEI listing on AAVE. We have openly had investors such as 1kx write and speak about the value of the metagovernance and how it was a large part of their investing thesis. IMO the value of the metagovernance power is factored into the INDEX price (not as much as it should in my beliefs, but the market speaks to what it values it at).

My point with this is that we could see a DAO shift their voting token away from the vanilla to a productive version such as Yearn is doing with the shift from YFI → xYFI → veYFI, thus removing any ability for INDEX to use its metagov powers without us addressing the first point.

[lee0007]

Gentlemen, love the focus here on building value for product holders and the value cycle. Thanks for the visualisation it helped my understanding. Smart people tackling tough problems is one of the reasons I love this community.

@mel.eth

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.

How would this proposal change the current function of the meta gov pod?

@oneski22

Any fee return directly to the index (DPI, MVI etc) would be intrinsic productivity and damage much of the work @Metfanmike and the IB team have done over the past year in achieving exchange listing, legal opinions and institutional adoption.

@oneski22

Not to open the productivity can of worms, but its the same reason I am strongly against swapping SUSHI for xSUSHI, Aave for stkAAVE and COMP for cCOMP etc in DPI. It makes DPI much closer to a security per present regulations and would relegate our products exclusively for a crypto native audience, causing us to fail our mission of making products “simple, safe and accessible ”.

The issue of intrinsic productivity <> securities raises warning bells for me so would like to hear more about mitigating the risk/concern @oneski22 identified.

@mrvls_brkfst

Though it is very difficult, and so far illusive, can there not be another way? One in line with our IC vision of creating decentralized financial products that unlock prosperity for everyone – not just the rich who can afford to buy votes to shape protocols in their favour

Both @oneski22 and @mrvls_brkfst make good points about accessibility as it relates to our mission to “unlock prosperity for everyone” and just wondering if there is an interim step needed here to improve the current system. I have a colleague that routinely references Galls Law and it really is permeating my thinking

Gall’s Law states that all complex systems that work evolved from simpler systems that worked . If you want to build a complex system that works, build a simpler system first, and then improve it over time.

So in terms of improving the current system. The reason I do not vote more often on meta governance is simply lack of awareness, for the life of me I can’t keep track of the plethora of IIP. My primary barrier to meta gov. voting is awareness, followed closely by timeliness probably 50% of IIPs are closed by the time see and open links.

Could we improve meta-gov turn out under the current system if it was easier to engage on time? Perhaps a simple tool like the Ethereum Push Notification Service could address this, by pushing IIP notifications to wallets as they go live https://app.epns.io/ Just launched, early adopter presence in a web3 native comms tool that I believe will become as ubiquitous as SMS

[Figue]

Hello everyone, Figue, core member of Paladin,

You might have heard about us in this proposal as well as this AMA with Crypto Texan.

Our vote lending protocol is compatible with $INDEX and has been ready for two months. We have not deployed it yet because we believe that its current setup was not compatible with values of the coop and it wasn’t enough value additive for the protocol.

Here are the following challenges I understood from the above messages

• Meta-governance is globally acknowledged as highly valuable but undervalued and under-used under the current Index meta-governance setup ;
• Reduce infrastructure cost of running meta-governance while venturing into yield bearing opportunities for DPI ;
• Maintain the Coop’s values, namely empowering smaller holders ;

I’d like to add :

• Avoiding extra smart contract risks ;
• Reducing plutocratic excesses.

Also, some tokens in DPI are simply not compatible with vote lending.

With a regular Paladin Lending pool I believe that Paladin is a solution for almost everything (let me know if you want me to develop some points) outside of defending the Coop’s values.

However, as some of you might have seen with our newest dApp, Warden, we’re committed to build high quality bespoke vote lending platforms for specific tokens / protocols.

Here’s what I have in mind :

• Enable fractional voting for DPI (let me know if not feasible) ;

• Create a custom Paladin Pool that allows for vote lending while letting the Coop vote with all unborrowed voting power ;

• Make DPI the vote lending payment method ;

What do you think ?

[oneski22]

Hi @Figue love some of the experiments in governance you have been doing at Paladin.

A few corrections just on the setup of our metagovernance. All power from all products (DPI, MVI, DATA, GMI) are pooled into some addresses which then vote based on the outcome of $INDEX voting.

Would love to connect further with our BD and GovOps teams to learn more about Warden and see if it makes sense with Coop Products in our discord at indexcoop.com/join

[shawn16400]

Reasons I love this proposal:

1. It attempts to unlock the incredible power of metagovernace
2. It elevates a topic (metagovernance) that is not well understood by the community
3. It demonstrates how difficult metagovernace is and highlight a lot more thinking is needed

Reasons I don’t think this proposal is the right path forward:

1. IndexCoop trades the market shifting power of metagovernance for non-strategic revenue generation
2. It abdicates the incredible responsibility of Metagoverance to the market
3. It puts IC at risk of supporting / enabling nefarious activity

I read the mission of IC “Create decentralized financial products that unlock prosperity for everyone” and ask “how does this bring us closer to this mission” and I think the answer is: it might help cover some operational expenses, but it has the additional risk of:

1. Distracting IC from mission critical goals
2. Harming IC reputation,
3. Causing real damage to our partners and the industry.

Done well, Metagovernance can affect real change. For example, BlackRock quietly uses their investment stewardship (our metagovernance) to literally move Wall Street. Recognizing environmental concerns in 2017, Larry Fink told Wall Street CEOs the “environment matters” to his Index Fund investors. In 2018, he asked CEOs “how are we managing our impact on the environment?” In 2019, he declared “environmental risks and opportunities” were a priority for BlackRock’s investment strategy, in 2020, he stated Blackrock was “exiting investments that present a high sustainability-related risk”. Now that he had their attention, in 2021, he demanded CEOs to publicly “disclose how they will compete in a net-zero economy”.

He was able to move Wall Street because BlackRock Index Funds yields the shareholder voting power of $9 trillion in assets under management. Often the largest voting block across the fortune 500, BlackRock can remove CEOs, change boards, and create new business objectives.

That’s IndexCoop. And that is the Metagovernance power we need to learn how to leverage. If we really want to unlock prosperity for everyone.

[mel.eth]

Quite the philosophical statement as an org as I see it:
“As a community we’re better stewards of great power than the open market.” You capture it really well here; thanks for bringing this into sharp focus as you have.

This makes me want to really explore how we’ve used the power in the past (and whether the market would just pay for it anyway, net positive, as I see it). I wonder if cause-specific orgs would form and exert influence in the markets should they develop, effectively decentralizing and unlocking the value and allowing influence to express where it is perhaps best exerted?

[overanalyser]

My views overlap with @oneski22 to a large extent.

Value capture to the product creates challenges.
Allowing our metagoverance to be rented for a single vote may not be in the interest of the underlying protocols. If they see it as a problem, they can look to avoid this (black listing the INDEX coop help tokens, requiring staking to vote).

If I remember correctly, a Maker collateral vote was pushed through by the proposer borrowing tokens (from AAVE?), as a result, Maker sought to prevent lending of MKR on the open market.

Personally, I’m against most bribe mechanisms.

I’m not sure how they will play out for CRV style gauges. But I’m strongly against bribes for governance power. People who vote, should be thinking about long term benefit to the project they are voting on, not a short term gain.

I think INDEXcoop has a value in being seen as a good steward of the tokens we hold for our passive users.

---

How can we reduce the burden of this responsibility?
Can we remove the snapshot requirements. i.e. send everything to a metagov committee? The downside is INDEX holders don’t get their say.

Maybe we need some system of allowing INDEX holder to identify which meta votes they want to participate in.

Maybe we use inb0x to allow wallets to talk to us.
Maybe we invite INDEX whales to join the metagov committee.

Can we ask the underlying projects to pay us for our service to their governance. e.g. A $UNI grant for being a good and active participant in their governance.

[oneski22]

@overanalyser

If I remember correctly, a Maker collateral vote was pushed through by the proposer borrowing tokens (from AAVE?), as a result, Maker sought to prevent lending of MKR on the open market.

That is correct, additionally borrowed COMP was used to list TUSD and boost its COMP rewards to the benefit of a single whale (Justin Sun its is believed).

[Matthew_Graham]

Hi @overanalyser,

I wish I was the originator of the idea, but credit goes to @oneski22 and what is presented here may not be accurate to oneski22’s vision. It is an idea, it could be going in completely the wrong direction, or it might get traction. Let’s see.

This idea enables everyone to delegate to earn yield and receive yield. But rather than a lending market, it is more a delegate voting service for good actors.

How does one determine a good actor?
For that, we have stewards and currently the steward is Index Coop’s snapshot process.
In this model, the steward “Blockchain Tokenholder Service” is an external entity that is vetted by Index Coop (whitelist) and one would expect the proposal would need to have the backing of the core contributors at the respective DAO if it was to be implemented. This avoids a lot of the risk from lending markets. Entity submitting the proposal has the support of the community being affected by the proposed change.

By outsourcing this, we essentially use a combination of a whitelist and incentives to drive user flow.

We can enhance the metagovernance reach by enabling anyone to delegate and receive yield. Index Coop can delegate product voting power and can route the flows to those who staked there governance token or even to products with intrinsic productivity enabled. The portion of the voting power belonging to the product that is unproductive would flow to Index Coop Treasury, in addition to a small fee for facilitating all this.

This approach is way more controlled and is not a free market. Index Coop’s reputation is at risk, so this model only acts as an enabler for communities whereby the core team intends to support the change proposal. It has the benefit of enabling small defi holders to sell governance for yield. Ideally someone builds this from outside Index Coop, like we have seen emerge in other communities.

There is gINDEX, so IC folks can deposit INDEX receive gINDEX + yield.
INDEX holders can still vote on metagovernance and Index Coop votes.
gINDEX holders can only participate in Index Coop votes, so no metagovernance voting.
The Yield comes from the Payments/Bribes to use the service.
Index Coop Treasury gets a facilitator fee
“Blockchain Tokenholder Service” receives an payment as part of attracting deal flow

[oneski22]

more details on this and a fuller proposal soon ™

[mel.eth]

gm @lee0007

Thanks for the great questions.

@lee0007

How would this proposal change the current function of the meta gov pod?

The MGC would be deprecated. Given that the MGC currently executes the votes, operationally it would be handled by the entity facilitating the marketplace.

@lee0007

The issue of intrinsic productivity <> securities raises warning bells for me so would like to hear more about mitigating the risk/concern @oneski22 identified.

This question will arise time and again. DeFi is largely about yield and our product users hold their DPI on-chain. Alternatives posed above don’t seek to eliminate yield, they just cannibalize it from user-provided funds and give it to INDEX holders. If our mission is to build the best tradfi products on ethereum I’d say we’re well on track by deferring to geography-based rules. The mission is best products for our users and almost all existing users are on-chain. If the principle of accessibility outweighs long-term thinking, performance, and innovation, so be it. I’ll note that most opposed to IP tend to favor still selling the governance in some fashion and giving fees to INDEX holders, which I find self-serving given that our users provided that value; if we can unlock it for them great, but we shouldn’t just take it.

@lee0007

Gall’s Law states that all complex systems that work evolved from simpler systems that worked . If you want to build a complex system that works, build a simpler system first, and then improve it over time.

The proposed system is incredibly simple: Aim our product delegation at a marketplace, give the fees back to users. It’s actually that simple. The market exists and fees can even be paid in DPI. Activists buying DPI drives TVL and doesn’t cause INDEX volatility up and down when activists participate (like it would now).

While I share your frustrations with metagov participation, I don’t share your optimism around increased participation via awareness. The simple fact is that very few INDEX holders vote. Full stop. Way less on metagov. And the sad reality is that even if you or I or even a simple majority of this DAO voted, it would still be 5x shy of quorum and the MGC would decide anyway - we pay a committee of 5 ~$90k a year to have an opinion when there’s a market willing to pay to express those opinions. Metagov 1.0 has mostly been a game for whales and the MGC, but mostly the MGC; otherwise we’ve gotten an integration that benefited holders by proposing on Aave, but we could still retain proposal power in this construct if it’s more valuable to us.

The alternative? We give our product holders back what they trusted us with in the first place in the form of the asset they already choose to hold.

If we can get over the hurdle that a marketplace for governance in what are largely software upgrades is somehow inappropriate I think the product holder support for this may be too overwhelming to ignore given it’s an evergreen source of yield that scales with a growing product lineup.