title: IIP-XY: FLI Economic Model Upgrade - Future Gas Costs
author: Matthew Graham (@Matthew_Graham)
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.
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.
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.
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.
Upgrade the FLI contracts gas management system by transferring gas cost to FLI product holders, in line with Industry standards,
DO NOT perform any upgrade to the FLI contracts gas management system.
Copyright and related rights waived via CC0.