IIP-74: FLI Economic Model Upgrade - Future Gas Costs

title: IIP-XY: FLI Economic Model Upgrade - Future Gas Costs
status: Draft
author: Matthew Graham (@Matthew_Graham)
created: 2021-08-12

Simple Summary

The gas costs of maintaining the FLI product range are currently borne by entities other than the LFI product holders. This IIP represents the intent to shift gas costs for maintaining the product from Index Coop (indirectly via service provider Set Labs) to FLI holders. This proposal will significantly improve the profitability of the FLI product range and will align the maintenance cost structure inline with industry standards.

Abstract

ETH2x-FLI and BTC2x-FLI were built with ongoing gas maintenance costs being paid for by Index Coop. This is unlike Yearn, Badger, Idle, Harvest and other financially engineered products across the industry.

To date, Index Coop and it’s service provider have spent $146K in gas on ETH2x-FLI. If the FLI product was built in line with industry standards, then this cost would have been paid by ETH2x-FLI holders. With a circulating supply valuation of over $100M, this gas cost can be socialised across FLI holders for 18 cents per unit holder at the current circulating supply level.

Over the same period, the FLI products have generated around $500K in Comp tokens, which are now sitting unused in both the ETH2x-FLI & BTC2x-FLI contracts. I will be submitting a separate proposal for the Coop to be reimbursed for past gas costs up until the time this IIP is implemented on-chain.

Motivation

As Index Coop continues to refine and improve the FLI product offering, it is now time to internalise the rebalancing costs within each respective product. Comparing FLI products to existing industry standards, there is precedent for users to bear the maintenance cost of holding the product. With respect to the FLI product offering, this means the gas costs associated with maintaining the product are paid for by the FLI product holders themselves.

This will significantly improve the overall economics of the product and remove future Index Coop liabilities associated with on-chain maintenance costs. As the FLI products scale, with multiple offerings across L2s and L1 it becomes operationally more efficient for these costs to be built into the product itself. Each product shall hold sufficient ETH to enable rebalancing to occur in an automated fashion. This eliminated the operational need for Index Coop to maintain an ETH balance outside of the product to facilitate rebalancing. Furthermore, it eliminates the need to actively manage this ETH balance with consideration to various market conditions. This simplifies the economics of the product, improves profitability and reduces ongoing funding costs. This change is expected to lead to up front developer costs, which are scalable and spread across an entire portfolio of FLI like products. This change will also pay for itself over time in the way of improved profitability across the product offering.

Specification

Change the FLI contracts to use the underlying assets, mainly ETH and BTC inside the FLI contracts to pay for Gas fees. This is to be replicated across the entire FLI product offering present and future.

The FLIs are created with a new Set Protocol modules system, and we assume that adding a DEX module that would sell underlying assets for ETH, and keep in the contract for use on rebalances is the easiest way forward.

An alternative idea is to replicate the way yearn handles its performance fees, whereby yearn mints new pool shares daily, thereby diluting the total supply, and allocating these shares to the fees component of the vault. This IIP is to drive the change and enable the best technical solution to be implemented.

The costs of implementing these changes are to be borne by Index Coop and its service providers. This cost will feature in a later publication relating to the streaming fee and/or COMP tokens that have been accumulating within the FLI vault.

Voting

FOR:

Upgrade the FLI contracts gas management system by transferring gas cost to FLI product holders, in line with Industry standards,

AGAINST:

DO NOT perform any upgrade to the FLI contracts gas management system.

Copyright

Copyright and related rights waived via CC0.

8 Likes

Hi @gregdocter, @Pepperoni_Joe

May I please have an IIP Number assigned, a discord discussion channel created and a Snapshot vote scheduled for Monday 16th August 2021.

Thank you in advance.

This is a special situation IIP post that I don’t have a good mental model for.

Fundamentally, product improvements flow through the PWG and EWG. This process makes sense as these two teams have the most amount of context on the engineering difficulty, existing pipeline, security concerns, etc. Most other contributors have different things they are accountable for so it makes sense that they would have less context here.

The way engineering and product are working together now is through Pods. In this case, the Leverage Indices Pod led by @afromac. Any new product improvements are vetted and tracked by the pod and implemented if and when makes the most sense.

This IIP assumes a solution, but doesn’t provide the level of consideration that would go into a real product decision done by the PWG and EWG teams.

For example:

What industry standards? I would be skeptical of any existing in an industry so nascent. This also really isn’t a deep enough consideration as all protocols and their tech stacks can be quite different and make a series of different assumptions.

For example, some special considerations for Leverage Indices that Felix highlighted here: FLI suite streaming fee offer - Request for comment from the community - #6 by setoshi.

Not sure what operationally efficient means really and why that is a main consideration. For the Coop, the most important thing is security which isn’t really talked about as much in this IIP. Again, it would be hard for the proposer to actually consider that given that we separation of responsibilities at the Coop for good reason.

Super unclear that it is only upfront developer costs and that those costs are scalable. Again, not sure how that assumption is being made without feedback from EWG. Additionally, EWG can not be expected to vet every single product idea a community member has, hence the use of Pods to prioritize.

Not sure how profitability gets improved. The economics of the product seems to be the same.


As a final note, I just want to flag that we don’t have an existing system to deal with product improvement IIPs such as this one. It would be my guess that we need to have a more defined delegation of powers between Working Groups and only use IIPs for what falls outside of that.

It would also be my guess that even if this IIP were to pass, it would effectively go to the same prioritization process anyways and still may not be implemented if it were deemed to have too many security vulnerabilities, or a better solution was found.

Flagging to @overanalyser for his thoughts as well.

3 Likes

If the gas costs are socialized amongst holders and not paid by us, we can all agree that this change will pay for itself over time by increasing profitability of the product.

In terms of eng pull needed to build this, I would trust @ncitron to do a better job than me.

1 Like

Ah of course. Makes sense. Sorry, silly quick read on my par.

2 Likes

Hi @puniaviision, @Matthew_Graham.

Just confirming I am going to wait until this discussion plays out I get both of your support before putting anything to IIP.

Hi All,

Apologies up front here.

I am resurfacing this topic again with the sole effort of creating visibility and seeking to kick off a broader discussion around transferring gas costs from Index Coop via Set Labs onto product holders.

It is not clear, to me at least, what blockers are in place and how those blockers can be overcome.
I could be wrong, but I strongly suspect if we sum together Set’s monthly gas spend across our product offering, Index Coop could hire a dev/engineer with the sole goal of finding away and implementing changes that socialising gas costs across product holders.

As long as we remain on L1, I firmly believe this should be in the roadmap for Index Coop. In my mind, if we want to have conversations about product profitability, then we need to address the elephant in the room. I don’t mean carving up the revenue pie and allocating a portion to gas cost reimbursement - that leaves Index Coop & Methodologist with a smaller piece of the pie.

Perhaps I am a fatty and I want Index Coop to have a lot of pie. I think we can all agree a revenue split Gas Cost | Index Coop | Methodologist is not ideal, a revenue split Index Coop | Methodologist means a bigger piece of pie for Index Coop. :pie:

6 Likes

Seems like a meaty topic that involves a number of stakeholders and is a bit muddled at the moment (based off of, “It is not clear, to me at least, what blockers are in place and how those blockers can be overcome.”)

One way to drive forward on a topic like this :point_up: is with a RAPID (Coinbase article, my google doc template).

I’m doing a rough draft as an example, I’m not claiming accuracy :point_down:

Issue: It is unclear how to advance the conversation around transferring gas costs from Index Coop via Set Labs onto product holders.

Decision Type (1 or 2)
[1 = Irreversible and/or highly consequential, 2 = Reversible ]

  • 1, ultimately this is reversible. However, it will likely be high-consequence cost due engineering requirements and impact on end-users.

Recommend
[Person who is raising the issue and proposing a solution. What are they going to specifically do?]

  • Matthew Graham - surface the issue via the forums and ensure the right people are working on this problem

Agree
[People whose input is required and must be incorporated in the decision. Why are they required?]

  • Ed - EWG lead, b/c any solution will require engineering work
  • Cav - PWG lead, b/c any solution will impact product

Perform
[People who will have to enact any decision and therefore should be heard. What do they need to do?]

  • Ed - EWG lead, b/c any solution will require engineering work
  • Cav - PWG lead, b/c any solution will impact product
  • INDEX token holders – will need to vote-in the changes to product contracts

Input
[Any others whose input would be valuable. Why would their input be valuable?]

  • Methodologists - impacts their products
  • Product token holders - impacts their holdings, they bear the cost

Decide
[Who or what groups of people makes the decision? How will that decision be made?]

  • Ed / Cav will decide on a solution to advance

End scene :clapper:

I do recommend as a next step actually creating a real version, and then begin circulating it with the “Agrees” and “Inputs” and “performs” to get feedback on whether they are the right stakeholders to advance this conversation and drive towards a solution.

3 Likes