IIP Voting Analysis
Recently, INDEX holders voted on whether to add a new product to the Index Coop launch pipeline in IIP-7. IIP-7 was the most contested Index Improvement Proposal to date, and as such it gives us a chance to examine the existing governance dynamics in the Index Coop and reflect on how our system can be improved.
In this post:
- What are the desired characteristics of Index Coop governance?
- How does the existing governance structure behave?
- What changes, if any, can be made to generate more of the desired characteristics (or to mitigate the undesirable ones)?
Index Coop Stakeholders
One way to think about Index Coop stakeholders is in the following three categories:
- Day-to-day Index Coop maintainers / contributors (e.g. Growth Working Group, Index Coop Gold & Silver Owls)
- Index methodologists and 3rd party partners (e.g. Set Labs, DeFi Pulse, CoinShares)
- Token price speculators
Each stakeholder is critical to the health and success of the Index Coop.
- Index Coop contributors are the lifeblood of the organization, ensuring the evolving maintenance and growth needs of the Coop are met.
- Index methodologists & third parties bring industry expertise and DeFi integration. A key component of DeFi has been integrations and composability. It is hard to imagine Index Coop succeeding without the help of ecosystem partners.
- INDEX speculators (driven by whales) collectively assess the work and promise of the Index Coop. Over the long term they determine if the Index Coop is headed in a valuable and promising direction.
Q: What are the desired characteristics of Index Coop governance?
Each of the above stakeholders should be meaningfully represented in Index Coop decision making. That is, in principle, any two stakeholder collectives above should be able to move the Index Coop in opposition to, or ambivalence of the third stakeholder.
Q: How does the existing governance structure behave?
IIP-7 was a contested vote, with roughly 60% of voting INDEX tokens signaling FOR and roughly 40% signalling AGAINST. IIP-7 also had the highest participation of all IIPs with ~30% of circulating tokens participating in the vote. Set Labs and DeFi Pulse did not participate in IIP-7 voting using their vested share of tokens (more on this later).
If we separate the votes for IIP-7 between whales and non-whales we see a familiar story in decentralized governance:
An INDEX whale is defined as any address containing more than 10,000 INDEX tokens.
For IIP-7 INDEX whales accounted for ~80% of INDEX voting power, but comprised ~11% of voting addresses. Set Labs and DeFi Pulse did not vote with their vested INDEX stakes. If they did, they would represent an even larger voting block comprising ~300,000 INDEX voting tokens or ~45% of voting power.
Referring back to the desired governance characteristics above, Index Coop contributors, Index methodologists & third parties, and INDEX token speculators should each have a meaningful say in Index Coop decision making. The correlation is not certain, but based on the monthly reward distributions we suspect most Index Coop core contributors are not INDEX token whales. In the case of contested votes, the current governance structure strongly discounts the voice of Index Coop core contributors. There’s a case to be made here that a discount of this size is a shortcoming of the current governance system.
Q: What changes, if any, can be made to generate more of the desired characteristics (or to mitigate the undesirable ones)?
Quadratic voting is a different accounting method used to count the voting power of a single vote. Basically, in the context of the Index Coop, when an INDEX holder casts a vote, their voting power would be calculated as the square root of their INDEX token holding. This can reduce the voting power of large token holders.
Here’s IIP-7 with quadratic voting applied:
Quadratic voting would
- reduce INDEX whale voting power from ~80% to ~48% of the vote
- increase INDEX minnow voting power from ~20% to ~52% of the vote
If Set Labs and DeFi Pulse were to vote with vested tokens they would comprise ~17% of the vote.
Quadratic voting is imperfect, especially in the context of DeFi and with anonymous voters. Large INDEX holders can increase their voting power by splitting INDEX tokens among many addresses and voting with each. However, quadratic voting is a low hanging fruit capable of mitigating some of the INDEX voting imbalances in the short term. It is fairly easy to implement and has already been deployed in DeFi projects such as Pickle Finance. It also will enable Set Labs to confidently voice it’s opinion in matters of Index governance without fear of dominating the vote.
Increase INDEX distribution to core contributors
Another way to increase the voice of Index Coop contributors is to distribute them more INDEX tokens. Dark Forest Capital is working on a proposal for this-- stay tuned for more details.
Continued Research & Experimentation
Over the long term, it seems sensible for the Index Coop to adopt a flexible approach to governance. Decentralized governance is hard and relatively new. Establishing an expectation that Index Coop governance should be continually improving may help move us towards more research and more experimentation with the understanding that better governance solutions are likely still out there to be found.
Proposed Next Steps
- Work on adding quadratic voting to snapshot
- Create IIP to pilot quadratic voting for all IIPS for 3 months after implementation
- Whitelist Set Labs and DeFi Pulse vesting contracts for voting on Index Coop’s snapshot strategy