INDEX has seen parabolic price movement over the past two weeks, going from $2 to north of $15 before stabilizing around $12.
However, there is minimal liquidity for $INDEX at the moment - a $25K buy right now on Uniswap would move the market more than 13%
If we want to make $INDEX more stable and attract larger buyers, we need to create deeper markets.
There are a few options here:
1/ The simple option is to conduct a liquidity mining scheme for the INDEX/ETH pool on Uniswap, similar to the one that we’ve been conducting for DPI/ETH (see here for recent discussions on liquidity mining).
However, this is not a great option given that there seems to be community consensus on turning $INDEX into a productive asset (likely by staking to serve as a risk backstop to $DPI). Hence, we want people to use their $INDEX for something other than providing liquidity on Uniswap.
2/ Another option is for the Index Coop itself to provide liquidity, which is what @setoshi proposed on the November 16 product/growth call. Specifically he proposed that the Index Coop do the following:
-Depositing $X in INDEX from its balance sheet
-Depositing $X in ETH (funded by selling $X in INDEX)
From my point of view this is not ideal for a few reasons:
- Potential tax consequences
- Selling $INDEX when we believe its price is going to increase
- Don’t think that the Index should start diversifying into ETH, would rather do it into stablecoins
3/ Index Coop provides liquidity by borrowing ETH (pledging its INDEX holdings as collateral). This avoids us having to sell INDEX (which we believe will go up in value) and prevents the Index Coop from holding ETH on its balance sheet (I believe it should diversify into USD if it wants to diversify).
I will work on getting some more details around what the structure of a loan might look like, but I think we could get relatively favorable terms from funds that are interested in acquiring INDEX if we agreed to pay the interest in INDEX for example.
The goal is to get the INDEX/ETH liquidity pool deep enough that a $25K buy only creates 1% slippage. I estimate this would require ~2650 ETH (the pool currently has 240 ETH). This is approx $1.25M.
In order to accomplish this, the Index Coop borrows 3500 ETH for 90 days. The Index Coop also pledges ~$1.25M in Index into the pool.
- In favor of buying ETH to supply liquidity
- In favor of borrowing ETH to supply liquidity
- Not in favor of supplying INDEX/ETH liquidity
*I need to dig in a bit more as to what this would cost in interest. A secured loan on Compound is currently ~2% APY so approx 0.5% for 4 months, but INDEX is high-risk collateral