authors: @DocHabanero, @puniaviision
reviewers: @Cavalier_Eth, and many others
Summary
IC has launched and continues to launch top notch Indices to the crypto space. We offer many benefits to our methodologist such as, smart contract engineering, a leading growth team, and a strong community supporting all other operations. Yet, we don’t have a clear plan for how IC should leverage it’s capital when launching new products.
I wanted share some thoughts on how IC can use our expertise and capital to accelerate new product growth.
An IIP is likely to follow this post.
Situation
As the Index Coop scales its product offerings we need to continue iterating and perfecting our go-to-market strategies. One of those key points is how we spend and negotiation with methodologist on capital needed for product launches. With the situation today, our product teams are spending far too much time and energy engaging in conversations about how much capital is needed to launch a product and who pays for it.
We’ve made significant headway along standardizing our fee split offering, and @Cavalier_Eth will be addressing this in another forum post.
A few questions we’re looking to solve:
1. Who will provide the capital for seed liquidity and incentives?
2. How much capital is necessary?
a. How does this change per DEX?
3. How much in incentives do we provide and for how long?
4. How do we decide to discontinue incentives?
Giving methodologists clarity on each of these points and positioning IC as an expert in these questions will continue to make use the best GTM partner. At the end of this post we have outlined our request for capital that we would like to have approved by the community.
Complexity
A few key points before diving into each question:
1. We do not have a clear vision of how much is necessary to fuel the right amount of growth for new products.
2. Seed liquidity and LM/Incentives are a constant negotiation piece between PWG and methodologist (this is the current hold up for $PAY, $LDI and $GMI)
3. This is a multi-party problem that will need the approval of Treasury WG and the relevant product pods.
4. For now, this standardization will only be relevant for Composite Indices and other non-FLI products as the dynamics behind FLI products are radically different.
5. These considerations will need to be upgraded as our expertise and knowledge in the area increases.
6. Seed liquidity and incentives are inherently different. Seed liquidity can be recuperated with minimal loss while incentives are a spent cost (we will not get the capital back)
Answers
1. Who will provide the capital for seed liquidity and incentives?
Currently, this conversation is handled on a product-by-product basis. The Index Coop has paid out 100% of incentives for $DPI and $MVI, while Bankless helped provide incentives for $BED, and IC did not provide any incentives for $DATA.
The Index Coop will have the ultimate burden on providing the appropriate amount of incentives. We are the go-to market experts and primarily responsible for making sure the products we launch are successful. Operationally, it is also much easier for us to manage the incentive spend so we can manage, test, and iterate on different strategies.
Seed liquidity will also play a big portion in the go-to market process. Having some liquidity on a DEX at launch helps kick-start any liquidity mining program as people are able to purchase and stake easily without minting.
Acknowledging that IC has limited capital, requesting methodologist to pay seed liquidity removes a portion of the opportunity cost if IC funded all of the capital.
2. How much capital is necessary and how does this change per DEX?
There is no single answer to this question because the there are so many options and market conditions varies for each product. We haven’t had the opportunity to test different options and there’s little market research.
We will aim for certain standards when figuring out the right mix of liquidity mining and incentives, such as:
- 2% price impact is ~1.027% of the pool AUM
- $2.4 M pool AUM for $25 K @ 2%
- Or ~$3 M for 2% including a 0.3% LP fee.
- If we assume LP’s are happy with 20% APY LM rewards then $480 K pa
- $40,000 per month to maintain 2% price impact @ $25 K trades.
3. How much in incentives do we provide and for how long?
We understand that incentives are a great way to draw attention to new product launches, but it’s not clear how much and for how long incentives need to run. There are also many incentive options, such as Liquidity Pool rewards and single sided staking.
Our current hypothesis is that enabling $25k purchases at 2% slippage is sufficient enough to gauge PMF. The exact APY this translates into changes per DEX and Index, but is what our liquidity mining programs will target.
4. How do we decide to discontinue incentives?
As a standard we would run incentive programs for 2 months.
Within those two months, we have a chance to test growth programs, integrations, and talk to potential customers. Based on the data we receive, after those two months, we may choose to increase, extend, or eliminate our incentive programs.
Some of the things we look for:
- Liquidity on other DEXs.
- AUM growth.
- Unit holder growth.
- Transaction volume.
- Customer feedback.
The Index Coop would like to maintain full control of how incentives are managed, the incentive schedule and total capital spent. This allows us to test and iterate on the best incentive strategy for new product launches.
As an example, we could decide to taper off incentive spend if the product reaches a certain AUM within a set time period (eg. $50M in 2 months)
Summary of request to community
In order to remove friction with methodologists and speed up the Go-to-market process, we’re recommending the Index Coop provides $400k for all product launches. This money can be used on any combination of liquidity mining and incentives.
We are requesting that methodologist provide seed liquidity.
If the Index Coop is able to launch one product per month, this would amount to $4.8m per year to launch 12 products. We understand there is inherent risk in providing this amount of capital per product so we would like to expand on the market research completed for each product. More details will be provided on the market research once they become available.
By placing more rigor on products in the pipeline, and providing capital for product launches ensures the Index Coop is able to launch the highest quality products quickly.
We work in a space where incentives are provided everywhere. We feel our products, in the long-term, will not require incentives because they’re great products. The request for this proposal is not to set this as a standard for all products, but to use this opportunity to understand how effective our capital can be to launching new products. We’ll provide insights as we receive feedback from the market.