IIP-150: Composite Tokenomics Module

IIP Number: 150
Title: Composite Product Liquidity: Tokenomic Module
Status: Proposed
Author(s): @mel.eth
GovReview: @pujimak_in
Created: 19th April 2022

Simple Summary


Through rewarding PRODUCT:INDEX Liquidity Providers both product and INDEX token liquidity will be simultaneously increased through market forces. This 6-month experiment pairs strongly aligned LPs (holding both product and governance token) with product revenue and governance token distribution. Given the liquidity of UNIv2 LP positions, the reward can be constructed and distributed as LP positions, effectively and effortlessly adding to the position of liquidity providers in a pairing that is desirable to IC and the liquidity provider.

Abstract

‌A‌ll product revenue (by product) is to be paired with INDEX in the community treasury, to be distributed to UNIv2 LP holders of ICs composite products paired with INDEX on a monthly basis, for holders of the previous full month that revenue was earned, increasing the native yield for the LP and inspiring deeper liquidity for ICs products on Uniswap v2, the most integrated DEX.

Motivation

At present, product revenue isn’t used for any specific purpose or considered vital to operational runway relative to stables and INDEX. Liquidity on L1 is an ongoing need and inspiring hold pressure on both products and the INDEX token in proportion to revenue, while distributing useable governance to such holders, is an ideal scenario. Inspiring liquidity in addition to INDEX demand, helping protect Index Coop against governance attacks and firming up the value of our treasury through INDEX market demand due to PRODUCT:INDEX LP creation. All wins.

Specification

‌‌Inspiring deep liquidity across our products permissionless-ly is a challenge, but the goal, of an advancement toward further autonomy and organic decentralization. This 6-month experiment with the option to extend would give us quite a bit of data.

Technical Specification

‌Pair treasury INDEX with all of ICs product revenue for 6-months, on a monthly basis. PRODUCT:INDEX UNIv2 LP tokens will be airdropped to LPs that have held for the entire month in proportion to LP size. In this context, PRODUCT includes composite tokens such as DPI, MVI, DATA, GMI, BED, and JPG. LP refers to Uniswap v2 PRODUCT:INDEX LP positions. LP size for the purposes of monthly airdrop refers to the relative % of LP held.

INDEX utilized in such LP positions would remain eligible for DSM participation by active contributors subject to the variances in INDEX tokens held within the LP position(s).

Copyright

Copyright and related rights waived via CC0.

1 Like

@GovNest please review, assign an IIP number, and queue for voting as early as possible. Thanks.

Hi Mel,

Thanks for this proposal. I have the following questions:

  1. Would the APYs be high enough to motivate LPs? We have developed a specification and some APY calculations which could be helpful. Depending on whether you plan to distribute revenue or profit, bear in mind that these calculations did not include the methodologist fee split nor rebalancing gas costs. @Matthew_Graham also has a strategy for a Liquidity Market with incentives and emissions gauges.
  2. I assume the revenue share would be post rebalancing gas costs and methodologist fee split. Otherwise you should get approval from methodologists that their income would be directed to LMI.
  3. We currently don’t have an on-chain method to calculate post-gas revenue so if the distribution was post-gas the engineering effort could be substantial and/or the process would be off-chain.
  4. Why is this exclusively for Uni v2, particularly when POL is predominately on G-Uni?
  5. The project should be evaluated and prioritized against the other technology infrastructure products currently on the roadmap, which is managed by @afromac and @allan.g. This prioritization is particularly important considering that engineering resource will be scarce in the forthcoming months with rebalancing coming in-house, a heavy launch schedule with new product adaptors, and transitioning partially from TokenSets to Managed Balancer Pools.

I hope that’s helpful.

Best,
JK

2 Likes

Gm @JosephKnecht -

Great questions, I’ll address in turn:

I don’t know, I’m certainly open to alternatives, but the idea here is to create a deep pool of liquidity and inspire INDEX and product buy pressure, so this is important. I imagine products with greater fees would garner deeper pools and smooth out the yields across products, but to be clear only PRODUCT:INDEX LPs would get yield in this form so even though its collected at low single digits, it would be accumulate at a higher rate especially when paired with INDEX.

Correct.

Given no accounting method, revenue would be paired pre-gas; gas costs will remain the burden of Set/IC in this model (no change to current).

This experiment is partially to gauge interest in a permissionless tokenomic staking model. UNIv2 is hard infra, GUNI is a granular solution that isn’t ready to be built into something like INDEX tokenomics.

I agree, and I hope that discussion happens. As I see it, this is a set-and-forget solution that requires some EOM transactions to execute, and could be easily fully automated if adopted more long-term. Noting this also doesn’t interfere with existing liquidity ops that focus on ETH pairings.

Hey Mel, thanks for posting.

As Joseph mentioned, we’ve talked about this in-depth for a few weeks. It’s critical we find launch and maintain our products without requiring a lot of capital from IC. I like that you’ve paired it with INDEX to help improve APY. The calculations Joseph ran get us to about 25% APY but our single-sided staking goal for $GMI was 100% to really be attractive.

Ed and the engineering team have done some early discovery to estimate workload and it would likely require an audit to add this functionality in it’s full form.

Interestingly, Lemonade and Bankless did something similar for $GMI. They gave back their streaming fee to LPs that held for two months. This was done manually but as the concern goes, I don’t think the rewards would have been enticing enough if we knew what it would be upfront. After the first rebalance, two months into the products life, total profit was ~$600 post gas. Lemonade/Bankless got 50% so they were able to distribute ~$300 to LPs.

I love the idea because at least we aren’t putting up new capital but if the product doesn’t see strong growth in the beginning LPs will likely jump ship, creating a downward spiral in liquidity.

It’s a hard problem to solve. We’re also looking into other options, such as a similar solution to the Pie DAO oven to determine the right solution. Launching on L2s also help because we don’t need a dex pool, people can just exchange issuance.

3 Likes

Thanks for the additional info @DocHabanero -

Any idea on the sizing of the more established products, DPI and MVI, in terms of monthly revenue numbers? Keeping in mind that the idea here isn’t fully to just source liquidity, but also to inspire dual-sided buy pressure on products and the INDEX token in proportion to revenue accrual (the market/model picks the winners here, liquidity pod bootstraps otherwise). There would be no required audits or resource requirements on engineering; this would be a matter of constructing and distributing LP tokens and that can be done via the operations account.

Here’s our monthly and continuous revenue and profit by product. For March, DPI had revenue of $62.7k and $6.8M TVL on Uni v3. This would give 11% APY before methodologist fee split and rebalancing gas costs. 11% APY is not competitive and would be unlikely to incentivize LPs.

The 11% referenced would be boosted to 22% given the paring with INDEX. I further doubt that the DPI:INDEX pool would grow to the size of the unincentivized and concentrated v3 DPI:ETH pool; assuming half we’re at 44% on a DPI:INDEX pair that is otherwise still eligible for DSM rewards.

I think using existing pools to estimate the returns here are not going to be reliable. To be clear this would be an experiment and success will largely be determined by whether this inspires useful product liquidity and sufficient product and INDEX hold pressure for those that are strongly aligned. Imo asking users to hold equal amounts of products and governance token to support deeper product liquidity is the epitome of aligned behavior.

Forgive me for offering my two cents out of the blue but this is an interesting topic that is directly in my wheelhouse :slight_smile:

I’d like to suggest an alternative approach here. Instead of pairing product revenue with INDEX and giving that to PRODUCT:INDEX LP’s, take advantage of Balancer’s new veBAL system by using product revenue (and INDEX potentially) to bribe for BAL emissions to PRODUCT:INDEX pools. By bribing, you will turn the predicted ~22% into something significantly higher. Can’t give any exact numbers because Balancer hasn’t had a bribe yet - but there is around $2M of BAL emissions up for grabs each week at current prices.

Any sell pressure from bribers realizing their gain would be offset by farmers taking advantage of the high BAL APY - and you might find many veBAL lockers would like to accumulate IC products and/or INDEX tokens to farm more BAL with :slight_smile:

Instead of creating several different pools for each PRODUCT:INDEX pool, you could create a meta index pool and concentrate all bribes on that one. Sort of a one stop shop for investing in all IC products + INDEX. If this experiment is successful, the bribes would grow as this pool’s TVL grows creating a positive flywheel effect.

Anyway, curious to hear what you all think about this.

5 Likes

If I understand it correctly, the current proposal calls for distributing all of our product revenue plus a matching amount of INDEX for 6 months. I think there are more calibrated ways to test the experiment. Our POL requirements are typically only up to ~1-2 months post launch. Accordingly, instead of trialing it with 2x all of our product revenue I’d recommend testing it with a single upcoming product where there’s scope to pre-negotiate the fee split to include LMI and to direct the rewards to where they’d have the most impact

Hi @solarcurve,

Thank you so much for being active on our governance forum. :slight_smile:

@MrMadila, @anthonyb.eth, @oneski22 and I have been working up some really nice ideas for creating Balancer pools that Liquidity Providers (LP) will naturally want to provide liquidity into. The Balancer Boosted Pools with Linear pools that tap into Index Coop’s exchange issuance to create intrinsic yield for LP which can then be enhanced with BAL and even AURA rewards on top. I strongly expect intrinsic productivity with BAL & AURA rewards will be a massive TVL growth driver for both communities. There has been some discussion around an INDEX/ETH pool as well. I think when we have a few pools figured out, Index Coop can approach Balancer DAO about becoming a strategic partner and having the pools voted in as being eligible for BAL rewards.

Index Coop is already active in earning BAL rewards via the mainnet Balancer Boosted Pool. These rewards could be paired with ETH, deposited into the 80/20 BAL/ETH pool and then the receipt token deposited into the voter escrow contract to attain veBAL along with associated voting rights. This requires Index Coop to be added to the voter escrow whitelist. Alternatively, Index Coop may wait for Aura to come out with auraBAL wrapper and then deposit BAL into Aura’s contracts which may grant Index Coop more voting influence than simply holding veBAL. This is something to consider given veBAL is non transferable.

The idea of Index Coop products being integrated into the linear pools a massive TVL generating opportunity for Index Coop and Balancer DAO. The stETH/ETH pool, >$500M TVL, is yielding 8-10.6% and with icETH generating around 9% APY, there is an opportunity to craft a Balancer Boost Pool that creates a huge ETH yield opportunity. If Index Coop was to be considered a strategic partner, bringing LAYER1 + product pools to Balancer V2, is it fair to expect the Balancer Liquidity Mining Committee would view this favourably and allocate a portion of the 14,500 weekly BAL emissions to Index Coop product and INDEX pool.

3 Likes

Hi @mel.eth,

With Arrakis coming to market soon and G-Uni pools adopting Curve like Gauges, the new SPICE token is to be used to incentivise TVL into the G-Uni pools. As Index Coop has many G-Uni pools, more than any other Gelato/Arrakis partner, we are hopeful for favourable SPICE rewards across Index Coop product/INDEX pools. The yield from SPICE tokens will hopefully lead to greater Uni V3 liquidity for applicable products. I hope this leads to the migration of DPI and MVI across from Uni V2 to Uni V3 accelerating.

For those that are interested, below is a link to the proposal that @JosephKnecht mentioned earlier. This idea has been dormant for a while now. I think we could do something like this which would be away to reduce the reliance on Protocol Owner Liquidity (POL). But the dev lift and timing with Index Coop taking on the keeper and rebalancing work load, it is not an ideal time to pursue such a strategy.

Having spoken with @Dmitriy_Berenzon about tokenomics, the general view that resonates is Index Coop’s Tokenomics needs to be linked to growing two metrics, unit supply and number of wallets that hold our products. Index Coop can not control price, so TVL is a less ideal metric and although wallet address can be faked, it broadly represent the network affects of our products. The number of units in circulation is a pure metric that is linked to the minting of new product. Ideally if we can incentivise this behaviour, eliminating the potential circulator behaviour for profit, then we may have a really strong tokenomics upgrade. Ideally a positive ROI for any investment would be great, so the holding period for our is a key factor. @DevOnDeFi, @Metfanmike and I have been exploring some ideas around how to achieve this and also expand it into some broad growth acceleration program. We are yet to zero in on any specific idea and work through the possible ways to track, implement and scale such a construct. I am hopefully we will crack this chest nut in time.

6 Likes

Hey @Matthew_Graham,

Due to recent unexpected events you can read about on Balancer’s forum here, the Liquidity Mining Committee will no longer have any power to allocate any amount of BAL. It was a unanimous choice across the board to remove their 10% allocation.

As far as a boosted ETH pool using icETH I think it’s a very interesting idea and should be possible assuming there is no withdraw/deposit fee (arbers have to be able to deposit and withdraw ETH freely).

For the BAL the Coop is farming, I believe it is a choice between voting for pools with your products/INDEX or earning the highest possible yield. If the priority is the former, I’d suggest making a proposal on our forum to whitelist the relevant Gnosis Safe to deposit your BAL/WETH into veBAL. If the priority is the latter, I would simply wait to farm AURA when they launch. You give up your governance power but I expect the AURA yield to be quite high, and of course over time you will slowly earn back (and beyond) your voting power through AURA holdings.

I only commented on this topic because there is no question bribing in a nascent market like veBAL will carry a FAR higher ROI than using your funds for a vanilla LM program. Whether you want to go for a multi-token pool with all IC products or focus hard on one in particular, it offers the best chance to get farmers interested (and I would say that is a large part of DPI’s success). Also removes any need for development resources as all infrastructure for bribing veBAL is ready to go and simple to use.

Once we have a product where our interests are fully aligned, like LAYER1 maybe, I think a joint bribing program could be very interesting to explore. Perhaps both DAO’s commit equal $ in INDEX and BAL for bribes over a 12 week period to bootstrap adoption.

2 Likes

Thank you for feedback. I had not seen the news on the Liquidity Mining Committee until now. Thank you for sharing that.

We are both definitely thinking about this the same way with respect to bribing veBAL votes. It is definitely a good growth strategy to consider. Others have pursued this strategy with Convex and done really well from it. As for BAL v AURA, this is going to be something we need to put more thought into. The key variable is time. If we want the voting influence sooner, veBAL is the way. If we have a few months post Aura launch, then we need to take a moment to weight up the options before going either way.

Building LAYER1 on Balancer V2 is exciting and we are definitely both aligned there to make that product a massive success for both communities. :slight_smile:

2 Likes

Hey @mel.eth,

Thanks for posting. A couple of thoughts:

  1. Uniswap V2 is undesirable for collateralized, redeemable products because most of the liquidity is unused. Unlike a native token which can range from price 0 - ∞, indexes have a NAV which you can market-make around. Therefore, it’s highly capital inefficient to use xy=k pools. There are two problems we face on mainnet. The first is that gas costs make rebalancing the position a concentrated position super-frequently unprofitable. Second, our products are unique and currently there are no automated concentrated liquidity managers that can rebalance using direct/mint and redeems. There are potential solutions that have been discussed for these issues, and our resources should be devoted to them. We are in a unique position to be able to make LPing in a concentrated liquidity position actually outright profitable - so we won’t need incentives.

  2. If we are to provide incentives for liquidity, we should do so when the liquidity benefits our users the most. Liquidity that is provided in a Uni V2 pool that is paired against INDEX makes entering and exiting our positions far more expensive for users. This is something we really, really don’t want to pay for.

  3. I am a proponent of using future revenue for driving seed liquidity, but mature products do not need this because it becomes profitable to LP. With native tokens, volume is often correlated with change in price. For example, if I buy $1M of INDEX off the market, I will move the market price up. However, if I buy $1M of DPI, the market price stays the same. Now if we assume that a product’s AUM and trading volume are roughly proportional, you’ll see that as a product matures the trading volume (fees) will rise, while divergence loss remains constant.

My conclusion overall is that while this is an interesting proposal, it wouldn’t achieve the desired outcomes of meaningfully deepening liquidity on L1 and it slow us down from becoming a sustainable organization by spending revenue on product liquidity that doesn’t need it. I am very receptive to the idea of sharing product revenue with LPs, but not to incentivize excess liquidity, particularly on an AMM and pair that is not optimized for user experience.

5 Likes

Hey @mel.eth , an IIP number (150) has been assigned to this proposal, thus beginning the 48 hour formal discussion period for this IIP. A GovRep (@pujimak_in ) has been assigned to review and run this proposal through the IIP Process.

The soonest this vote can be queued is on 22nd April May 2022. Recommendation here would be for this vote to go live on 25th April 2022 to avoid the vote running through the weekend.

For reference, an overview of the IIP Process can be found here, and guidelines for the usage of the GovNest account can be found here.

2 Likes

Hello,

Request has been received. IIP 150 has been assigned to this forum post. Currently in review process.

Re suggestion by @GovNest on start date. Please revert to the suggestion above @mel.eth, if you’re alright on the vote will go live from 25th April 2022 and will go on for 72 hours as to avoid vote running through the weekend. As I intend to put this on queue once confirmation has been made.

Once that is done, will post the snapshot link in my subsequent reply to this post.

For the rest, this topic has entered a formal discussion phase, any feedback and discussion on this particular topic should be raised during this period.

Thank you.

2 Likes

Thanks for the suggestion @pujimak_in; let’s go with a start right after the 48 (April 22). While I appreciate that there are some things in the works I’d like to move quickly to let INDEX holders decide if an interim tokenomic model is preferable to none. While the feedback within the above comments has been mixed, the anecdotal has been overwhelmingly positive and this would be a fantastic option for contributors given most of us like yield + holding INDEX and our products. Yes this is an experiment, but doing nothing has ruled the day and tbh I don’t see why a rational DeFi actor would be accumulating INDEX when it’s mainly only good for seasonal budgets and launching products. Lets get this in place, learn, and grow. Otherwise we’re a protocol 1.5 years on with no mechanism to absorb INDEX and new supply constantly hitting the market; let’s get people putting it where it’s useful. Thanks.

2 Likes

Hi @mel.eth,

What are your thoughts on using icETH to create an INDEX buy flywheel ?
It would give INDEX a yield and increase the icETH revenue stream.
It is a double win.

Here is what is blocking this product:

  • Reliable Oracle Feed
  • Lending Market Integration

The oracle feed is preventing the lending market integration. With more CEX listings and better on and off chain liquidity, the more likely we are to attain a Chainlink oracle.

The yield may be lower than say if the strategy was applied to USDC or DAI, but something around 5% would be achievable.

The below shows two instances where the same strategy is applied to USDC and WBTC.

2 Likes

Gm -

This looks like a great 1-token solution to INDEX yield once supported by lending markets. Given this would be a few months out minimum and wouldn’t really incentivize the same desired behavior in relation to our products and product users I don’t think it’s hits on the outcomes outlined in this proposal, namely increased liquidity and market support for both products and governance. Effectively what you’re proposing is a strategy not a tokenomic distribution model that supports and incentivizes user behaviors we find valuable; I’d support it as a standalone proposal given it doesn’t impact this proposal under consideration - any indication that Aave would support listing INDEX near term?