IIP-58: Launching Pulse Aggregate Yield (PAY)

Greetings, New here how can we vote for this proposal?

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Since PAY is still in early stages of governance, am curious if Olympus DAO is a potential match here. They have released OHM and are attracting a healthy interest i.e. $72M in Treasury, $350+M MarketCap, 17% APY

I have not completed DD on their product yet, but would like to know if it meets Index Coop risk criteria and could fit into one of three tranches planned for PAY. Probably too many layers of smart contracts to manage, but have to ask. Olympus DAO

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Is there any update on when this will likely be released? The ideas is super exciting just to hold a single token with all the mechanics controlled and delivered.

Echoing a few other commenters on this thread, I’m excited about this product and thanks for putting this proposal together!

Can you share the formula for this risk score calculation?

I would benefit from seeing the risk score for the products in this table.

Is initial asset allocation expected to follow the pattern in this table?

What asset allocation will serve as a target for subsequent rebalances?

Hi @rootulp

Further details on this can be found here. This will give a really good guide as to how risks are qualitatively assessed and then converted to a number.

With respect to this comment, I would like to highlight a note in the IIP post. This note refers to some of the limitations around using the TokenSet infrastructure.

We are experiencing at least one community willing to assist building out an adapter which enables their product to be considered from a technical standpoint. Unless adapters are built out pre-launch, PAY will be limited to existing TokenSet functionality.

To allow this product to realise its fullest potential, adapters will need to be built out enabling other investments beyond the initial allocation as detailed in the forum post.

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xToken supports this initiative and we propose adding our xU3LP tokens to the PAY Index.

xU3LP tokens are ERC20 wrappers for the Uniswap V3 liquidity provision (LP) process. xU3LP is a set-and-forget token, requiring no active participation from holders. LP trading fees are automatically reinvested in the liquidity pool, allowing investors to compound their returns. Holders can redeem for either of the underlying components at any point, assuming there is available buffer liquidity. Fees are 0.1% on mint, 0.1% on burn, and 2% of fees claimed.

The PAY Index, as proposed, has no exposure to yield earned through concentrated liquidity positions via Uniswap v3. xU3LP tokens would give PAY holders exposure to Uniswap v3 stablecoin swap yield, and automate the management of those positions on behalf of the Index.

The AUM across all of our stablecoin xU3LP positions is currently ~13.7 million USD yielding a simple average of 4.45%:

  • xU3LPa $4,613,344 (~1.33% APY)

  • xU3LPb $4,902,580 (~3.07% APY)

  • xU3LPc $4,236,043 (~8.95% APY)

xU3LP audits can be reviewed here.

We are open to supporting yields on the chosen xU3LP positions through a liquidity mining program directed at the chosen positions. However, we are concerned about incentivizing external projects that intend to automatically sell XTK rewards as they accumulate. We’d like to engage with the community on a way to minimize the “farm-and-dump” element of this proposal. Please let us know if there’s a way to meet halfway.

In addition to our xU3LP positions, we’ll be rolling out xToken Lending in the coming months which can serve as another source of stable-coin yield for the PAY Index. LPs of xToken Lending will supply USDC to xAsset holders who wish to borrow against their position(s).

If we can come to terms with the community on the details of this partnership, xToken is willing to build an xToken adapter to make the integration of our xU3LP stable-coin positions and xToken Lending as smooth as possible for the Index Coop.

Let us know of any further information that would help the Index Coop develop a good understanding of the risks/rewards associated with using xU3LP tokens in their products.

cc: @Matthew_Graham & @Jo_K

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Overview
We would like to praise Index Coop for their collaborative, positive and enthusiastic approach towards PAY. Discussions to date have been very open, transparent and pleasant. Thank you to everyone involved for all their efforts in helping move PAY towards launch. We are excited to be launching this new product type with Index Coop.
The following topics have been discussed between the Business Development Working Group (BDWG) and the methodologist. The below passage has the broad support of both BDWG and methodologists. We hope the community supports the view expressed below.

TL;DR
Mint Fee: 0
Streaming Fee: 35 Basis Points
Redeem Fee: 0
Fee Split 50% Index Coop and 50% Methodologist
Revenue Sharing 50% Index Coop and 50% Methodologist

Mint & Redeem Fee
With the user experience front of mind, a zero basis point fee for both mint and redeem fees is proposed. A zero mint and redeem fee enables PAY to closely track NAV which is an important feature for a money product where investors expect the deposited USD value to not fluctuate and steadily increase over time.
A zero minting fee is important for enabling investors to deposit a USD amount and receive, as close as possible to the USD deposited amount. The best user experience involves not charging a fee for depositing funds into a savings account product like PAY. We have also received feedback from prospective investors willing to integrate PAY into their business model, that having a mint and redeem fee is problematic where users only see a USD value in their account. Think about a wallet integration that uses PAY in the background to generate yield for its users - just like a USD savings account - and the user only sees a USD value on their screen.
Streaming Fee
The vision for PAY is to capture the full sphere of integrations and use cases. A very high AUM with a low streaming fee is needed to enable TradFi businesses and DeFi protocols alike to build on top, and incorporate PAY into the backend of any product offering. Too high a fee and we risk PAY failing to capture its true potential.
A 35 basis point fee is proposed and we believe with this fee, PAY will find good product market fit. Like with all products, provided both parties agree, the fee can be adjusted to suit market conditions at a later date. This will need to be managed with the utmost consideration for investors.
Revenue Sharing
As various protocols offer incentive programs to attract partners, like Yearn’s performance fee sharing, there exists the potential for a material revenue stream outside of the typical AUM based streaming fee.
This potential revenue stream was taken into consideration when determining the 35 basis point streaming fee. We also agreed it would be fair to distribute these revenue streams in-line with the fee split. This keeps the commercial arrangement simple. Both partners are incentivised to grow PAY, to generate revenue and the incentives are aligned through the Fee Split.
Note: All intrinsic productivity yield is to remain a feature of PAY. “Revenue Sharing” includes things like reimbursement of management/performance fees.
Fee Split
We propose a 50% Index Coop and 50% Methodologist fee split for both Streaming Fee and Revenue Sharing. The design of PAY is complex, it has a proprietary risk analysis model, requires deep research into each possible constituent and will require high resource loading to maintain an active strategy that reflects shifting market conditions. This is day to day work that needs to be constantly updated with evolving market conditions & risk profiles to keep the product safe & competitive.
The pre-launch developer lift and ongoing needs were taken into consideration when discussing the fee split. We note the pre-launch developer lift benefits multiple products and that product maintenance is required for PAY to remain competitive and relevant within the space. The methodologist has been active in helping find partners to assist Index Coop with building out adapters.
Liquidity Mining
The methodologist believes PAY will find strong product market fit and does not need incentives to be a successful product. A lot of interest was already shown by partners looking to get risk adjusted returns through PAY, and the Coop will not need to provide seed liquidity. However, the methodologist recognises that Index Coop may wish to provide incentives on PAY and wishes to be clear that this is at the discretion and cost of Index Coop. The methodologist is not open to revisiting the streaming fee or fee split due to any associated cost borne by Index Coop relating to incentive expenses.

cc @Matthew_Graham

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Hey Jo,
Thanks for putting this together!

What is DeFi Pulse’s understanding of the engineering lift required to create, distribute, and maintain this product? I want to make sure everything is being accounted for.

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Thanks Jo, really excited for this product. Could you expand a little more by what you mean here. I think the context would be highly valuable for the community to understand the full potential here.

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Great work team! I was a huge fan of the original $SYI and firmly believe that the updated $PAY will be an even better product. Products like $PAY really highlight the benefit of having strong external methodologists - the analysis needed for this product is sophisticated and requires a deep understanding of DeFi money markets.

We spoke extensively with the DFP team around the streaming fee of 35 bps. Percentages matter a lot in money markets and we want to build a product with compelling and low fees. Add this to the fact that several of the components already charge a management fee and this split makes sense.

In regards to the fee split itself. $PAY is an innovative product that will require significant resources from both teams to execute. Scaling this product to the $100s of millions will require a large lift across DFP / Set / Index Coop.

It is important that we get the fee split right across our products - but it is also important that we continue to launch groundbreaking products. Using the original Methodologist Fee Menu as a rough heuristic - the complexity of the methodology alongside the initial seed liquidity and significant work that is already done to recruit ecosystem partners points to a higher % of the fee split for the methodologist.

Finally, I think it is important to highlight to the community the full-extent of the engineering lift required to launch this product. Launching $PAY will require significant engineering resources to implement full functionality. Here are a few examples of the major engineering work that is required.

  • Building mStable adapters

  • Incorporating Rebasing tokens

  • The underlying mechanisms for re-investing Yeild

Each of these is a discrete and significant lift that will demand a large % of our engineering resources. While everyone is eager to see this product get launched - we need to remain cognizant of the very real bandwidth limitations across multiple engineering teams.

Lets get $PAY launched

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Yup would be great to get more clarity here. I’m curious why 35 basis points is considered “low fees”. What are the benchmarks/references for arriving at this number?

Super stoked for this, team! :grinning_face_with_smiling_eyes:
Have some thoughts/questions on the fee split.

Since the fee split is (mostly) proposed on the basis of $PAY’s complexity and day-to-day work load, it would be good to have more clarity on the following:

  1. Is the complexity of the methodology as resource intensive as the engineering lift required to implement it?
  2. How much of the day-to-day work is being taken on by the Coop vs DeFi Pulse?

It might also be relevant to provide clarity on the following in the context of deciding the right fee split:

  1. How much incremental value is the methodology’s complexity offering over a simple methodology?
  2. Aside from engineering support, are there any other reasons for DeFi Pulse to partner with the Coop for this product?
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We think that a product like PAY will enable 3rd party providers like wallets, financial apps & money managers to act as front-ends, helping their users get exposure to PAY’s risk adjusted returns, and thus amplify its network effects.

There is the potential for very deep moats within these business lines, we are just trying to design the product with these future integrations in mind

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The streaming fee was discussed during the negotiations with the BDWG and we both believe the product will find a good market fit with the proposed streaming fee. Do note, the methodologist will be actively seeking to secure additional revenue streams which are to be distributed as per the “Revenue Sharing” split. This revenue stream is additional to the streaming fee.

We would also like to highlight the following passage in the prior post.

“Like with all products, provided both parties agree, the fee can be adjusted to suit market conditions at a later date. This will need to be managed with the utmost consideration for investors.”

When determining the fee split we look at the value each party brings to the product as there are limitations with a cost based approach. Here are some of the challenges that could be faced:

The developer lift to implement the functionality built into PAY is not unique to PAY. Meaning this functionality can be implemented by all TokenSet users like Ember Fund, YAM and others. The benefits are not unique to PAY nor are they unique to Index Coop.

From the Coop’s perspective, a lot of these features being developed will be utilised for existing & planned products like DPI, DATA, LDI, YHI. They will also open the door for new lines of products not yet foreseen today. We can think of these features as R&D which should be top priority for growth minded organizations like IndexCoop & TokenSets. Investing in developing new functionality for the infrastructure the Coop uses is crucial to attract more products and unlock potential growth.

LDI for instance monetises this developer lift by way of including PAY in that product. LDI & YHI also require the TokenSet contracts to hold rebasing tokens. Intrinsic productivity on DPI becomes easier and in time other products will be developed using these new features. There are already early plans to utilise this functionality in other products.

This is why such high value additive R&D expenses become very hard to price from a cost based perspective. The first product to utilise new functionality risks being sandbagged with the development costs and the later products somewhat receive free carry. In this instance, it means any future PAY variation will have way less dev lift and if we think of the whole suite of products as a portfolio then the initial dev lift can spread over multiple products.

Probably the most overlooked aspect of a cost based approach is the behaviour it incentivises. Index Coop’s cost base is different to other organizations. Attracting and retaining the best talent often means paying above market rates. With differing cost bases, it can lead to difficult discussions around why costs are what they are. As a methodologist, we do not want a commercial incentive to challenge our partner’s cost base. Thus, we always prefer approaching this problem from a value creation perspective, and in this instance we are 100% sure that the value we are bringing to make this product a success will outweigh the fees charged.

The methodology was presented in the original forum post and the concept of risk adjusted returns has always been a feature. PAY is optimised for risk adjusted returns and reduced idiosyncratic risk. Idiosyncratic risk is unlike systematic risk and can be diversified away.

There needs to be some means of determining risk and electing which yield strategies are considered for inclusion in PAY. There is a balanced weight across the risk spectrum and low idiosyncratic risk through diversification which then is enhanced through scaling PAY as AUM grows. If there is a simple design, it will most likely compromise some of the features mentioned above. If anything this “complex” methodology will still require constant fine-tuning and updating to keep up with the fast growing complexity in DeFi.

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Pumped for $PAY! Can’t wait to swap out my stablecoins for it.

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As part of the DAO Treasury relations team, this is a product which is very appealing to our clients looking to diversify. Super excited to see this come to life.

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While I am excited to see this product move forward, I cannot justify a 50% fee split. I have been speccing out the engineering work required to implement PAY and intrinsically productive products in general, and have found many hidden challenges. Many of these challenges are also specific to PAY, and cannot be reused for other products. Additionally, rebalancing any intrinsically productive product is a much more involved process and will add additional operational load.

If we proceed with this product, the IC will likely have to hold off on other smart contract work. As it stands, it seems we may want to prioritize products that will be more profitable to the Coop due to a more favorable fee split.

I fear that each product that DFP proposes shrinks the fee split. At a certain point, it might be more beneficial to launch this product in-house. The IC certainly has the distribution channels, legitimacy, and social media presence to make this product successful without the need for an external methodologist.

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Hey. New to this forum and IC. I’m curious how this product will be marketed to DAOs and institutions. Does IC do more active marketing with these types of potential clients than Twitter, etc? Thanks for your time.

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a paid contractor of set labs/index coop is literally proposing the coop steal ideas from people in its own governance process.

i dont think you are a good fit for the coop.

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Thanks for the detailed response @Jo_K, really appreciate it.

I understand the importance of having a value-creation perspective while trying to solve this problem. My questions on the fee split were in direct reference to the cost based reasoning you provided.

However, I do wholeheartedly agree that we must take into account the value that each party brings to the product. That is kind of where I was trying to lead the conversation with my last question which went unanswered.

Please bear with the silliness of me answering my own question, but I think it is relevant to all of the points you raised (your points in block quotes so it’s easy to follow):

It might be true that “Ember Fund, Yam and any others” can implement the technical functionality of PAY. Therefore I understand how it might not be fair to account for the developed lift incurred by the Coop to implement PAY. However, these other companies/protocols don’t have the network effects of IC. We are a strong and huge DAO of highly motivated people with all sorts of skills required to make PAY successful.

The fact that Index Coop’s engineering will gain from implementing PAY is not a convincing argument at all in the context of value creation/fee split. Engineering will gain useful experience from any product they develop. Furthermore, I’m fairly certain that any other product that the Coop develops will be very innovative, just like PAY, and with time even more than PAY. It’s the composable nature of DeFi which “opens the door for new lines of products not yet foreseen today”.

The fact that PAY will be used by LDI is again value that IC is adding to PAY, not the other way round. A big reason Index Coop enjoys network effects is due to the proven credibility of their dev team. It is certain that more and more methodologies will be implemented by the Coop and many of those products will use each other. BED and DPI being recent examples.

I think it’s great that the methodology is relatively complex and I appreciate the methodologists for that. However, who gets more hurt if the methodology doesn’t work as expected or falls prey to a hack due to its complexity? I totally understand that this would be due to the Coop failing at its core competency. But the fact that the methodologist is not taking on nearly as much of the risk but an equal amount of the reward does seem unfair to me.

Sincerely appreciate you talking on the topic of value creation @Jo_K. I think the Coop and DPI need to address this topic exclusively and at length.

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