Finance Nest Update - May
Authors: @Matthew_Graham, @ElliottWatts, @Hammad1412, @MrMadila and @prairiefi
General Update
Over the last month Finance Nest has moved the DAO forward in several key areas. The nest provided feedback to the council on Season 1’s performance, progressed the DAO towards being incorporated, provided an in depth review of the DAO’s stablecoin runway to the council for review and the DAO initiated a small veBAL position.
A glimpse into the stablecoin runway is shared below and a more detailed analysis is expected to follow shortly when the council has completed a review.
More generally, operations across the nest spanning contributor rewards, third party payments and the DAO credit card processes are all going smoothly. Our largest challenge is finding a way to accurately track the DAO Protocol Owned Liquidity (POL) positions. At this point in time neither the Liquidity Pod or Analytics teams or Finance Nest are able to identify an easy means of checking the USD value of all positions in one place. This is further complicated by capital being held in DAO and Personal wallets across multiple networks.
As a result of the complexities with POL reporting, we can be more punctual with our reporting and we note the stablecoin analysis runs past the end of month closing the books timeline into the financial reporting window for the month of May which has added further delays.
We would like to encourage anyone with an interest to join us on the Money Talks call, 4pm UTC+1 each Tuesday in the contributor discord.
Debit Card update
The DAO’s credit card has been in use for around a month now and several on-going payments have been migrated from current and past contributors to the credit card. For those that still have transactions yet to be migrated from personal accounts to the DAO, please do get in touch with us via the ops-expense-request channel in the contributor discord and tag @hammad1412.
We have seen great efficiencies within the organisation by doing this and it has unlocked the ability for the DAO to work with external providers we were once previously not able to work with due to restrictions around how fiat payments are made.
Incorporating Index Coop
Finance Nest continues to lead the Incorporation of Index Coop and is hopeful to deliver this within the next month. We have engaged with Walkers who are currently onboarding Index Coop as a client (there’s some delay due to background checks on ICC member signing on behalf of the Coop) we then need to review the bylaws prepared by Fried Frank, this is expected to be delivered this coming week. There then needs to be the creation of a new treasury multisig - owned and operated by the Index Foundation which will be distributed on behalf of the community. An IIP will be proposed to implement this change to the Treasury wallet multisig.
Changes Core Hires
During the month of May, we started the month without @ncitron and by the end of the month gained an additional four Core Hires. The DAO intends to hire two Senior Smart Contract developers between now and year’s end.
With the four Core Hires in May, stablecoin spend increased by 47.9K per month. When the stablecoin runway analysis is shared, we will be able to show the impact of adding additional Core Hires and more importantly, the impact of hiring two Senior Smart Contract engineers.
During May, four full time vesting contracts were clawed back into the DAOs treasury account. This led to 35,716.80 INDEX being received into the Treasury account. We thank the team at Set Labs for their support in making this happen.
Stablecoin Runway Update
Finance Nest invested a lot of time over the last month to model out the stablecoin runway with what we believe to be an appropriate level of detail without turning it into a science project.
The preliminary findings, which are based on the assumption the DAO funds all POL and rebalancing costs from Revenue and Revenue is not included in the stablecoin runway analysis, indicates the DAO’s existing stablecoin balance due will run out Q1 2024. Note, this assumes all stablecoins holdings are unproductive.
The chart below assumes yield is earned on the investment account in line with how the DAO is currently managing its finances and assumes the DAO hires two Smart Contract Engineers before year’s end. There are also other variables like wage inflation and discretionary stablecoin spend growth over time included in the model.
The model also shows the effect using a portion of the stablecoins to generate yield, selling some INDEX on market each month which is equivalent to directing $35k of revenue each month to extending the stablecoin runway. If both the Investment Account is productive and some revenue is put aside to extend the runway, the runway will extend by 4 months or roughly 20% without taking into consideration how the farmed assets could be used to support growing revenue which is excluded from the model.
Do note the below chart is preliminary and may change if we opt to amend the assumptions feeding into the model. We look forward to sharing a more detailed analysis on the forum soon.
During the month of May the DAO spent 299,113 USDC compared to 280,924 USDC in April and 268,162 USDC in March. USDC spending in May increased 6.47% relative to April. This is on top of a 4.76% increase in April relative to March. A breakdown of March through May’s USDC spend is shown below.
| Description | March USDC | April USDC | May USDC |
|---|---|---|---|
| Administrative Expense | 3,801.953 | 17,251.89 | 2,132.10 |
| Ads & Sponsorships | 15,928.01 | 11,760.26 | 4,999.20 |
| Contributor Rewards | 234,990.40 | 250,073.20 | 238,492.90 |
| Data & Software Licensing | 0.00 | 1,838.98 | 11,891.94 |
| ETH Gas Expense | 405.70 | 0.00 | 0.00 |
| Events | 0.00 | 0.00 | 5,228.03 |
| Exchange Listings | 6,004.32 | 0.00 | 0.00 |
| Legal | 7,031.10 | 0.00 | 22,580.70 |
| Audit Expense | 0.00 | 0.00 | 13,787.97 |
| Total | 268,161.50 | 280,924.33 | 299,112.86 |
During the month of May, within the Operations Account the Balancer productive stablecoin holding was withdrawn and converted to DAI. At the end of May the Operation Account held 979,174.04 USDC and 317,003.23 DAI unproductively. The DAO is currently holding 4 to 5 months of unproductive runway. We expect funds to be sent from the Investment Account to the Operations account to bring this up to 6 to 7 months soon.
Financial Insights
The table below shows the DAO Contributors Rewards relative to total DAO expenses excluding methodologist fees and liquidity mining. The data indicates that 82.42% of the DAO expenses are Contributor Rewards during the month of May. A positive worth highlighting here, is the continual decline in nominal value of Contributor Reward spend. May experienced a 26.97% reduction in Contributor reward spend relative to April.
| January | February | March | April | May | |
|---|---|---|---|---|---|
| Contributor Rewards | 644,201.08 | 543,485.68 | 573,949.79 | 578,331.50 | 422,335.56 |
| Total Expenses | 737,268.26 | 620,361.19 | 680,082.36 | 628,666.14 | 512,425.34 |
| Ratio | 87.38% | 87.61% | 84.39% | 91.99% | 82.42% |
The largest reduction in contributor rewards was from the distribution of INDEX which fell from $302,375 in April to $127,480 in May. A portion of this may have been distributed in icETH with Index Coop now offering contributors the ability to receive payment in product.
In response to enabling contributors to receive payment in product, we observed $103,166 and $56,345 of icETH being requested during March and May respectively. Given stETH is trading at a discount to peg, there may be some contributors willing to hold the icETH until after the merge to benefit from the current 12% upside icETH is expected to generate when the stETH/ETH peg is retained.
The table below compares the DAO’s Contributor Reward spend relative to Streaming Fee Revenue. Even with Contributor Reward spend reducing, Revenue is contracting at a greater rate during May.
| January | February | March | April | May | |
|---|---|---|---|---|---|
| Contributor Rewards | 644,201.08 | 543,485.68 | 573,949.79 | 578,331.50 | 422,335.56 |
| Streaming Fees | 332,759.47 | 270,202.45 | 274,801.84 | 286,840.39 | 177,229.50 |
| Ratio | 194% | 201% | 209% | 202% | 238% |
Investment Strategy Update
The previous two monthly updates have been rather detailed with respect to the strategies deployed with the Investment Account. For the month of May, the Investment Account continued to progress these strategies with no funds being withdrawn. We did however claim our BAL rewards across both the Operations and Investment Account and consolidate the BAL holding in the Investment Account before later deploying it into the veBAL contract.
Finance Nest presented a proposal on the Balancer governance forum requesting the Investment Account be added to the veBAL whitelist enabling Index Coop to deposit funds from the Gnosis Safe smart contract into the veBAL contract. This proposal passed Balancer’s snapshot and the Investment Account was granted access to the veBAL contract.
After the proposal passed, we deposited the BAL plus some ETH into the BAL (80BAL/20wETH) pool on Balancer v2, receiving a BPT that was then deposited into the veBAL contract and locked for 1 year until the 1st June 2022. The veBAL positions was then used to vote BAL incentives to the bb-a-USD pool. Finance Nest did ask the council before voting which way to vote and the council elected to delegate responsibility to Finance Nest. The vote was made to maximise the ROI on the Coop’s investments. However, the holding is immaterial and in time it will grow playing into the strategy of using veBAL to bootstrap new Index Coop products as the primary motivation for pursuing this investment strategy.
Pivoting from the Balancer strategy to the TRIBE and icETH strategy. The update here is that very recently the TRIBE rewards stopped on Rari Fuse Pool 8. Whilst TRIBE tokens were being distributed, Index Coop managed to earn 279,494.156 TRIBE tokens which currently have spot price valuation of $58,693.77. This valuation reflects the recent fall in the TRIBE spot price from over 50 cents to 21 cents. We will be thinking through how best to use the TRIBE, initially the plan was to roll this into a SPICE position when Arrakis launches its token. However, with incentives finishing earlier than expected and do not want to have exposure to the price of any governance token in these volatile market conditions.
We intend to migrate the POL position from Rari to either Aave or Compound. Initial checks indicate Aave is offering better ROI for depositing stables borrowing ETH and providing icETH/ETH POL. We also need to rebalance the icETH liquidity and may migrate it to the lower 0.3% fee pool that is attracting most of the trading volume at the time or writing. Given the generous over collateralisation of the loan, we are looking to introduce a third strategy to diversify away from having just two strategies whilst also reducing the overall amount of our stablecoins being made productive noting the Operations Account will be needing funding in the coming months.
There are a number of other strategies being considered which will boost the ROI on the Investment Account and we look forward to sharing those at a later date when they are more mature.
Liquidity
May was as usual a busy month for POL (Protocol owned liquidity), with product launches, and POL reductions and re-allocations.
Detailed below is the current value of each position as at 5th May. Index Coop currently has ~$1m of product liquidity and ~$0.75m of INDEX:ETH liquidity.
| Pair | Total $ value May 31st | Type |
|---|---|---|
| DPI:USDT | $186k | KuCoin CEX Order Book |
| GMI:ETH | $100k | 50/50 Full Range G-Uni Pool |
| JPG:ETH | $50k | 50/50 Full Range G-Uni Pool |
| JPG:ETH | $60k | Concentrated v3 (-/+25% Range) |
| iMATIC:MATIC2x:MATIC | $20k | Balancer Pool (Delta Neutral) |
| iETH:ETH2x:ETH | $20k | Balancer Pool (Delta Neutral) |
| iBTC:BTC2x:BTC | $20k | Balancer Pool (Delta Neutral) |
| DPI, MVI, BED, DATA, GMI , JPG | $153k | ZigZag Order Book for Argent Partnership |
| USDC | $12k | ZigZag Order Book for Argent Partnership |
| ETH | $52k | ZigZag Order Book for Argent Partnership |
| icETH | $43k | ZigZag Order Book for Argent Partnership |
| icETH:ETH | $297k | Concentrated G-Uni Pool |
| (Investment Account Allocation) | ||
| INDEX:ETH | $760k | Gamma Managed Pool |
| Total | $1.77m |
The Liquidity Pod is currently running small experiments with the FLI-P’s on polygon balancer pools to achieve hedged aka “delta neutral” LP positions that drastically reduce “IL” whilst still providing liquidity for the flexible leverage suit. Results so far have been promising, testing and analysis will continue before increasing allocations to this strategy.
Reporting
During May, Finance Nest delivered its standard financial reports being that of a long form monthly analysis of the Coop’s finances. We have received good feedback on the reports to date and are proud to be a leader in the space when it comes to transparency in DeFi. We are also working to prepare shareable investment decks to share with potential investors in the Index Coop.
We look forward to showcasing what we can deliver as we work through Season 1. 