IIP-16 Smart Treasury

Governance Proposal
1

iip: 16
title: Deploy Smart Treasury
status: WIP
author: DarkForestCapital (@darkforestcapital), AlphaGuy (@alphaguy)
created: 2021-02-23

Summmary

Deploy a Balancer Smart Pool with $500k from the community treasury to pilot a buy-back-and-make model for improving INDEX tokenomics, with an option to extend after 3 months based on program success.

Abstract

Issue: Looking for a function to accrue value to INDEX tokens that is gas/tax efficient and allows the Index Coop to retain income for reinvestment during the growth phase.

Solution: Deploy a smart balancer pool for a portion of our treasury as an automated buy-back mechanism for the INDEX token.

Why:

  • Streaming fees accrue value directly to INDEX tokens via the automated buy-back mechanism
  • Maintains a fixed amount of treasury diversification because of fixed pool weight
  • Sustainability in terms of being able to reward contributors from the pool into the future
  • Increased market liquidity
  • Improved treasury transparency
  • Traders pay us to rebalance the pool by arbitraging the price difference after a deposit/withdrawal. Further reading

How: 80/20 INDEX/ETH Balancer smart pool

Immediate Effect: $100k DPI swapped to ETH, combine with $400k INDEX from treasury committee wallet and seed the pool. Manually sell DPI streaming fees to ETH and deposit into the pool over the following 3 months.

Implementing this proposal would involve the creation of a balancer smart pool that only a whitelisted controller contract (in this case the Index Coop multi-sig) can interact with. We will deploy the pool through Balancer’s GUI using the parameters set out in the Specification section below. This will provide enough funds to cover 6 months of reward contributions plus sufficient liquidity to encourage arbitrage trades.

We will be able to monitor the performance of the pool and determine slippage, trading fees and Balancer rewards. The data can be used to project if this is worthwhile scaling up and adopting on a permanent basis, as well as how to best adjust the trading fee parameter for optimal growth.

  • FOR - Pilot the Balancer Smart Treasury for 3 months. Deploy a balancer pool with 80/20 INDEX/ETH composition seeded with 500k USD INDEX/ETH equivalent. Temporarily redirect the Index Coop portion of DPI streaming fees to the Balancer Smart Treasury.

  • AGAINST - Do not deploy a smart treasury according to the parameters above.

Specification - Initial

Weight: 80/20 INDEX/ETH

Liquidity: $500k seeding ($400k INDEX, 100k ETH), further liquidity added via DPI converted to ETH

Swap fee: 0.3% (can be changed)

Cost: Negligible, gas fees are reimbursed for deployment

Scope of work: deploy via GUI, manually sell streaming fees for ETH and deposit in the pool.

Configurable rights:

canPauseSwapping - TRUE

canChangeSwapFee - TRUE

canChangeWeights - TRUE

canAddRemoveTokens - TRUE

canWhitelistLPs - TRUE

canChangeCap - FALSE, allows flexibility to add any amount of liquidity

Specification - >3 months

Weight: 80/20 INDEX/ETH

Liquidity: $1.5m, with plans to add further liquidity via all live product streaming fees

Swap fee: 0.3% (can be changed)

Cost: Development (minimal), contract spec below

Scope of work: Develop a contract to convert streaming fees to ETH and deposit into smart treasury (shown in red box below).

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image1330×1072 99.4 KB

Background:

Treasury Strategy is currently being guided by Treasury Questionnaire Pt. 1 and Pt 2

Forum Post: Adopt a Smart Treasury

Google Doc: Treasury Goals

Example: AAVE smart pool

Example: IDLE Finance

Copyright

Copyright and related rights waived via CC0.

13 Likes
2

Hey @DarkForestCapital had a quick question on the swap fee. Any specific rationale for setting the fee at 0.3%? Maybe we should go higher? Would love to know what other smart treasuries do when it comes to the swap fee (I think IDLE is at 0.5%). This is just for my curiosity, it doesn’t really affect my support for this IIP.

2 Likes
3

Not sure if this was the reason for the 0.3% fee, but the higher the fee of a pool, the lower the BAL rewards. To encourage usage balancer applies a feeFactor which increases BAL rewards with lower pool fees.

Strong +1 for this proposal! Thanks @DarkForestCapital for your great work on this!

1 Like
4

The fee factor penalty starts at 0.25% as far as I know. The fee factor for 0.25% fee is 1 and the fee factor for a 1% fee is 0.94. There’s not much impact there.

On top of that, there is a wrapfactor, ratiofactor, capfactor and lately the governance-related factor. So in the grand scheme of things, there won’t be a difference in BAL rewards regardless of what we set as a swap fee.

1 Like
5

Hey, 0.3% was chosen as a baseline to match the two largest DEXes in the space Uniswap and Sushiswap. The thinking is if we then lower the fee does the pool become more attractive to trade than elsewhere, vice versa with raising it above.

I didn’t set it based on BAL rewards as they are negligible and as you pointed out in response to Lavi, fee factor has a pretty minimal impact in itself.

1 Like
6

Yes, understand. The reason to have a higher fee is to minimise impermanent loss. For example, a fee of say 2.5% or 3% will make sure the pool doesn’t get arbed as much and reduce the IL on it. Might be worth thinking if minimising IL is a valid criteria for the Smart Treasury. But if the goal, to a large extent, is to provide liquidity to the market then 0.3% makes sense :+1:

2 Likes
7

I don’t think the fee would have much impact on IL.

If INDEX drops 50% compared to ETH, then Arbitrage will happen, and there will be 5.7% IL.

Higher fees just make trading and arbitrage less attractive so we:

  1. get less trades,
  2. get less arbitrage

So, we may well get less fee income than a pool that has more trading volume for the same risk of IL.

Arbitrage become more attractive as pool size increases. At $500 K we would be 73% of the current sushi pool (But I’m not sure what impact the 80:20 has).

I would be tempted to go for 0.3% based on matching UNI and sushi, but given the higher gas costs for balancer pools, we may be better at 0.25% to attract volume.

1 Like
8

@DarkForestCapital thank you for your hard work on our smart treasury proposal. I am beyond excited to see the impacts that this will have on our treasury and community as a whole.

This is a great step towards long-term sustainability for our project. I’m glad that we have our Genesis to Q1 report complete as it will be fascinating to see the impacts of the smart treasury over our next quarter.

On a broad scale - the creation and implementation of this IIP demonstrates both the depth of skill within our community and the scope of possibilities available to us. I hope community members, myself included, feel inspired and challenged to follow your example by taking on similarly ambitious projects in the future!

4 Likes
9

I am in favor of the proposal. Will vote FOR once the proposal is available for voting on Snapshot.

4 Likes
10

I will also vote FOR when this goes to snapshot and thank you for continuing to dig on this theme @DarkForestCapital

1 Like