As DeFi’s largest asset manager, Index Coop has a unique and outsized impact on the greater DeFi ecosystem. As $DPI and Index Coop’s other index products grow, Index Coop’s impact will be further amplified. By creating a strong meta-governance framework early, Index Coop will establish itself as a trusted entity within the tokens held by $DPI and the rest of DeFi.
Inspiration and Caveats from TradFi
Governance in public TradFi is extensively regulated and an area of growing focus. While big players in the market, like Vanguard and Blackrock, have enormous economic and voting power, much of public governance is dictated by the recommendations of two other entities: Glass Lewis and ISS. These entities research voting proposals and other issues of importance to public company shareholders. There are some things TradFi does well in this arena:
- Detailed disclosure and solicitations for voting on particular proposals.
- The ability to outsource your voting power to a proxy on your behalf.
- Actors which spend extensive time and money looking into company governance and voting proposals, and which then make specific recommendations on issues.
- Public notification of upcoming proposals on which a shareholder is entitled to vote.
At the same time, however, there are flaws with TradFi governance:
- Votes can become too issue-specific and the forest can be lost for the trees: Glass Lewis/ISS can overexert their power by recommending voting against the election of company directors or specific issues because of unrelated actions taken by the company which Glass Lewis/ISS disagrees with (e.g., lack of specific ESG proposals).
- Due to the size of most public companies, the individual voter has no incentive to participate in governance because their vote has essentially zero impact.
To address these flaws with the TradFi system at Index Coop are two proposals:
- Focusing on a principles-based governance structure rather than a rules-based governance structure.
- Encouraging participation of all $INDEX holders through incentives.
Principles Over Rules
Rather than approaching meta-governance for $INDEX holders like ISS/Glass Lewis do for public stockholders, where there is a right and wrong answer on each specific governance topic (down to the strength of specific policies that are adopted by a company), meta-governance proposals should be recommended using a set of principles, followed in order:
- In a specific meta-governance proposal, where there is a clearly superior option for reasons that do not need to be enumerated, that is the outcome that should be targeted (because Index Coop likely sees more proposals than other DAOs due to meta-governance, it is likely well-positioned to identify such options).
- Where there is no clearly superior option, the outcome that is reasonably expected to improve the value of the underlying token should be targeted.
- Where neither outcome will necessarily affect the value of the underlying token, the outcome that is reasonably expected to improve liquidity of the underlying token should be targeted.
- Otherwise, the outcome which may improve transparency and decentralization should be targeted.
Although intuitive, establishing such principles is important for alignment across Index Coop and to serve as a systems-first means of reviewing proposals.
Governance mining is likely the most effective way to grow $INDEX holder participation in meta-governance votes. Voter participation is important for several reasons:
- Dissipates a concentration in power of the largest $INDEX holders by incentivizing a larger total number of $INDEX holders to participate in votes.
- Avoids potential gamification by actors looking to impact underlying proposals via $INDEX meta-governance.
- Proves to the tokens underlying $DPI (and other current and future Index Coop partners) that Index Coop is a trusted entity which takes governance seriously. As $DPI grows, Index Coop’s impact will grow at least proportionately; if we prove we are a serious entity in the ecosystem, this will help bring projects and proposals to Index Coop rather than vice versa.
- The crypto community as a whole, and especially the Index Coop DAO, is one built on decentralization, transparency and trust, all of which are strengthened when there is more widespread participation.
To encourage participation in meta-governance matters we can incentivize voting through the following structure:
- Once an $INDEX holder has voted in at least one meta-governance proposal, they are eligible to receive rewards so long as they participate in at least 2/3rds of the meta-governance proposals that have taken place since they first voted.
- If an $INDEX holder drops below a 66.67% average participation record in meta-governance proposals, they are ineligible to receive new rewards until their average returns above the threshold.
- The reward per meta-governance proposal that those $INDEX holders who are above the threshold will receive will be relatively small, so, practically (due to gas costs), the reward will only be distributed once large enough. This serves as a de facto vesting structure, such that if a holder sells their $INDEX prior to the distribution, accrued but unpaid rewards are forfeited.
- To discuss the following:
- (i) appropriate voting threshold (average voter participation record since first vote)
- (ii) size of voting reward per $INDEX token
- (iii) at what point “vesting”/distribution can occur (and whether this is necessary/desirable)
- (iv) what the reward should actually be (e.g., $INDEX or another/new product as a means to build out liquidity)
- (v) feasibility of monitoring participation.
Not all $INDEX holders care about the non-economic benefits of holding the token, and we have an opportunity to provide a means of allowing them to transfer that right to a group who will take the charge seriously. Considerations for discussions:
- Whether to incentivize a proxy election with rewards. Index Coop would be receiving a valued benefit and there’s likely a value-clearing spread between how Index Coop values meta-governance power and passive holders’ indifference.
- This would also allow Index Coop (through a specific meta-governance committee or working group) to exert more influence on meta-governance votes and allow the principle-based voting more room to flourish (and also increase incentive for underlying tokens to coordinate with Index Coop).
- It’s worth noting that there’s some tension with decentralization here, but the idea is to target those holders who do not or would not want to participate in the voting. Still, open to feedback on this point.
In addition to the above, there are other considerations to encourage participation:
- How to better alert and keep informed $INDEX holders of upcoming meta-governance votes for those who are not monitoring the forum / Discord (i.e., opt-in email/text/twitter alerts strictly for votes closing shortly). There was a suggestion in Discord to use the Ethereum Push Notification System once available, which I think would be effective.
- Which meta-governance votes, if any, do we not care about in the face of voter fatigue, which may grow as the community grows and novelty wears off? With 10 tokens underlying $DPI, this could potentially mean 10x the number of votes.
- For consideration with the BD team: as $DPI and $INDEX grow, Index Coop more formally reaching out to underlying tokens to establish a system for such projects to approach Index Coop to solicit votes on proposals, rather than Index Coop monitoring what is going on with each token. Once large enough, like with Vanguard/Blackrock, underlying tokens will want to make sure $INDEX is aligned with their proposals.
$DPI represents one of the easiest entry-points to DeFi for new users, so as the space continues to grow, we should expect $DPI to grow and, concurrently, the average $DPI or $INDEX holder’s interest in and understanding of the DeFi space to naturally be lower. In order to (i) prove to the tokens underlying $DPI that we are a trusted partner who will take governance seriously and (ii) avoid potential gamification of $INDEX to impact votes, this means we will need to encourage greater $INDEX holder participation in meta-governance and begin building more formal systems for governing it.