Author(s): @0x_Dev
Reviewer(s): @jordan.t, @MrMadila, @allan.g, @anthonyb.eth, @pblivin0x
Introduction
Index Coop and the INDEX token were launched in 2020. After a few years, and a range of feedback from holders and the community, we want to open a conversation about ways to potentially evolve INDEX, our products and our tokenomics. We will seek to align ideas and innovation with legal considerations. Some ideas may come to life, some won’t and some of them (like many of our products) may not be available to Restricted Persons as defined here.
Until now, the main use cases of INDEX have been:
- Governance: using your INDEX to vote in Snapshots to govern the DAO
- Meta-governance: using your INDEX to vote - via product holdings of other crypto assets (e.g. DPI holding AAVE or COMP) - in other DAO’s affairs
Core contributors have historically focused on increasing net flows and revenue at the expense of working on improving INDEX’s tokenomics. But, after nearly 3.5 years of building, it’s potentially time to improve the INDEX token. This post intends to initiate a wider conversation about INDEX, products and tokenomics.
Goals of the exercise:
- Improve INDEX utility, our products and overall tokenomics
- Attract $ into products which is retained
This should in turn lead to more TVL, volume and revenue.
Utility ideas:
We list INDEX utility, product feature and tokenomics ideas initially by support level from contributors (most popular and supported ideas first; less supported ideas last), before sharing preferences and ideas from community whales and VCs.
1. Product Revenue Tokens
Product Revenue Tokens (PRTs) are fungible tokens that represent ownership in the cash flow of a smart contract, in this case, Index Coop product tokens. PRTs can be useful for bootstrapping new products, gaining important market signal and aligning incentives with the long-term interests of the DAO.
Early supporters of a product during its pre-launch phase could be incentivized with PRTs, which entitle the holders to a percentage of the product’s revenue for perpetuity. Essentially PRTs are sharing the future revenue potential of a product to early supporters of that product. A finite number of PRTs would be generated at the genesis of a product and they could be used for incentives, product partners, partnership tactics, etc.
The product would disperse its revenue into a staking pool, where holders stake their PRTs to receive a pro-rata share of the revenue that flows into the pool. Index Coop would receive PRTs too which it would stake. PRTs would likely need to be restricted from Restricted Persons and we have ideas for ensuring this at the contract level and via our website too.
PRTs aim to solve the cold start problem when launching products - bringing capital into product launches early in a way we can see signal around. PRTs could be given out to early supporters of a product which are early/first to do something and which continue to do something (e.g. hold the product). E.g. for a hypothetical example high yield ETH index product:
a. XX% of hyETH PRTs could be given out for being part of the first $10m in pre-launch deposits
b. And, the PRTs’ ability to receive revenue could be dependent on the address staking the PRTs and continuing to hold hyETH
Because this is quite a novel idea in DeFi - h/t @anthonyb.eth - we thought it could help to articulate some potential benefits.
Potential appeal/benefits of PRTs:
- Could be more attractive to onchain natives than fee rebates/revenue share, because PRTs have potential large, hard to quantify, long term value versus smaller, short term, easy to quantify value. They offer optionality.
- Potential next evolution beyond ‘Points’.
- Can be used for a product, a suite, or all products.
- Narrow or wide test potential
- Could be a good incentive fit for more risk-on buyers of leverage or higher yield index products, making PRTs a good incentive to test for these parts of our product portfolio.
- In contrast to a number of incentive mechanisms in DeFi, which incentivize secrecy and hoarding, PRTs incentivize advocacy and word of mouth.
- PRTs reward active value add, not passive hodling which benefits from other incentive mechanisms (e.g. buy back/burn).
- No direct engagement with the INDEX token
2. List INDEX on more CEXs and make it more liquid
Historically, Index Coop has not paid for CEX listing fees. However, in 2024 token holders could vote to pay for listings on 2-3 selected CEXs as a test. Initially, efforts will concentrate on the INDEX token, with plans to explore listing products tokens later.
Currently, INDEX’s primary trading venue is Coinbase and there is also some liquidity on DEXs, but it doesn’t have a breadth of CEX listings like some other governance tokens. Most of the top 10 largest CEXs by volume are considering applications to list INDEX.
Five VCs have advised to secure more CEX listings and enable more INDEX liquidity.
3. Using INDEX to operate and secure Index Protocol
INDEX could be used as the currency to enable a range of protocol functions - from proposal, to product launch, to rebalance, to deprecation, etc.
An example:
You may have seen the news of our recently launched trust minimized reweighting and auction rebalancing - in partnership with UMA - which is exciting and also involves a proposer and challenger role. The proposer role, which can be fulfilled by anyone, requires the proposer to pay a bond of 140 INDEX to propose a reweight. A challenger then has to pay gas and their own 140 INDEX bond to challenge and, if they are successful, the challenger receives their bond back and 50% of the proposer’s bond also (the balance of the proposer’s bond goes to UMA). This process aims to use cryptoeconomic incentives to drive and secure our products’ core operations using INDEX as the base currency required. Naturally, the bond mechanics, including the amount of INDEX required, can be evolved and we could also reward the proposer role - which for the next few months we’d assumed is a role fulfilled by contributors or partners.
There are pros and cons of this approach, and we’d need to handle the volatility of INDEX versus USDC in any currency roles for INDEX in the protocol, but there’s some sense in using INDEX as the base currency for running Index Protocol and products.
4. Index product productivity
We could also provide solutions for holders of our index products, where they can deposit their product holdings and receive yield in some fashion. They could also be required to hold INDEX too to deposit into these solutions.
By way of example:
As this Dune shows, there were >14k addresses holding DPI in December 2023 (filtering out dust), some of which could be:
a. Attracted to also hold INDEX to access a DPI productivity solution.
b. Motivated to buy more DPI and other index products if they can earn yield on it.
“Yield” could take the form of lending product tokens to market makers, providing DEX liquidity outright, or lending product components on prominent money market protocols like Aave. As with other ideas here, these productivity solutions might need to be restricted from Restricted Persons.
5. Onchain governance
Evolving the means by which INDEX holders can exercise even more complete and full ability to govern the DAO is another idea.
There’s quite a large design space here and this effort could be started with a product focus, improving governance mechanisms so token holders via their governance votes are able to take onchain actions such as launching products, treasury management, and revenue distribution.
We are working with UMA regarding integrating oSnap at this time.
6. stINDEX
We could explore a potential staked INDEX solution, where INDEX holders stake their governance tokens to receive a pro-rata share of a percentage of DAO revenue in the form of more INDEX tokens.
The economics flowing to this solution could come from revenue generally - the collection of a percentage of all fees across all products - or from specific fees, or even specific fees from certain products.
E.g. 20% of revenue could be redirected from the DAO Treasury - in its form of product tokens (e.g. DPI tokens) generated by an inflation schedule each month - to be sold for INDEX, which in turn is then offered to stakers pro-rata according to the size of their INDEX position in the staking solution. At today’s financial numbers, while this would divert revenue to the staking solution, it would take ~20 months’ before eating a month of cash runway. Index Coop’s revenue has been lower in Bear Markets ($50k/M) and higher Bull Markets (>$500k/M).
We could also potentially only direct, say, redeem fees to stINDEX. This way when product holders choose to exit a product with redeem fees, some economic value is directed to the INDEX holders staking in stINDEX.
Speaking of product holders, another related idea would be to make this solution only available to holders of INDEX and of a certain value of our products.
Noting the segments of addresses holding >$100, >$1,000, >$10,000, >$100,000 of our products, we could potentially require >$1,000 of product holdings (in any combination) - or ~280 INDEX at the time of writing - to access the INDEX staking solution. This could potentially help incentivize:
a. Smaller product holders to increase their position size to gain access
b. Medium and larger product holders to buy INDEX, thereby learning about INDEX and hopefully organically deciding to buy more to gain more exposure to i) Index Coop’s success overall and also ii) the INDEX yield of stINDEX.
7. Referral program
Rewarding existing or new users for certain behaviors - via a range of rewards - could also be an idea to explore, though this received a lot less internal support than ideas such as PRTs and more CEX listings above. This idea also doesn’t so clearly fit under ‘evolving the token and products’. But, rewards could include: fee rebates, access to certain products/solutions, referred revenue share, INDEX vesting contracts, etc.
We think, in general, such ideas reward smaller crypto market participants and potentially even those which don’t even hold our products too, as anyone - regardless of onchain wealth level - can talk about Index Coop via word of mouth and drive referrals. In contrast, PRTs, stINDEX and other ideas which link to deposit size or holding size tend to reward whales more. Interestingly, this idea ranked in the middle of the pack amongst core contributors.
Related, we have also recently launched an Advisors Program.
8. Burn INDEX
Linked to fees (more below), we could also consider directing some part of the DAO’s fee revenue to buying INDEX on-market then burning this INDEX.
Example proposed by an INDEX whale:
Use the redeem fee revenue to buy INDEX and then burn it. This could mean when people exit an Index Coop product they pay a fee which in turn buys INDEX - adding a bid to the market - and then via burning reduces the supply of INDEX to the benefit of token holders. Or another way, outflows of products - which reduce revenue and potentially impact INDEX - lead to reduced INDEX supply which supports INDEX.
This is how net revenue breaks down by fee type:
| Net streaming fee revenue | Net issuance fee revenue | Net redeem fee revenue |
|---|---|---|
| 78.87% | 11.41% | 9.72% |
And related, INDEX has a fixed supply of 10m tokens, with the keys having been burned by Set Labs when Index Coop was created.
In contrast to burning, one of our most engaged and largest holding VCs recommended considering updating the INDEX token to enable inflation - programmed and governed by token holders - to enable new tokenomics and incentives (e.g. veTOKENs).
9. Make index products hold a small percentage allocation of INDEX
One idea - raised a couple of times by INDEX whales - could be to include in our index products a small percentage allocation to INDEX. E.g. 0.5% INDEX allocation.
In some ways this could increase demand for INDEX - if products are successful and growing (it’s worth noting the very early stage of indexes in crypto at this time) - but it could also fuel the offer for INDEX if products experience negative net dollar flows. Ie it’s reflexive up and down and this doesn’t seem optimal, given stINDEX (or similar ideas) could help potentially increase the appeal of INDEX and increase utility without the downside profile.
There are also considerations to mind re: purity of methodology, index product benchmark tracking, our brand association, etc. Some readers might note other onchain index products using this tactic in 2020-2021, which got some negative feedback.
10. Fee reductions
There are also a few ideas we could experiment with re fees, potentially in combination with a requirement to hold some amount of INDEX. E.g.: if an address holds products and >$XXX amount of INDEX it:
- Pays no mint, redeem or annual fee
- Pays half fees
The idea here is to incentivize product holders - which benefit from reduced fees - to also hold INDEX and become a more aligned and engaged stakeholder (more likely to tell others about Index Coop). E.g. ~750 INDEX - about 1 ETH in value today - could be required to access reduced or half fees.
Noting the various customer segments by holding value (small, medium, large), we could also potentially reward certain users with half fees if they meet product holding requirements and hold a qualifying $INDEX position. We would need to be careful of this sort of incentive framework as the majority of our revenue comes from larger holders, especially those with holdings >$100,000. We should aim to incentivize those large holders not mistakenly cut their revenue generation without benefits.
Aggregated contributor support for ideas
This is a crude view of contributor support levels for aforementioned ideas, noting most but not all contributors participated in the vote.
Ideas suggested or supported by VCs and whales
| Idea | Supporters |
|---|---|
| More INDEX CEX listings and liquidity | 6 |
| PRTs | 2 |
| stINDEX | 2 |
| Index product productivity solutions | 2 |
| General INDEX-gated access to products, promotions and experiences | 2 |
| Forcing index products to hold a small allocation of INDEX | 2 |
| Change INDEX to make it inflationary and enable veTOKEN games et al | 1 |
| Stake INDEX on products (similar to GRT staking on indexers) | 1 |
| Burn INDEX | 1 |
Personas to consider
While there are a range of different types of crypto user who might find these utility ideas interesting or even attractive to participate in productionized versions of, we think Index Coop has three personas which it should consider first:
- INDEX holders which also hold Index Coop products
Our most aligned, most currently incentivized supporters.
Some INDEX holders also hold our products, but these are a minority - 20.26% (filtering for >$100 INDEX holding and >$100 product holdings in Dune). Some INDEX holders might hold their >$100 $INDEX and product holdings in separate addresses, deflating the rate above.
This persona is already quite incentivized to talk about INDEX and products, to drive demand for both, which feeds back to revenue - and theoretically the INDEX price. But, what new ideas would encourage them more and most?
-
INDEX holders only
This persona - whose incidence you can back out of this Dune - is also quite incentivized to talk about INDEX and products, to drive demand for both, which potentially feeds back into increased revenue and token price. What new ideas would incentivise them to buy IC products and evangelize more? -
Product holders only
Some product holders are also holders of INDEX, though this is a very small minority - 3.12% (filtering for >$100 product holdings and >$100 INDEX holding in Dune). Again, this rate could be deflated here due to people holding INDEX and products in different addresses.
This persona is not really incentivized to talk about INDEX and products, as increased demand for INDEX or our products doesn’t really benefit them. We also have no referral program built into products.
What new ideas would incentivize them to buy INDEX and evangelize most?
We think having more addresses which are product holders and INDEX holders is a good thing, because these folks are most bought in and invested in the org., which makes it more likely they will tell their friends and encourage them to buy INDEX and/or our products.
Beyond these three personas, there’s perhaps also a notable other persona to consider: would be buyers of onchain structured products who haven’t yet, due to the value proposition and/or incentives not being quite motivating enough yet. PRTs might be most appealing to them, before other ideas become more attractive once they hold INDEX and/or our products.
Conclusion & request for comment
Thank you for reading. Quite a bit of thinking and work has gone into this forum post and we’ve cut it down a lot to make it shorter to read - cutting some deeper thinking on pros, cons and incentives generally.
We’d love to hear your feedback and ideas.
If you’re a large INDEX holder and would prefer to share your ideas directly, you can do so via email or Twitter DM.
Which ideas would you like to see explored?
- PRTs
- List INDEX on more CEXs
- Use INDEX to operate and secure the protocol
- Make index products productive
- Onchain governance
- stINDEX
- Referral program
- Burn INDEX
- Make index products hold INDEX
- Fee reductions
This forum post is in no way a guarantee of action by Index Coop, is not financial advice, and should not be treated as an invitation to buy INDEX. Many of the ideas raised here will prove to be unsuitable, impossible to execute in a compliant fashion, or simply on balance too expensive to execute. The potential for a staked INDEX product or solution should in no way be assumed. Index Coop will consider the compliance and legal ramifications of the ideas above, or variants of them, before pursuing any of them further. Many of these ideas will need to be restricted from Restricted Persons.
This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
You shall not purchase or otherwise acquire any of our restricted token products if you are: a citizen, resident (tax or otherwise), green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (a “U.S. Person”), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. Person, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized). You shall not resell or otherwise transfer any of our restricted token products to any Restricted Person. The transfer or resale of any of our restricted token products to any Restricted Person is not permitted. Click here to view the list of Tokens Restricted for Restricted Persons. You shall read the Terms of Service and use our Website in compliance with the Terms of Service.
