IIP Number: 125
Title: Liquidity Pod - Funding Request H1 2022
Status: Proposed
Author(s): @overAnalyser @matthew_graham
Created: 14th January 2022
Simple Summary
The purpose of this proposal is to make available a dedicated $5M budget within the Operations Account to support the ongoing liquidity needs of INDEX and Index Coop products.
Abstract
With IIP-110 passing, the Liquidity Pod has “the authority to spend from the Operations Account to set and achieve liquidity goals for new products, existing products, and the INDEX token.” In this proposal we define the capital needs of the pod for H1 2022.
The Liquidity Pod will continue to use the RAPID decision making framework and OKRs to track the performance of the pod. Reports are to be provided monthly as we endeavor to keep the community informed of our actions and share our learnings.
Motivation
Managing the DEX liquidity of $INDEX and our products is a key part of our operations. If done correctly, it greatly improves the user experience when buying and holding our tokens.
To date, liquidity has been managed by either expenditure (liquidity mining) or the direct provision of liquidity,implemented on an individual basis via the IIP process. With the creation of a dedicated Liquidity Pod, Index Coop has already delegated authority to a select group to act in the communities best interest in a more streamlined manner, maximising operational efficiency.
The Liquidity Pod has the ability to make decisions relating to the liquidity of INDEX and Index Coop’s products. However, the pod needs a dedicated amount of capital and to know it will be made available whenever it is needed.
The current table below shows the status of past, current and pending deployments from the Operations Account at the Liquidity Pod’s request.
| Product | Type | Value Deployed | Notes |
|---|---|---|---|
| BED:ETH | Long term (>90 day) | $270 k | NFT (Current $220 k) |
| ETH2-FLI:ETH (polygon) | Seed (< 7 day) | $250 k | Already closed ($180 k) |
| INDEX:ETH | Long term (> 90 day) | $1,400,000 | IIP-109 |
| GMI:ETH | Growth (~30 day) | $400 k | NFT Position 1 ($220 k) NFT Position 2 ($178 k) |
Please note there are risks with deploying community capital to provide liquidity. Some of these risks are detailed below:
- Price exposure to volatile assets (typically ETH, wBTC and our products)
- Impermanent loss (IL) due to price divergence within an LP position - when using concentrated liquidity, this is greater than the less capital efficient full range DEX positions.
- Price impact costs to issue / redeem products
- Gas costs
- Time costs to monitor and manage positions
It is worth noting that LP positions are considered a high risk asset allocation within the broader pool of community capital. Finance Nest will need to reflect this in how other community funds are managed.
Specification
Funding Request
The Liquidity Pod will be given dedicated funding to be held across the Index Coop Operation Accounts on the various networks that support INDEX and Index Coop product liquidity. The funds are to be administered by the Operations Account signers at the request of the Liquidity Pod.
The Operations Account provides the Liquidity Pod access to a safe operational multisig that will soon have the added benefit of crisis management funding needs. Liquidity Pod also gains the advantage of having a network of already established multi-sigs across the various networks Index Coop operates.
To support the ongoing liquidity needs of INDEX and Index Coop’s products, the Liquidity Pod requests $5M in initial capital to support ongoing operations. With $1.97M already deployed, this represents an additional $3.03M in funding.
Currently, the community holds around $838K of the $3.03M being requested. Rather than use stables to fund liquidity positions, Liquidity Pod will use future revenue to bridge the immediate funding gap. Index Coop earned on average $400K for each of the last four months of 2021. Liquidity Pod will draw on Index Coop’s revenue until the $5M of capital is made available. It is not ideal to use stable coins to fund the higher volatility liquidity positions, unless it is absolutely necessary. However for low volatility assets like PINT and PAY this remains a valid option as it could be considered a productive stable asset position.
Why $5M ?
FLI products are going to be launched in waves. The next wave of FLI products could be as many as five at one time, the four mentioned here and MATIC2x-FLI-P. This is around $1.25M of the $3.03M. With DATA, LDI, PAY & PINT plus others in the pipeline that may also require liquidity the remaining balance is $445K per product. Some products require more than this and others less. After looking at various options, the Liquidity Pods feels the $5M request is sufficient funding in the short term before reassessing towards the end of H1 2022.
The Liquidity Pod at this point in time expects PCL to be an ongoing need of Index Coop’s and for funds to be rolled from one position into the next as we look forward to launching products more frequently during 2022. We are still actively determining how best to exit positions and will be doing a lot of work in this area going forward so we can optimise how the communities capital can be deployed.
To help communicate how LPs are determined and managed, the Liquidity Pod will be publishing guidelines to outline the remit and considerations driving Liquidity Pod decisions and fund management.
To make sure the community is well informed, the analysis and performance of the liquidity pod will be shared monthly on the governance forum. This shall provide the community with insights into how the liquidity pod is performing. Keeping with the new Nest and Pod model, Liquidity Pod will create and track performance with the use of OKRs.
Voting
For
Do make available $5M worth of capital to the Liquidity Pod for supporting on-chain liquidity deployments of INDEX and Index Coop products.
Against
Do Not make available $5M worth of capital to the Liquidity Pod for supporting on-chain liquidity deployments of INDEX and Index Coop products.
Copyright
Copyright and related rights waived via CC0.
