Extending the Stablecoin Runway Discussion

[Matthew_Graham]

Hi Community

After a period of intense market conditions where asset prices have been volatile and sentiment has turned for the worse. We feel it is appropriate to share our opinion on the current financial situation within the organisation and provide some ideas we think will benefit the community.

We are first to admit the remuneration process at Index Coop is not perfect. We accept that it is virtually impossible to design a perfect construct which addresses a wide range of scenarios and all types of actors. However, we are aligned across Finance Nest that following the 80/20 rule, the current framework is good enough. It would be a waste of DAO resources to try to reinvent the wheel that risks dragging the community into a lengthy discussion or risk demoralising the team that compiled the first iteration of the remuneration structure. Reconstructing the remuneration framework is not a DAO priority and any new paradigm is an unwanted distraction from focusing on sales and distribution efforts.

Having reviewed the DAO stablecoin runway and witnessed the recent market turmoil, Finance Nest would like to present two simple amendments which can be easily adopted into the existing Contributor Reward framework.

The first idea is to allocate $35k of revenue each month into supplementing the stablecoin runway. This will generate an extra 2 months of runway if implemented in silo. This can be actioned immediately and executed by the operations account at the end of each month when revenue is claimed. Allocating $35k of revenue to stablecoins runway each month would offset two thirds of the recent core hires stablecoin cost. Assuming we maintain only 6 months of unproductive stables, the combined runway would extend by 4 months, this more than offsets the recent Core Hire additions. This intends to commit funds to sustaining the runway, representing a shift in capital allocation/priorities, in turn providing the DAO with more time to see through a bear market if it emerges.

The second amendment is most likely to be a strong conversation point. The idea we are presenting is that all contributors who have been Core Hires for more than four months move to a maximum $8,000 per month stablecoin distribution with the remainder of their remuneration package paid in INDEX. This means a Band 5 resource, receiving $140,000 per year, would now receive a maximum of $8,000 per month or $96,000 in USDC/year and remainder, $3,666.67/month or $44,000/year in INDEX. Selecting 100% payment in stablecoins for the Base Salary would now be limited to $8,000/month/contributor. Band 5 are Nest Leads and more senior/developer roles. Implementing this change would extend the communities runway by 14 months and would only affect Leadership and Developer roles.

	$10k USDC	$9k USDC	$8k USDC
Additional Runway	7 months	10 months	14 months
Stablecoin Runway	February 2025	May 2025	September 2025

Leadership and Developer roles are the resources we want receiving/holding the most INDEX as their decisions directly affect the wealth that accrues to the DAO and they need skin in the game. One could extend this logic to encourage community elected leaders on the council receiving 100% INDEX encouraging skin in the game at the highest level of leadership. But we’ll leave it to the leadership team to volunteer / opt in.

Reviewing the above chart, the intersection between the cost base curve and the stablecoin balance curve is when we estimate the DAO will need to perform a Series B raise. Currently, we expect the raise to be Q2 2023 and with implementation of the ideas presented here within, we could see this move towards the end of Q4 2024. This 1 year delay would give the DAO a lot of flexibility and ability to wait for better market conditions and create products and partnerships that cement the future of Index Coop in the market.

With uncertainty around future revenue due to turbulent market conditions, pivoting the DAO remunerations towards adopting one or both ideas presented above would provide extra runway and breathing room for the DAO. We can always revisit/reverse any change at a later time when market conditions improve.

A final idea that we would like to put forward is the potential to use a portion of revenue to buyback INDEX, creating a bid in the market. Buying back INDEX at a heavy discount to the OTC deals of 2021 would be a strong signal to the market and it would absorb some of the sell pressure as the industry navigates through a bear market. This could be implemented periodically via a Balancer pool that rebalances from 100% ETH to 100% INDEX. The repurchased INDEX could be sold at a later date when asset prices have recovered. There is a trade-off, it is likely we will need to do a raise next year and a higher INDEX price means less dilution of existing circulating supply holders. With revenue fairly correlated to ETH, the safer route would be to extend our stables runway now and revisit any buyback scheme when our revenue position is stronger.

This publication is aimed at sparking a conversation and sharing some initial ideas. In times when the market is as volatile/uncertain as it is now it is worth reducing USDC spend and extending the runway. To accelerate spending and bring forward a Series B raise may just lead to a lot of holders being diluted as a percentage of circulating supply.

Authors: @Matthew_Graham, @ElliottWatts, @Hammad1412 and @prairiefi.

[Matthew_Graham]

Hi @LemonadeAlpha,

Thank you for sharing candid feedback. There is lots to digest !

You are right in sense that this proposal fails to address the core of the problem which is the overall spend relative to revenue. Finance Nest will be preparing a post that takes a closer look at what areas of the DAO we think present opportunities to right size in line with the current market outlook. That said, a DAO without a Senior Solidity Developer is a concern and we need to hire in this area.

If we size the organisation more inline with revenue, rather than our growth ambition, this will lead to significant downsizing. Downsizing the DAO would be difficult, the optics and community vibe would be at risk. Just having an open discussion in a DAO on how to downsize will mean discussing differing views and then the community will debate which way to move forward. On the other hand, trusting a few folks to choose the future of the DAO risks resentment building towards that group. It is a delicate topic and the communication around it is critical to ensure the DAO doesn’t get distracted from its overall mission.

This proposal is an immediate more palatable action which we can be implemented now. I ultimately believe folks working at a start up should want equity and unless we pivot the entire renumeration construct it is hard to implement a quick improvement that solves for this. A ceiling on USDC spend is not ideal, but easy to implement and buys us time to tackle the root cause. In my honest opinion all leadership roles should be skewed towards receiving equity to align long term incentives. The spot INDEX price is low and it wasn’t that long ago the community wanted more ownership and upside exposure.

[shawn16400]

@Matthew_Graham. I agree with @LemonadeAlpha that your proposal is work in the right direction, but does not solve the problem. At issue is the fact that Index Coop is not positioned to survive an extended bear market - much less thrive. As a trader, my most important jobs are to manage risk, acknowledge my own hard truths, and stick with a simple plan.

Hard truth 1:
We need to get to break even within 6-9 months. The two components of this are spending and income. Finance needs to report the gap to get to break even monthly, and help us celebrate any additional revenue generated. Growth needs to publish realistic growth targets quarter by quarter and work to hit the targets. If we do not hit the targets, finance triggers predetermined budget cuts until we get to break even. Growth – it sucks to be you. Yes, I know, that sales targets in a start-up are hard. The sales cycles can be long/unpredictable and it is difficult to predict a close. Made worse, this is a bear market. The problem is, if we do not figure this out, you / your friends / all of us are going to lose our jobs AND our investments. If the market dictates we lose our jobs, so be it, let’s not lose our investments too.

Hard truth 2:
We are top-heavy. We have too many highly-paid leaders doing lower-value work. Past window dressing to address spending was focused on flexible contributor spend - the kind of resources that can scale up and down quickly based on budgetary allowances and contribution to the top line.

Hard truth 3:
We overcomplicate stuff. Not sure where this comes from, but simple is clear, actionable, and most importantly auditable. When you complicate stuff, it’s too easy to hide poor delivery and confuse output with progress. Let’s keep this stupid-simple.

Next steps: (This is not an exercise for the ICC and Finance)

1. We stop all the org redesign work. Joe has done great work here to set the foundation for an explosive organization, but this is going to be a significant change/distraction that is ahead of its time as we need to undergo budget cuts & consolidation. Who / by when: The ICC can stop this work right away.
2. Finance publishes three tiers of increasing budget cuts that get us to break even by JFM (janfebmar) 23. We just need three rough % numbers across each nest (example: Cut #1=25% Cut #2=50% Cut #3=75%). Who / by when: Finance can likely do this within a couple of days.
3. Growth proposes income targets by quarter starting with the close of JAS(julsugsept). Whatever number they come up with will be wrong, but that is ok, overtime with focus, accountability, and impact, we will be really motivated to get less-wrong. Who / by when: Growth will have to do this within 1-2 weeks.
4. Each Nest proposes a Season 2 with Cut #1 built-in. This will be the starting budget for next season. As a second step, the nest needs to develop plans to deliver cut #2. Who / by when: Nest leaders propose by July 15th with plans to deliver Cut #2 by Aug 1.
5. We all get started with the #1 clear goal of making the Index Coop sustainable in a bear market. When we get closer to breakeven, we can talk about smart expansion that scales up and down based on drastic market changes. Who / by when: all of us.
6. Ongoing: Finance reconciles income with expenses and declares the budget cut triggers that will deliver profitability. If Growth gets a huge couple wins, we get may get a reprieve. If income worsens, cuts may come faster or deeper.

IF we take these steps above, 1) we will engage the power of the DAO 2) we will get to profitability 3) token price goes up 4) we will be well-positioned to explode in the bull market

Finale note:
THIS IS NOT AN EXERCISE FOR THE ICC (or finance). You guys are great, smart, elected and all that, but this is a job for experts. No one knows more about how to turn this into a lean organization than those that are in the pods and nests doing the day-to-day work. They know the high-value work and where the pork is. Give them the targets (budget cuts) and delegate the work.

these thoughts are my own, influenced by me, and not representative of anyone else. So, yeah. Blame this hot-take on me.

[polar_pete]

Making tough decisions because of the “vibe” is not sound decision making. Decisions should be made based on logic, not emotion.

If the hard decisions are properly communicated with a clear explanation to the remaining team and community than the “vibe” and motivation can remain strong. There is a lot of precedent on organizations that had to make layoffs and cut overhead while maintaining a strong, motivated workforce. It’s worth studying how they were able to do it.

It’s your role to put the organization and investors first, not the emotions of contributors that were let go. Doing the opposite will lead to a failed organization that will never succeed long term.

The goal should be to operate as if we are always in a bear market. And when the market is bullish again, keep costs down as if we’re still in a bear market.

There should be no need to raise additional cash…

• Cut costs,
• Get to breakeven based on current revenue (not lofty projected revenue),
• Keep working hard and push to work even harder,
• Communicate effectively,
• and be selective with priorities (urgent, high-impact tasks only).

“When the going gets tough, the tough get going”

[Matthew_Graham]

Hi @shawn16400,

Thank you for contributing to the discussion. I’ll be honest Finance Nest doesn’t have all the answers but we are here to support as best we can. If we receive guidance from leadership/community the DAO is to be profitable by a certain date, we can definitely work towards making that happen. At this point in time, we hired 5 Core Hires in the last couple months which reflects our current growth mindset.

To help provide context, the below chart shows the total Revenue of our products, minus Gas, Methodologist split and Operation Costs. Index Coop’s revenue post rebalancing gas costs and post methodologist fee sharing is the Orange Area in the chart below. Operation Costs is equal to the Orange + Red area and Contributor rewards make up on average 83.5% of our Operation Costs each month. Any path to profitability will involve the Red area in the chart converging to zero.

If we reduced Contributor Reward spend in May to be operating at a “Normal Profit” ie: break even, then Contributors Rewards would need to be reduced by 76% with the DAO earning interest on its stables or 83% if the DAO held its stables passively. Or put another way, only 80% of Product Nest would remain which is basically developers only. This indicates cutting costs is only part of the answer, the Revenue side of the business must grow and grow a lot for it to be a sustainable business.

Index Coop’s revenue is 83.5% correlated to the price of ETH using data from November 2019 to May 2022. If we forecast the DAOs revenue forward, our largest variable is the price of ETH. A focus, already in motion with the yield products, is to move towards creating a portfolio of products for all market conditions.

Something that has come up recently which moves us towards profitability is to reduce product rebalancing costs. Since genesis, we estimate around $538K has been spent on rebalancing our products. If Index Coop was to acquire 100,000 1INCH tokens, deposit it in the st1INCH contract then Index Coop would be reimbursed all gas costs in 1INCH tokens each month. If products are post gas fee splits, then Index Coop would receive 100% gas cost reimbursement and only need to cover a fraction of the gas costs. Our partner’s share of the gas cost would become another revenue stream for the DAO. This idea would reduce the DAOs cost base would at the very least reduce the cost base.

Furthermore, if all the swaps performed on Index Coop’s UI were routed through 1inch then Index Coop would receive referral fee splits from 1inch DAO and this would also be an additional income stream. The payback period for purchasing 1INCH on market at the moment is 2-3 months of gas costs based upon May’s rebalancing costs, assuming all trades are routed via 1inch. It represents a 8% cost reduction across the DAO for the month of May 2022 assuming Index Coop pays all rebalancing costs. Index Coop could then optimise rebalancing for User Experience by minimising price impact on swaps during rebalances and reduce the Net Asset Value decay our product holders are incurring. Better product holder UX, reduce cost base and new revenue stream all with a 2-3 month pay back period on the investment.

[Matthew_Graham]

Hi @polar_pete,

How effective the communication is managed will be reflected by how well the DAO responds to challenge. If the “vibe” becomes a low moral and loss of confidence in leadership or the business’s ability to correct from its current trajectory - then it will become self fulfilling.

An all Hands meeting that addresses the market environment we find ourselves in, that articulates a way forward would be a great benefit to the community. It is common for cyclical businesses to go through this and for employees to be made aware upfront of the process going forward is and what the business is striving to achieve.

FWIW - Several members of the v1 Council advocated for a Core Hire group sub 20 people, we hired around 30 in the end and that has since grown with v2 Council. I think the DAO is aligned with a need to cut cost. To break-even, as the post above highlights it is not likely to be in the near future. This thread was created to help facilitate open communication and I will do my best to lead with data and enable readers to build context.

[shawn16400]

@Matthew_Graham
I saw the 1INCH concept and it for sure seems to have merit, and your investigation / ideas are exactly what we need - across the whole DAO. From experience, I know that if the organization has meaningful focus on the problem (like Finance does) we would find other creative ways of curtailing costs and increasing incomes that could help off set headcount reductions - although as your chart illustrates, without that step change in income, headcount reduction is an inevitability.

Thanks for the illustrating that we would need about a ~76% reduction in contributor spend to get to breakeven. That is sobering. I do not advocate for an immediate reduction to breakeven - we need to give ourselves a chance for the yield products to mature, prove we can set and hit income targets, and thoughtfully redesign the work to be profitable during a bear market.

I think we can continue to hope for the best, but we really need to plan for the worst. And if our efforts are not sufficient, lets codify a path to sustainability which is built on the best ideas of the entire DAO.