IIP-XX: INDEX Buyback and Reinvest

Governance Proposal
1

iip: TBA
title: INDEX Buyback and Reinvest
status: Draft
author: @Matthew_Graham @ElliottWatts
IIP-26 clause: “option to extend” applied
created: 04/12/2021

Simple Summary

This proposal presents the community with an opportunity to set aside capital to be used for buying back INDEX on-market when both Finance Nest and Wise Owls (Index council) believe the price is significantly undervalued. The INDEX purchased on the market can then be sold at a later date or used to fund operations. Finance Nest has the ability to implement various trading strategies in order to create a positive carry trade.

The initial budget request, $700K, will be deployed upon receiving approval. To accommodate this reallocation of capital, $700K will be transferred from the Treasury to the Operations Account ensuring the Operations Account is well funded.

Treasury Account: ‘0x9467cfADC9DE245010dF95Ec6a585A506A8ad5FC’

Ethereum Operations Account: ‘0xFafd604d1CC8b6B3B6CC859cF80Fd902972371C1’

Abstract

When the value of the INDEX is deemed undervalued, the community has an allocated budget to support buying INDEX on market. Other protocols like Yearn have implemented a buy-back and build model, and this proposal services the same buy-back values, with a point of difference that INDEX will be reinvested, either sold or used to fund operations.

Index Coop is to implement a positive carry trade philosophy, wherever possible. The intention is to deploy strategies that are self-servicing. Finance Nest will be responsible for designing and maintaining the free carry trade strategy which will then be executed from the Operations Account. A free carry trade in this instance indicates that Index Coop is making a positive ROI on the buy-back strategy independent of INDEX price fluctuations.

Finance Nest proposes an initial $700K budget be deployed towards implementing a buy-back and invest strategy. In time, Index Coop could redirect a portion of revenue to this concept. The intention is to start small and monitor progress.

Motivation

The Index coop currently does not have the functionality to be able to buy back its governance token on-market. The ability to purchase, and sell, the INDEX token is something that is essential to maintaining good protocol ownership. This proposal details the ability for Finance Nest to request approval from the Wise Owls to transact in INDEX on market beyond the normal operational WG funding needs.

On-market buy-backs are an effective way to reinvest in the communities future success by bolstering our INDEX. This proposal creates the ability to purchase INDEX when the price is perceived to be undervalued and either sell INDEX at a later date or reinvest it back into the community. This will enable the Index community to retain ownership through utilizing current circulating supply via repurchasing and reissuance of INDEX without increasing circulating supply.

This proposal enables Index Coop by the Finance Nest to manage a portion of the community’s capital like a reserve and capitalize on broad market moves. On-market buying of the INDEX token sends a powerful signal to the market that the community feels the INDEX token is undervalued. For Index Coop to realize the goal of becoming a sustainably funded DAO, the community’s assets must be utilized to benefit the community and this includes the ability to transact in INDEX.

The Finance Nest will have the ability to implement free carry trade strategies that benefit the community. This involves some financial engineering which the Finance Nest is more capable of implementing.

An INDEX buyback will also have the effect of improving the community’s financial metrics. A number of key performance measures that utilize the circulating supply of INDEX as a denominator will improve such as the earnings per circulating supply token.

The Finance Nest will provide periodic reporting through the monthly Operations Account update and community calls.

Specification

Key concepts:

  • $700K of USDC held within the Operations Account for supporting the INDEX buyback program
  • On-chain transactions are to be executed from the various Operations Accounts
  • Decision-making process - Finance Nest recommends an INDEX transaction to WO and WO approve the transaction prior to on-chain execution
  • Finance Nest designs, manages, and reports all trading strategies
  • Reporting is to be provided via the Operations Account monthly updates provided by Finance Nest
  • INDEX can be purchased and sold on-market
  • Profits are reinvested back into the buyback program over time

Notable considerations. When a free carry trade strategy is mentioned, this could include the use of debt. An example is when lending rates for one stable coin exceed the borrowing rates of another stable coin. Thus enabling a deposit and borrow strategy which nets a positive return.

Voting

FOR:

DO approve the using $700k USDC within the Operations Account for the purpose of supporting the INDEX buyback and reinvest program as detailed above.

AGAINST:

DO NOT proceed with the above proposal.

Poll

Do proceed with creating a $700K fund to buyback and reinvest INDEX ?
  • Yes
  • No

0 voters

Do delegate ability to implement this proposal without going through snapshot to the Wise Owls ?
  • Yes
  • No

0 voters

Copyright

Copyright and related rights waived via CC0.

6 Likes
2

Very interesting proposal - thank you for the great work here! I am in favor of Index Coop setting up a mechanism to take advantage of significant mispricing opportunities (like the one we find ourselves in today). Acquiring undervalued INDEX using the treasury is a value accretive and synergistic operation for the community. Some of the best CEOs of all time derived a lot of their success from being shrewd capital allocators that could swoop in at market lows to buy up their equity and deliver superior returns (best case study: John Malone and TCI).

A couple of thoughts that came to mind the first time I read this:

  1. We could also think of using the acquired INDEX for core contributor compensation. Something a lot of public companies do is use their treasury stock (bought back shares) to finance stock-based compensation. Thus, the Index Coop community wins from both a price increase since the purchase as well as from a way to finance compensation (paid to naturally long-term holders) without having to increase the outstanding supply as much

  2. I would like to caution the ‘selling’ component of this strategy. Opportunistic buys are great, but the sale part can get a bit tricky. Firstly, how do we know the asset is priced fairly? This could be a contentious debate in the community and opening this up could reveal where the team thinks the asset should be priced at, which leads to the problem discussed next. Secondly, selling would theoretically signal what the community thinks is fair value. This could dampen overall price discovery, which could have led to prices even greater than what is interpreted as fair value. Adding more color or perhaps certain re-engineering of the ‘disposal’ piece could use some more discussion (i.e. paying contributors is another way of looking at disposal)

Overall, I am for starting this program given the great purchasing opportunity that lays before us right now; however, I would appreciate further discussion of what to do with the actual INDEX tokens at a later time. Thank you again!

4 Likes
3

I have a few concerns :

  • I doubt the ability of any person to suggest that a governance token such as $INDEX is cheap or rich. The market decides the price.

  • The reason why I got involved in this space was #defi which implies centralised entries stay out of way.

  • At the risk of repeating myself the $INDEX liquidity pools are useless and we need to deploy the DAO capital

  • I’ve been tracking some of the selling and it looks like it’s contributors + early LP mining rewards. Why can’t we pay contributors in USDC if they going to dump it.

  • I really struggled to build a long position in $INDEX if we boosted the LP then decent buys could go through the pool. This boosts sentiment.

  • To be totally honest at this stage of a bull market the last thing we need to do is swap out of Stable coin and destroy the project runway.

  • On a POSITIVE note I voted for the Liquidity Pod and am happy to contribute directly. The recent AWG discussion on Liquidity was excellent and I believe we have the critical thinking to solve problems.

8 Likes
4

Hi @chopper,

Great feedback and we are definitely up for a discussion. So everyone, don’t hesitate to get your questions on the forum.

This is a fair call, the market determines prices and it is the combination of all opinions. We could introduce a metric to make this less subjectivity, but the development of those metrics is also subjective.

If we dedicate a percentage of revenue to purchasing INDEX, then we purchase INDEX independent of price and this is a less optimal outcome. It makes sense to acquire INDEX when price is low and if that day never comes, use that capital productively in other ways. Whilst our Treasury is mostly INDEX, then we should reserve the right to acquire INDEX on market for when the INDEX price is relatively low.

At a first glance, the below is happening via IIP-109. The INDEX liquidity issue is being addressed :slight_smile:

In this instance, the distinction being made here is that the Wise Owls discretion is centralised. Thus, each decision should be routed via the IIP process. Is that the correct interpretation ?

We are not seeking to sell stables for INDEX. We are seeking to use our assets productively and acquire INDEX via a strategy that pays for itself with time. Think Alchemix with a self repaying loan.

3 Likes
5

Really appreciate this post and that we’re finally discussing $INDEX tokenomics.

Instead of discretionarily deciding when to buy $INDEX on the open market, why not implement some form of buyback program based on the Coop’s monthly revenue?

3 Likes
6

I am for this proposal.
I am against delegating this responsibility straight out the gate.

This is a fundamentally new and major change to treasury management. Imo you need to provide substantial reasons to exclude community participation in the decision process.

Council should be the exception, not default decision maker.

2 Likes
7

codingalex Really appreciate this post and that we’re finally discussing $INDEX tokenomics.

Agree we are now touching on Tokenomics. Whilst you can tweak Tokenomics part of the power lies in predictability e.g Monthly Inflation, Unlock schedule, generating LT incentives.

For example here are 2 other projects I follow $DAO and $DEXT. Both have tweaked the Tokenomics post launch + have strong product traction.

$DAO

  • UNISWAP $25k Trade 1.5% slippage
  • Tweaked the Tokenomics after <12 mths. Focus on locking up circulating supply >50% combined with 100% revenue being directed into Monthly Buy Back of Token. Team has alot of discretion on Timing of buybacks.

$DEXT

  • UNISWAP $25k Trade 1.4% slippage
  • Tweaked the Tokenomics after <15 mths. Initially focused on paying out 90% of Revenues collected in Tokens each month to existing holders >fixed ownership. High inflation (product traction was good + existing inflation) appeared to lead to existing holders selling the effective monthly dividends which capped the DEX price.
  • New approach - Cut Inflation, takes strong product revenues and burns / buyback (random during month)

Teams have alot of discretion on Timing of buybacks to stop front running and support the price but the key here is that the Tokenomics are transparent. Both focus on : driving LT performance of the token, using the Treasury to support liquidity / DEXs, limiting inflation and driving product revenue back into decreasing circulating supply (albeit they have plenty of free cashflow)

1 Like
8

Having the ability to buy back you own token is essential for optimum treasury management imo. You want to take advantage of the market cycles. A good article on the reasons why is https://uncommoncore.co/a-new-mental-model-for-defi-treasuries/, but I’ll highlight this excerpt:

“When adhering to the above rules, a DAO becomes an acyclical trader of its own token. If the DAO sees its token as overvalued and internal reinvest has a good return, it should sell tokens for cash and reinvest that cash into the protocol. This is almost certainly the case in all bull markets. When the DAO sees the price of its token below the fair value, and it has excess cash without a high internal return, then it can buy back the token. This is almost certainly the case in all bear markets.”

You’ll note however that any buying atm would fall out of the convention, provided we are in the perceived tail-end of a bull market (and as @chopper points out, something to be cautious of). I suppose the general perception however is that $index has been/is undervalued even in the midst of a bull market, which I would agree with.

Worth saying this is not a solution for that undervaluation, so much as it is another tool in the kit for treasury management. Liquidity, utility and just overall attention to the $index token as a perceived product of the coop needs to be given before we can start see less of a mismatch between the coop’s (outstanding) growth/potential and $index.

5 Likes
9

Thanks for putting this proposal together!

I appreciate the positive signaling a buyback program creates, especially as we struggle with a difficult market environment for the INDEX token at the moment.

I would like to caution, however, against a manual buyback process for the following reasons:

  • Overall Treasury Diversification - Index Coop has been actively working on initiatives to increase treasury diversification for the sake of long-term sustainability. However, we have yet to actually raise more stablecoins outside of what was generated from the OTC sales. This feels like a step backwards in this initiative if we begin deploying this capital back into the INDEX token.
  • Market Timing - I would agree with some of the other comments here that it is difficult to ascertain a fair market valuation and accordingly purchase or sell INDEX around that metric. Market timing is inherently difficult even for the most sophisticated traders, and crypto is arguably even more difficult given its rampant volatility. I do not think it is suitable for the Finance Nest / Wise Owls to become active traders as this will take away time from more important initiatives.
  • Principal-Agent Problem / Transparency - I understand the need to avoid broadcasting large purchases or sales before executing, but I do believe we will have a tough time ensuring transparency and avoiding informational asymmetry in a manual process. For example, how would we ensure a contributor aware of a pending purchase or sale is not trading ahead of the event. The temptation would be great and it unfairly disadvantages those not active in the decision-making process.
  • Short-termism - Finally, I tend to side with the idea that buybacks are a product of short term thinking. While this may alleviate the sell pressure in the near-term, a buyback does nothing for the long-term growth prospects of the DAO. Instead, a better use of the capital might include funding ecosystem development initiatives or otherwise reinvesting back into the Coop. Buybacks are typically performed by mature organizations with few positive NPV projects available to them. I do not think this is the case with the Coop, which feels much more like a start-up.

Instead, if we want to pursue a buyback program, I think we should revisit the smart Balancer pools (not sure why that initiative was shelved) or utilize a UNI V3 liquidity strategy with the help of an active manager like Visor. These methods are more automatic and transparent in their execution, and they avoid the issues of information asymmetry and market timing.

10 Likes
10

I support this measure, but assuming these purchases will impact price, I would ask:

  1. Is there a risk of insider trading? In my former world we would lock out insiders from buying / selling for specific periods where trading may take place. Is this a risk that should be mitigated for, or is it not an issue?
  2. If this (temporarily) drives up price, would it impact bounty payments? Or should buys and sells be done in a period that would have the least impact to a monthly allocation? (like right after a payment)?
    -hoot
4 Likes
11

I really like your comprehensive overview of caution areas and think that a lot of what you said makes solid sense. The one part where I can see another way to interpret buybacks is on short-termism.

First of all, as I mentioned above in my comment, some of the best companies engage in opportunistic buybacks as a form of allocating capital. If you look at TCI under John Malone or the tenures of other CEOs as outlined in Thorndike’s The Outsiders (a book covering some of the best CEOs from a stock holder perspective), buybacks were used in companies that were still growing a lot. It is an appropriate tool to use if the market is seriously undervaluing the asset (now this assumes the team can understand this mis-valuation, which is another weakness you listed and one I agree with / think needs to be worked on).

Second of all, buybacks can also be done in more of a regular way than one-off purchases to combat sell-pressure from compensation. Several companies do this to offset stock based comp.

Third of all, if Index buys a bunch of $INDEX at a cheap price and deploys that to initiatives or strategies at a later date, it can be long-term accretive. Acquiring some $INDEX say when the price was $15, and in an optimistic near future where it returns to $60, using the $INDEX then for certain long-term initiatives becomes much cheaper.

Not arguing with your point, just wanted to present another view. Otherwise, I appreciate the thoughtfulness in your points over all - thank you.

4 Likes
12

repeating choppers note:

  • the index council does not know if token is over/undervalued, you might just create loss.
  • buyback & burn is bs. buyback & trade meh. but buyback & grant to contributers = good.
  • a project is supposed to hold a significant amount outside their own token, deepdao lists many projects of high valuation but 0 balance sheet outside their own token. well where is the exit liquidity, the new investors? nope and he moves on.
  • clearly conflict of interest: the project trades its own token. well guess when bad/good news will be posted on the socials. Could turn disgusting insider trading really fast (one small step at a time). just look at leggit project yfi and their announcements and twitter talking heads coming out now that it pumped 100%. It even risks the brand and smell test of new investors researching the project ( & eventually raising the price floor)
  • these owls time is better spent than looking at the TA chart repeatedly. yes it ticks in the back of your mind & influences decision making = poison.
  • if you want to create support, grant project tokens on a vesting/lockup schedule only, that simple

yet if you want to venture, go ahead and show profitability by trading a 10k usd fund for 1 year. then lets reevaluate. i am all for experiments

1 Like