IIP-84: Index Coop OTC Sale (Update to IIP-32) Final Close

Governance Proposal
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iip: 84
title: Index Coop OTC Sale (IIP-32) Final Close
status: Proposed
authors: @BigSky7 @oneski22 @neilh
created: 2021-09-7

Simple Summary

This proposal suggests the final steps to the process laid out in IIP-32. Continue with the OTC Initiative laid out by IIP-32 and approve selling 92,759 INDEX tokens to Sequoia Capital, White Star Capital, and Blockchain.com Ventures at a price of $24.26 USDC per INDEX. This will bring the total amount raised to $10,000,000 which is the limit authorized in IIP-32, fully completing Index Coop’s treasury diversification efforts.

Abstract

The OTC sale will be carried out by three separate investors, who will each provide USDC to the treasury as follows:

  • Sequoia Capital ( @auilag ) - $1 million
    • Sequoia helps daring founders build legendary companies, from idea to IPO and beyond.
    • In partnering with Sequoia, startups benefit from close to 50 years of tribal knowledge and lessons learned working with companies like Airbnb, Alibaba, Apple, Dropbox, Google, LinkedIn and Stripe early on.
  • White Star Capital (@neilh @tklocanas ) - $500 thousand
    • $50 million crypto fund (investors in Paraswap, Rally, Superfluid, Liquality, Alethea, Ledn, Multis, others)
    • Ability to bolster product integrations (Paraswap, Superfluid, Ledn, etc.), distribution partners (institutional tradfi + government LPs that can further distribution past the crypto-natives), upcoming liquid fund (liquidity provisioning)
  • Blockchain.com Ventures (@samuelharrison ) - $750 thousand
    • Investors in Set, 0x, Aave, Zerion, Arbitrum, Eco and many others. Portfolio includes many potential product integration partners with leading consumer on-ramps in various geos, such as Argentina, Brazil, Indonesia and the African continent
    • Over 76m wallets allow for material distribution of Index Coop products. Blockchain.com is a top 5 most visited crypto website and accounts for double digit % of all BTC transactions. Support in the exchange and wallet product would offer significant consumer exposure and we have a good track record for listing portfolio companies (Enjin, Aave, BitClout, Origin, Efinity, Sushi)
    • Exploring a branded Index product would bring further distribution and product offerings, with a trusted and well recognised brand with almost a decade of operating experience. Blockchain.com 2 is looking to bolster its DeFi offering and INDEX would be a perfect partner
    • Significant expertise in building and scaling crypto companies
    • Our internal DeFi fund has already been getting exposure to INDEX via providing liquidity in prior programmes. We’d look to expand this project in a more meaningful way going forward
    • Top tier legal, regulatory and security expertise which has enabled us to safely and compliantly secure billions of dollars of assets

Motivation

In April of this year, the community passed IIP-32: Index Sale which laid out the mandate to raise $10 million through a direct sale of the INDEX token to select investors. Through this process, a number of world-class venture capital funds joined our community.

During the months of May and June, conversations with three major funds to participate in the raise were ongoing but were not funded due to their diligence and funding processes, notably Neil from White Star Capital who has been speaking to the BD working group since April. Each fund committed for the remaining $2.25 million in June (the amount short of our original target laid out in IIP-32: Index Sale 2).

These three funds committed to participating in the round in late June, prior to the official OTC closing and deal announcement. They agreed to commit a total of $2.25 million (which would bring us to the full $10 million laid out in the original IIP). At no point did any of the 3 funds halt conversations, waiver on their commitment or backup, even when the price dipped significantly below the sale levels. They committed in June with the full intention of participating and funding the original $10 million OTC deal. Given some time has passed since their commitment and the original IIP, we are bringing this topic back up to the community to close out the original IIP and complete the 2nd and final closing.

Specification

Overview

  1. $24.26 USDC per token for a total of 92,759 INDEX Tokens (price is similar if the TWAP was moved to today)
  2. 18-month linear vest
  3. Tokens unlock linearly following a 12-month cliff
  4. Investors can vote with their vested tokens

The voting rights for the INDEX sold in this close of the OTC sale will not have its voting rights activated until an IIP addressing community ownership is passed, or block 13635000 is mined (expected on Nov 15), whichever comes first.

Rationale

After completion of the sale, the Index Coop will benefit in a number of ways:

  1. Long-term commitment from world-class investors
  2. Align long-term incentives around mutual value creation
  3. Deep connections across traditional finance. These connections will accelerate large scale adoption of our products by major financial institutions
  4. Significant quantity of stable coins to fully diversify our treasury and guard against any market downturns
  5. High-level strategic advice and resources (as IC increasingly navigates regulatory concerns and interfaces with more traditional institutions this level of advice and guidance will become increasingly crucial.)

Vote

FOR:

  • Approve the close of the OTC sale as described.

AGAINST:

  • Disapprove the close of the OTC sale as described.

Closing comments from BDWG

We have worked closely with these three funds over the past four months and built a high degree of trust. Each fund will bring something different to the table and help our community across the board. We are already busy scoping out how each investor can directly contribute to the mission of Index Coop.

I strongly support bringing these investors into our community and welcome feedback around how best to leverage their extensive knowledge and resources.

Alongside this - I firmly believe that Index Coop should set the standard for how DAOs interact with Venture Capital Funds. Both kinds of organizations have important lessons to learn from each other. I look forward to seeing a positive and collaborative discussion around this IIP. Regardless of our final decision, we welcome them into our community as colleagues and potential partners. :muscle:

Copyright

Copyright and related rights waived via CC0.

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@sixtykeys @Pepperoni_Joe @mel.eth formally requesting an iip number and a snapshot vote Monday on behalf of the authors.

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Just wanted to flag my support for this IIP - thanks for getting us here @BigSky7 @oneski22 @neilh.

Sequoia Capital, White Star Capital, and Blockchain.com Ventures - I look forward to having you as part of our community helping take Index Coop to the next level.

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Confirming this as IIP 84 - we will schedule this to go live on Monday 13th.

cc @sixtykeys

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@oneski22 just flagging that although the vote you’re calling for is in the future, more than the 2 day discussion period, it was called for right after posting which isn’t exactly the same as having a two day discussion period followed by a call for a vote. Maybe that’s fine, but we’re all pretty busy and even two days is a short period of time to hit all forum posts and give thoughtful feedback. Otherwise we would just always schedule snapshots when proposals hit the forum. Let me know if I’m out of line here, I just don’t see a ticking clock given that we were made to wait by the investors in question.

OTC

I am very opposed to using OTC as method of developing partnerships:

My perhaps overly simplistic way of trying to determine how much value we’re exporting relative to an open-market buy was to type $2.4MM in USDC into 1inch and it yielded 25,870.51 INDEX (2021-09-09) - an amount significantly lower than the 92,759 being exchanged here, or roughly 28%. Another way to slice it would be to calculate the cost of an open-market buy of 92,759 INDEX and net the difference, but at this time only 36,715 INDEX are available on the open market should someone have infinite ETH to spend. As far as I’m concerned, I cannot analyze this deal in market terms as the INDEX provided is nearly 3x the amount in all of circulation.

While the value leaving the system is extremely high relative to the USDC gain, I do want these partners. I’d like for the community to help shape what that might look like, but I feel that giving away immense value without commensurate benefit is not a healthy long-term strategy. Our stablecoin needs are not what they were and market conditions have changed. I’d say we need ETH more than stables and we are likely using a strike price well-below what others would be willing to pay. This proposed deal is the result of a lot of effort, but I feel it’s important to know the cost of the deals we make, and in a market-sense this deal is impossible to execute otherwise while there are outstanding concerns about protocol ownership, so what’s the value we place on that? I don’t know the answer, and despite my reservations I’m still leaning FOR as again, I want these partners, but the cost is just extremely high.

Owls

Further, the precursor to this IIP was this post outlining the potential updates to IIP-32, stating:

While I agree, in this case the investors are coming first. To head-off the coming representation that the contributor portion will happen imminently, I would say then fine let’s at a minimum do it FIRST, because previous attempts have fallen flat.

To that end, and this is a criticism of the original IIP (but that door’s been kicked wide open), offering those putting in sweat-equity the same deal as those having as-of-yet done nothing for this organization does not seem equitable at all. As of today the OTC offer is roughly half of spot, so an Owl would be spending $100,000 for roughly $200,000 in locked governance, or a option with an implied net value of $100,000. I ask, haven’t the affected contributors given enough? Why are we raising funds from those that are already providing deeper value? The original IIP had a 6-month vesting period, modified relating to the investor portion to 18-months via comment by @BigSky7, but why is that being ported to the contributor raise when or better was stated?:

While I understand that the MINIMUM that must be done as both a carrot and to maintain at least the appearance of equitability is offering the same terms to long-time contributors, I feel that same terms and fair terms are farther apart than I would like. If we are offering contributors a net $100,000 in value via this offer, it should not be via a pay-for-play scheme. Affected Owls have demonstrated deep commitment and the contributor portion only serves to further benefit those with the means to execute or worse, encourages economic actions by contributors that may not be in their best interest otherwise. Owls speculate on The Coop with focus, The Coop is speculating on large investors with governance, but that loop is currently open as no marginal value is flowing back to Owls other than USD-denominated compensation that has regularly been below spot at the time of distribution.

When dangling a carrot, dangle a carrot; don’t ask for one in exchange for two when addressing the carrot farmers. (got a little lost in my own metaphor there, but I think the gist is coming through)

I understand that this post remaining silent on the issue of a contributor raise might be an attempt to separate the carrot from the deal, but here we are with a passed IIP that wasn’t fully executed and an attempt to craft a new one that skips right over this community.

Owls > OTC

I think we should do some version of both of these things, but I’m made uncomfortable by the fact that we’re continuing to give away so much governance to investors for so little in USDC terms and no guarantees in real terms. I would lean further toward FOR if there was some representation that OTC usage is over after this. We also have partners with large governance holdings, are they amenable to divesting some portion to attract these investors? Further, I’ve always been bothered by the conflation of value that is provided to investors and Owls envisioned in the original IIP; this will hit Owls at different economic levels quite differently and if we’re offering $100k in value then just offer it without asking any more of this community, it’s well deserved in it’s own right and should be addressed before more investors get priority.

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Immensely well-written reply @mel.eth. You highlight a really important point in your comment. The community sale put forth in IIP-32 does not even come close to doing enough for contributors. We owe our community more than just the opportunity to get INDEX at a lower price. Our contributors need a long-term vested stake in our protocol. The reality is that our protocol needs to put community ownership front and center. That is at the core of Index 2.0 and a problem that needs to be solved.

Without true skin in the game, we will never reach our full capabilities. We have dedicated a tremendous amount of time and energy to developing the best talent in DeFi. We need to ensure that talent remains at IC and is incentivized to grow this platform into a financial powerhouse.

One possible solution is we can amend this IIP to make it contingent on the implementation of Index 2.0. The contracts will not be funded until after the full execution of our community ownership plans. This is a good middle-ground that ensures valuable engineering and leadership time is being spent first and foremost on taking care of the community. While also ensuring the Investors have a high degree of certainty and allowing us to move forward with these relationships.

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Posting by request of author @BigSky7:

Flagging an amendment to the IIP specification:

The voting rights for the INDEX sold in this close of the OTC sale will not have its voting rights activated until an IIP addressing community ownership is passed, or block 13635000 is mined (expected on Nov 15), whichever comes first.

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my 5 cents:

full disclosure - blockchain.com is investor in Wintermute and @samuelharrison is on our board:)

Wintermute will be voting in support of this because:

  • general benefits of being backed by arguably the top VC in the world (sequoia)

  • blockchain.com can be a very strategic partner going forward when it comes to distribution and AUM/TVL growth. Indexcoop products fit very well with their strategy

  • on process: guess something that pops in pretty much all governance discussions is some decisions are made and then being discussed >n times. If IIP-32 authorized the team to raise up to 10 mil and they executed this, there is not much else to do but to close the deal. Decision process for VCs is often lengthy, but they have reputation to lose if they bail out (as does Index Coop!). I know that in this case the decision on their part was being made at a point of time when INDEX was trading at or even below $24.26, which should be taken into account as well

  • with regards to rewarding community for their contribution - I strongly feel it’s best not to mix it too much with the currrent proposal. @BigSky7 proposal is a good middle ground

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While leggit VCs foster the integration with connections and advice, the mentioned amount is well spend considering that IIP-83 just passed, bluntly throwing out 50Musd future value for a MM that might just list on a gemini /usd pair, which is horrendous.
IIP-83: Wintermute Market Making Proposal - #23 by dyordud

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Though I understand that there may have been commitments made relating to the price, my experience with venture funding is that valuation is always a highly evolving topic. Since the timing of valuing this deal, the price gone upward to reflect the significantly growing traction, revenues are now 2x higher, much larger address exposures and favorable market conditions. Why should not the price they pay reflect this? I am certain if things went in the exact opposite direction (eg low adoption), they would probably have pulled out or demanded a lower price, and not honored their “commitments”, this is what VCs do. I think it is amazing we have attracted such amazing funds but feel we are in a very strong position to negotiate on price, given that we don’t short term need the funding and are at an awesome trajectory.

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Hey @robdog, Neil from White Star Capital here. Thanks for your note and feedback. It’s worth pointing out that from the point of our original commitment in June up until today, the INDEX price spent some time below the OTC price. We had several conversations with the BD team throughout this period and not once did we consider pulling out or adjusting terms (along with Sequoia and Blockchain.com Ventures). Happy to chat with you (and anyone else in the community) about our thought process here - my DMs are open!

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Hey Neil,
While that is certainly good to hear, the temporary INDEX price dip was not caused by a decrease in adoption, even during that time more or less all adoption metrics where growing very well, with the exception of TVL due depressed token prices. So my point remains, if you saw actual adoption fall (not token prices), then my bet would be that you would also reconsider your willingness to invest. In the same way, if adoption goes way beyond what we were all expecting (eg massive mints during dips like what we see now), then you should pay for that as it is a better token you are paying for now than in June. To me at least that would only be fair.

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Confirming that this IIP has passed with 168.17k INDEX (57.8%) voting FOR. :white_check_mark:

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