IIP-29 Activate DPI Intrinsic Productivity

This solution would work, but involves several actions by the DPI holders. Also the yields would obviously be considered as income for tax purpose.

What about simply reallocating the yields into the DPI positions? Would it be technically possible to do the following: the IC farming manager smart contract collects the yields periodically in the form of tokens (sushi, YFI, etc.) then send these tokens to the DPI smart contract, to add them to the positions of the index? Everything else stays equal. No additional actions required to the DPI holder, no staking contract, etc.

The NAV would be 100% accurate at the time of the yield allocation, then slightly diverge progressively until the next allocation. The more frequent the allocation, the more accurate the NAV will stay, but the slight divergence between each allocation is probably acceptable until a more complex solution is implemented (NAV computation taking into account in real time the accruing yields).

I fully support this proposal and find it quite frustrating that we have made close to zero progress on intrinsic productivity since launch.

There will always be reasons to delay things - exchange listings, integrations, etc. These things are ongoing and will not be ‘done’ anytime soon.

While we’re at it, we should also look at adding simple solutions like aTokens and xTokens (see here: A Simple Solution to Make DPI Productive)

Yes, we should do a legal analysis of this but I don’t see a strong reason to not implement this barring that

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@reganbozman The simplest and fastest way to market is to pass on all yield to DPI holders which also seems to be the preferred solution for our users and DPI growth. How fast can get that legal analysis to determine if that would make DPI a security?

That’s how it would work today on Set Protocol if we started yield farming without trying to take profit to the Coop. But then we would be giving excess profits to DPI holders which would put us in securities realm (an issue I dont care about but others do) Actual mechanics of how yield gets distributed was part of my original draft proposal but I took it out so that it could be decided in R&D what the best distro model is for what we setup.

Yea that’s exactly the problem that OA is talking about, difference between NAV and market price will affect different systems e.g. MakerDAO only cares about NAV because that is what’s liquidatable. sDPI cares about market price but people will price in yield differently - some might price it in once it’s farmed, some when yield is actually put back into DPI, some might price DPI with forward looking yields so there isn’t a single price for sDPI to value DPI at. Even if you want to rely on Chainlink’s price aggregation to get an average, that price can fluctuate a lot if nodes use different valuation strategies, nodes’ data sources change valuation strategy behind the scenes, or not all nodes respond on each job.

I think Maker is more concerned with the risk of farming and DPI solvency for liquidations where as sDPI is concerned about pricing. @overanalyser if no one at Set has I can talk to both Maker and Synthetix teams about what technical issues they think would arise from intrinsic productivity

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Passing as much value as possible back to the end user is a guiding principle of DeFi. We compete by making the most profitable tokens. People hold our tokens to make money. If some other token gets them the same risk profile but makes them more money, they can be expected to switch.

Agreed - @trx314 and @Thomas_Hepner nail some key points and concerns. It seems like we have broad alignment on the outline here and potential updates.

@overanalyser I hear the point here - but I strongly agree with @reganbozman. We should not let regulatory uncertainty or ambiguity around future plans keep us from innovating.

Regarding the NAV issue - this seems like this is solved naturally through arbitrage. Say we have a $50 million dollar sDPI <> ETH pool on Uniswaps. sDPI will never be at 100% NAV except during that time of yield allocation, however price arbitrage from the minting contract should keep divergence from NAV acceptably low for consumers.

Another thought - is keeping $DPI as is ($DPI Classic) and also launching this $sDPI possible? This would allow for a natural migration and potentially even increase our AUM as some users choose to gain exposure to both assets. This would also greatly expand the arbitrage possibilities to help maintain sDPI nav. And finally this will build a ton of flexibility - if an exchange or Maker doesnt want to list sDPI we can let them use DPI. We make money either way.

Great work @Kiba and thanks everyone for this awesome conversation. I learned a ton from reading this discussion - these dialogues are where true unforkable value is born!

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I took the time to read through most of the Intrinsic Productivity (IP) governance posts that have taken place since December, and while I am still confused about many aspects, I have come to a few beliefs and a conclusion.

Beliefs:

1. The Index Coop is Slow and Bureaucratic: IP discussions have been ongoing for ~7 months now. My sense is that organizationally the Index Coop is in a logjam and @reganbozman and @Kiba are trying to break the logjam and make incremental steps that bring immediate value to DPI holders while maintaining a long-term strategic view of the product. I echo @reganbozman’s comment that it simply unacceptable that DPI’s KNC position is being diluted at ~10% annually.

2. Investors want trust and abstraction, not understanding: I disagree with @overanalyser 's comment above that DPI investors would prefer something “easy to understand”. As a DPI holder, you are implicitly making a very speculative investment on frontier crypto technology; you are looking for abstraction, not simplicity of understanding. As a DPI holder, I am trusting (yes, trusting) the Index Coop community to make good technical and financial risk and return decisions within the DPI tokenset with the guarantee that I can always exit the asset if I disagree with those decisions.

3. The Community wants Intrinsic Productivity (IP): The vote in favor of @Kiba’s proposal is 92% yes to 8% no, and the at least half of the no votes are from the two people (@overanalyser @trx314) who are huge supporters of IP products. This means at least 96% of highly engaged community members, as evidenced by voting on this forum post, want IP. Simply put, the Coop has to have a public plan to make this happen.

Conclusion (Proposal): Form a short-lived Intrinsic Productivity team responsible for bringing a plan/ proposal to the community to either (1) update DPI with IP or (2) create a new DPI product with IP. My suggestions for the proposal are:

  1. Unanimous Agreement: has support from all project team members as signatories.
  2. Ownership: It is clear who is responsible for implementing the plan with clear timelines and commitments.
  3. Short-term and Long-term Viewpoints: Takes long-term Coop product development and strategic goals into consideration without letting the “perfect be the enemy of the good” to create immediate value.

Here are my suggestions for the IP team members:

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nice summary @Thomas_Hepner.
I’m meeting with Jo from DFP about IP and starting a working group on Friday already, I’ll bring up your suggestions.

After that talk and over the weekend I’ll go over all the dicsussions in this thread and parts of the proposal I didn’t bring over from my original draft that have come up and update the IIP.

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Hi, big believer that we need to activate IP, however concerned that we need to approach this in a responsible way that:

  1. doesn’t add unnecessary regulatory/securities risks to DPI/other indexes.
  2. is repeatable
  3. doesn’t fragment the market.

NOT AN ENGINEER SO UNSURE OF DIFFICULTY IN BUILDING THIS

High-level sketch of a proposal that I will be fleshing out more:

DPI Intrinsic Productivity Compromise Keeping DPI institution/regulator friendly while offering the more adventurous a yielding vehicle. Index Coop creates a vault contract that allows users to stake DPI for iDPI. This iDPI can be redeemed at any time for the original DPI + any yield generated (in the form of DPI). The contact has the ability to borrow the underlying tokens from the DPI contract, and use strategies approved by INDEX. The returns on assets are converted into DPI keeping things composable.

Benefits:

  • Yield product offered to those willing to bear risks without segmenting the market (multiple indices). still one product. DPI.
  • Main DPI product is not subject to extra regulatory/securities risks - Loss of tokens due to bad yield strategy only harms iDPI holders, normal DPI users are not affected.
  • Repeatable strategy for all other indexes (MVI, future products)
  • Clear separation of responsibilities, methodologists focuses on creating index strategies. INDEX holders decide the yield strategies and can balance meta-governance / yield via DAO Votes.
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Change Log:

  1. Update Yield Distribution to send 100% to DPI holders
  2. Increase % of assets earning yield from 75% to 90%
  3. Move description of how yield is returned to Description
  4. Add “Out Of Scope” section
  5. Reduce INDEX reward to 100 to reflect change in scope. Contract to manage farming no longer needed, only need YFI v2 adapter.
  6. Happy 420 :kissing_heart:

@scott_lew_is I ended up not adding aSNX to this proposal to keep it lean. Aave v1 only has 0.07% APY and Aave v2 only has 2% APY plus doesn’t have a Set adapter yet so it would take extra work/funding. I think xTokens are probably a better option as well and Regan + OA like it but I would have to do more research to feel comfortable at a technical level before proposing it.

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Still a strong proponent of considering separating the yielding asset from the base one. We defiantly should have some intrinsic yield, but it should be opt-in. We shouldn’t be shooting ourselves in the foot by adding additional legal concerns and possibly jeopardizing the exchange listing of DPI by adding yield to the base product by default.

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@Kiba really happy that you are leading this up. I have tremendous confidence that you are the best owner who can drive to a solution and solve this problem once and for all. I’m glad @Thomas_Hepner summarized the steps we need to take to break this logjam.

In my opinion either having a seperate yield bearing DPI or giving people the ability to stake their DPI is the best option. This will keep our existing product whole, provide an awesome new product, and eliminate some of the concerns around meta-governance.

This needs to happen and this needs to happen soon. If we have a product launched with intrinsic productivity by the end of May- we are winning. If not our competitors will continue to yap at our heels. Let’s throw some energy behind this and make it happen!

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Reposting now that it is a bit more thought out and after speaking with more members + Pulse, also with a diagram in case there are other visual learners like myself (I apologize for the bad handwriting).

Goal: Keep the main DPI product vanilla, regulator/CEX exchange safe, while providing the more adventurous a way to benefit from the intrinsic productivity in the DPI assets.

Sub-goals: Make a repeatable process for other IndexCoop Products (MVI etc). Empower INDEX holders to decide the balance of return vs. metagoverance power, allow the IndexCoop to make DeFi partnerships to externalize yield decisions (Yearn, Harvest, etc).

Proposal: create a vault controlled by IndexCoop (temp name: iDPI) that allows the deposit of DPI for iDPI, and redemption of iDPI for original DPI deposit, plus yield (in DPI).

This vault will keep a percentage of deposits in DPI to handle redemptions (10% using the number from above). The other 90% will be unwrapped into their components, which will be put to work (ex: YFI → yvYFI).

As for the streaming fee. The 10% that is held in DPI is already handled by the existing DPI streaming fee. As for the remaining 90% that is put out to farm, a portion is periodically streamed (same percentage) to Pulse/IndexCoop. This has the added benefit of diversifying the treasury should we take the streaming in its unwrapped form. The split can be the same or changed since INDEX is running the vault.

Lastly, as for Market Cap, this obviously complicates the calculation. Proposing a new metric, “DPI Family Market Cap” (DPI Market Cap + iDPI Market Cap)

A few benefits I want to stress:

  • Regulator/CEX friendly. “vanilla” DPI isn’t touched. If yield is allowed in your jurisdiction you can opt-in.
  • Added risk of the yield is taken on only by those seeking yield (opt-in).
  • Very beneficial for the IndexCoop, the ability to seek out partnerships with the vaults, and a way to diversify treasury.
  • Repeatable Strategy for future products (engineering effort hopefully is high upfront cost once, and can be deployed for MVI or other future products)

more than happy to work with @Kiba or anyone else working on this. would love to see something built so we can cut off this line of attack on our product without jeopardizing the nice simple investor-friendly vanilla nature of DPI.

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Great discussion so far! Wanted to present a summary of the conversations above and a general framework we can use to evaluate this opportunity.

This framework lays out some of the considerations from the discussion above into context around advancing core metrics, timing and implementation strategy:

Some notes:

  1. There is insufficient evidence that IP will lead to TVL growth, but will 2-3x Coop revenue from the DPI as Kiba mentioned above
  2. At the same time, there are differing opinions from the community on implementation strategy which makes this a high risk initiative
  3. In terms of timing, there are pending extrinsic productivity integrations (AAVE, sDPI), CEX listings, additional rebalance operations (unwrapping prior to every DPI rebalance) which also adds significant complexity other than engineering.
  4. Other product launches in the horizon that serve different use cases may be a better testing ground for IP i.e. BED and Synthetix Debt Mirror Index

A path forward could be aggressively pursuing IP in the Synthetix product which serves a different audience and use case. We use the data collected to inform us on IP in DPI as more integrations come online and implementation strategy becomes clearer

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A couple of points from me mostly on the revenue potential.

In @Kiba’s proposal, it says that:

Yet, @richard’s post says that revenue growth for the Coop could be significant while TVL growth from this is uncertain.

Would be great to clarify how we are actually thinking about this.

Assuming revenue is split in some way between Coop, DeFi Pulse and DPI holders - what is the true revenue potential for the Coop? Also, what do those revenue numbers look like assuming 50% of all DPI locked in the vault? What if it’s 30%?

I think it’s rather crucial that we understand what these numbers look like. Something that is worth doing for 2-3x in revenue might not be for 0.5x. At least it wouldn’t be a high priority.

In terms of the execution of intrinsic productivity, the proposed option with the vault makes the most sense to me as it 1) doesn’t affect integrations; 2) doesn’t affect CEX listings; 3) doesn’t farm the underlying assets without consent. But like I said above, it will reduce the revenue impact.

Pursuing IP with the Synthetix product seems like a better option.

While we are on the subject, I wanted to briefly touch on IP for MVI and just give everyone some context here.

At the moment, only one token, $DG, can be staked in governance. Governance yield on $DG is 40% and there’s a proposal to extend rewards at the current level for the next 10 weeks (original target was 20%). $DG is about 5% of the index. We know that both, AXS (7% of MVI) and SAND (10%) will enable staking when they migrate to their own sidechain in the case of the former and when the game goes live in the case of the latter. ENJ (17%) could also be staked in the future when their Polka parachain is ready to go.

In terms of experimenting on a small scale (MVI is currently at $5m TVL), MVI could be interesting. The revenue on $DG alone would be 2%. As Index Coop is the methodologist here, any revenue will be split between the Coop and MVI holders.

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I just want to mention that bDPI from BasketDAO may be some level of proof of the desire for IP. I know they are supplementing with BASK rewards too, but they have grown bDPI to ~$60m market cap. Seems like the immediate growth potential for IP with DPI is somewhere between $10m-$30m (just my estimate). Future growth is harder to determine.

I like the thoughts proposed by @oneski22 around keeping vanilla DPI and having a second product, iDPI.

Imo, the most important thing is that we get moving with intrinsic productivity - as @BigSky7 said, competitors are yapping at our heals here. If we are constrained by ENG resources, it probably makes more sense to start with SMI for intrinsic productivity and lean outwards from there. We are going to do it there no matter what, so let’s take that head on.

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Could be interesting to make intrinsic productivity opt in - this would potentially solve for concerns from integrators (exchanges, lenders, etc) about risk and pace of product changes, while allowing users and the Coop to benefit from yield as desired.

So you could have xDPI, which represents the same underlying assets and weights of the DPI index but includes intrinsic productivity strategies where available. Users could trade it, do the regular creation/redemption for underlying assets, and potentially the Coop could create pools for migrating between DPI and xDPI and handle the unwrapping/wrapping in batches.

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Personally, I’m much more in favour of kicking off intrinsic productivity on MVI first:

  • Compared to most underlying tokens in DPI there are higher yields available on wBTC, ETH and DAI even if just using a simple Compound strategy (yYFI is currently yielding < 3%).
  • No external integrations / CEX listings.
  • While the rebalances are more frequent, they are likely to be much simpler (and the rebalances are the hard part).

When we implement Intrinsic productivity for DPI (it is inevitable :slight_smile: ), I would argue for all the income to goto INDEXcoop and we can decide how to allocate that income (offsetting streaming fees down to zero, liquidity mining DPI…).

I don’t like staking for income as it prevents the holder from using the token for other uses and it adds more contract to be deployed and maintained. Also, until we get L2 staking, it becomes a gas drain for smaller stakers.

Creating a xDPI is possible (whether we have sufficient AUM to split it), but it would be an additional product to launch and integrate with the rest of DeFI.

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You mean SDI right, not MVI?

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On SMI IP

Majority of this discussion have been about our strategy specifically for DPI. Since they are different products/audiences there are many independent considerations for each. Even if we do SMI IP first, we will still have to circle back to this same conversation for DPI anyway. Also SMI doesn’t exist yet and might be months away.

There isn’t any material difference between DPI and SMI besides that DPI is already established and we have set a precedent for it to not have IP. Besides some small technical differences for integrators like calculating NAV it doesn’t meaningfully change the product in anyway, its just a perceptual change of DPI vs stkDPI where as SMI doesnt have that cognitive shift because we want to do IP from day one. If you’re invested in DPI you are already accepting a huge amount of risk (regulatory, financial, smart contract, and counterparty risks at the very least) while adding IP only increases smart contract risk by a fraction compared to base DPI, especially since this IIPs proposed strategies use protocols DPI holders are already invested in.

Opt-In DPI w/ IP

Opt-in solution is the unanimous preference from everyone on this thread and who I talked with around the DAO this week. Main objective of this is to isolate risk to help with integrations and BD with institutional investors. Personally I would prefer keeping it all within DPI but not opposed to second product if that’s what everyone wants.

Set can provide better advice than me but from what I can tell the best way to implement this is as a second Set token independent from current DPI. It will follow same methodology, have same streaming fee and cut to DFP/IC, but will have IP implemented in it. We use both Set tokens to calculate TVL of DPI. Farming mechanics would be as described in this IIP.
A second product is simpler than the vault idea from @oneski22 since there’s no real reason to have stkDPI and DPI tightly coupled like that. They are loosely coupled by methodology and the market can figure out pricing between the two.

There’s only one DeF integration that we currently have that would require updates with a second product which is CREAM and I help set it up so not a big deal getting it done again. The point of second product is to keep DPI vanilla and make ongoing integrations easier so saying “second product is more work” is a direct consequence of “keep DPI vanilla”.

From reading the docs on rebalance contract it seems to me it’s possible to keep xSUSHI and yvYFI in the set during rebalance by including their current token balances in _oldComponentsTargetUnits. With the parameters for farming in this IIP, 10% of component in DPI is enough to cover any rebalance and if a component’s allocation is reduced to <10% is liquid after rebalance then the farming managers / keep3rs rebalance back to 10%. What am i missing @richard that makes unwrapping mandatory before rebalances?

I agree with others that we should be focusing on growth and our users instead of revenue. I included revenue to IC in original post to avoid giving profit to DPI holders and making it a security. While there is no direct lever to growth, the additional yields make it a more attractive product (re: BasketDAO) and we earn our fees in DPI so an increase in TVL + increase value of DPI increases our income while still focusing on growth. It also opens us to a more DeFi aware audience since many can currently outperform DPI with yield farming but it would be harder to outperform DPI + IP.

There’s obviously a lot of duplicate convos happening p2p between Coop members on this IIP so Greg/Dylan/Punia are helping me setup a small workshop / group to hammer out details with a small group of people.

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Since the snapshot cannot be updated, posting here: the 20% APY for YFI is no longer accurate, the actual number is below 1%. Here is a link to see the live 30-day average APY directly from yearn.

[Grafana](https://Link to Yearn.Vision Dashboard)
0.718% or so is the current APY, the quote on the main yearn website is 1.09% Gross, 0.88% net.

This drastically changes the projected revenue of this change.

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There’s a lot been said here and I have a lost a clear view. I entirely accept that can be my problem and that I probably just need to DMOR. There’s a lot of knowledge here though and if I have questions maybe others do too:

I am mega FOR intrinsic productivity, it seems like leaving money on the table otherwise, at least being inefficient. And, it is essential for competitiveness.

BUT

The methodology from DeFi Pulse says use the bearer instrument …yet @scott_lew_is seems for.

great post kiba.

i would suggest being more aggressive than 75%.

That’s cool and provides strong motivation to support it. Is the proposal possible because DPI is minted according to the methodology but then the tokens swapped out by the IC? Wouldn’t that still affect CEX listings and institutional purchases? Furthermore, @reganbozman fully supports the proposal, but he does qualify it by saying

‘we should do a legal analysis of this but I don’t see a strong reason to not implement this barring that

Regan’s opinion counts for a lot and his suggestion seems reasonable but there is no explicit legal analysis following.

It says 20% for Yearn but then that is corrected to less than 1% in a comment:

0.718% or so is the current APY, the quote on the main yearn website is 1.09% Gross, 0.88% net.

…that seems a big change without commentary. Not including aSNX was based on it having a rate lower than 2%, so should YFI be taken out too? Is it worth the engineering time and risk if the return has become so low?

The yvYFI vault had a flaw. Lightning rarely strikes twice but opening up the prime Coop product like this is not just about voting for increased productivity, there’s fundamental change to the risk profile.

Considering the above, despite the desire to be quick, it is hard to cast a vote even though the overall aim and initiative is right.

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