IIP-XX: INDEX-ETH Balancer V1 Private Pool - ON HOLD Awaiting Operations Account

Governance Proposal
1

IIP-XX: INDEX-ETH Balancer V1 Private Pool
IIP: xx
Title: TWG - INDEX-ETH Balancer Private Pool
Status: ON HOLD until Operations Account is created
Author: Matthew Graham
Discussions-to: On HOLD - Until the Operations Account is Created
Created: 2021-05-14

Summary

The purpose of this proposal is to boost INDEX’s liquidity by creating a 70/30 Private Pool on Balancer. The pool will be launched consisting of $22.5M INDEX and $2.5M ETH (90/10) and over a 90 day period will rebalance to consist of $17.5M INDEX and $7.5M ETH (70/30). By changing the weights of the pool gradually over time, this acts to convert $5M INDEX at a rate of $55.6K per day to ETH which represents 5.4% of the average daily trading volume.

A 70/30 pool split means larger trades can be facilitated with a lot less slippage compared to the traditional 50/50 pool. This pool will be partly funded with INDEX and ETH from the Treasury. The ETH will be purchased by selling ETH2x-FLI, BTX2x-FLI and USDC. The Balancer Pool will be launched from the Operation Account.

Abstract

A 80/20 pool requires a lot less ETH for any given pool size compared to a 50/50 pool and offers traders a lot deeper liquidity. As Index Coop will be the sole liquidity provider, all of the trading fee income will flow directly to Index Coop. With the pool rebalancing from 90/10 to 70/30, Index Coop effectively will be selling $55.6K of INDEX for ETH each day for 90 days. Benefits of creating a Private Pool:

  • Maximise INDEX liquidity for minimal ETH investment
  • Increased appeal to larger investors due to improved liquidity
  • Private Pool offers complete control to Index Coop
  • Meet the liquidity requirements for inclusion into DPI
  • 70/30 pools have lower impermanent loss compared to 50/50 pool
  • Generate trading fee income

Motivation

Index Coop achieves 2 goals by launching the Balancer Pool.

  • Create a deeper pool of liquidity for the INDEX token
  • Diversifies some of its treasury into ETH

With the goal of maximising INDEX’s liquidity and being consciously aware our treasury has limited diversification, we quickly realised that a non 50/50 pool led to better trading conditions and required less ETH to fund. With limited non INDEX holdings, we prefer to maximise our usage of INDEX.

Specification

Private Pool

We propose creating a Private Pool on Balancer V1 allowing Index Coop to retain control of the customisable features with the intention of migrating to Balancer V2 at a later date. V1 is available now and has minimal lift to setup. V2 on the other hand is still new and the asset manager feature is expected to be released mid-late Q3 this calendar year. Currently, there are no extrinsic use cases for INDEX that would enable the asset manager functionality to generate a larger return for LPs. In time, when INDEX becomes integrated into a lending protocol the benefits of the V2 asset manager functionality becomes a lot more appealing. As V2 is new to market and not yet trustless, by allowing more time to pass, the risk of using something novel decreases.

In time, Index Coop will be able to retrieve liquidity from the V1 pool and seed a new pool on V2 utilising the new features. This will also give Index Coop another opportunity (choice) to divest INDEX tokens via a dynamically adjusting (smart) reweighting pool mechanism rather than the predetermined rebalancing mechanism used in V1.

Background

Unique Balancer V1 features we intend to utilise in creating the Private Pool:

  • Change Weights — Change the weighting of any token in the pool (V1 2% to 98%)
  • White list LPs — Only chosen address are eligible to deposit liquidity in the pool
  • Start/Stop Trading — Ability to pause trading

Private Pools — only allow the owner to add liquidity to the pool, but all its parameters are flexible. So the owner of the private pool can change the swap fees, pause trades, add/remove tokens, change token weights, etc. (trustless, unfinalized)

Different Pool Options

Based on a $2.5M ETH investment, we can estimate the trade size for a fixed amount of slippage across various DEXs. We have not considered V3 Uniswap as like V2 Balancer; both are new products not yet proven within the market. We are proposing a 70/30 INDEX-ETH pool and the most similar pool configuration on Balancer for the purpose of comparing slippage is a 80/20 UMA-ETH pool.

  • $25M Pool Balance (80/20)
  • $5M added to Uniswap Pool
  • $5M added to SushiSwap Pool
Pool V1 - Balancer (90/10) V1 - Balancer (80/20) SushiSwap (50/50) V2 - UniSwap (50/50)
Current Size 0 0 $2.637M $0.981M
New Size $25M $25M $7.637M $5.981M
$M INDEX $22.5M $22.5M $2.5M $2.5M
$M ETH $2.5M $2.5M $2.5M $2.5M
Reference Pool $29.3M RLY-wETH $23.4M UMA-ETH $7.8M ANY-wETH $6.1 PICKLE-ETH
~1% Slippage 24.3 ETH 26.7 ETH 11.1 ETH 2 ETH
~2% Slippage 52.5 ETH 61.6 ETH 22.4 ETH 10.4 ETH

Note: Data dated early May.

Impermanent Loss

In addition to considering liquidity, we also reviewed impermanent loss for three different pool configurations 50/50, 80/20 and 95/5. A more heavily skewed pool weighing reduces impermanent loss which is another benefit for opting for a non 50/50 Balancer pool. This is shown clearly in the chart below.

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The x axis represents the relative price change between the two assets in the pool as measured at the moments of adding and removing liquidity — 1 represents no change — and the y axis represents change in value of the pool compared to holding — 1 means the pool is worth the same as holding. Notice that trading fees are not considered for simplicity’s sake.

With a 5x change in price, the impermanent loss for a standard 50/50 pool would be 25.4% whereas in a 95/5 pool it would be only 3.88%, over 6.5 times smaller.

Vote

FOR

  • Do create a 90/10 pool that converts to a 70/30 Balancer Private Pool that is funded from the Operations Account

AGAINST

  • Do not create a 90/10 pool that converts to a 70/30 Balancer Private Pool that is funded from the Operations Account
12 Likes
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Great proposal, using the change of weights to sell INDEX to ETH gradually is genius. Can’t wait to see it go live and provide some much needed depth for the INDEX token!

Small point here even though it’s a fair way off in the future, there is still 30% of the pool that can be made productive in V2 in the form of ETH, regardless of INDEX being integrated or not. Might make it viable sooner.

2 Likes
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This is a great proposal and I am FOR it.

One concern I have is how much this will impact INDEX price in the short-term and if that should factor into the proposal or not? How much of a price drop due to this proposal is the Coop willing to tolerate? Would we be willing to sell INDEX for ETH at $20/INDEX? How about $10/INDEX or even $5/INDEX?

How was selling $55k of INDEX per day for 90 days decided upon?

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$55k itself is just an outcome of a $25m pool shifting from 90/10 to 70/30 over 90 days. $55k is also 5% of the average daily trading volume for INDEX, which we thought was a reasonable amount of sell pressure that the market can handle. I would hope that having a $25m pool would actually drive an increase in the daily trading volume for our token so that we would make up an even smaller share of it.

We thought about this but in a slightly different context. Which was basically that we could choose to sell X amount of INDEX per day, if the price or ratio of INDEX to ETH stays above a certain point. However, this would be very much a manual process and the execution would be cumbersome. The Balancer option provides an automated solution plus clarity for the following 90 days. I believe though, that we can pause or cancel the rebalancing if we so desire. @Matthew_Graham can correct me on this.

I would still point out that we are talking about selling INDEX for ETH. So the absolute INDEX price is irrelevant. If both go up or down by the same amount in % terms, it makes no difference if INDEX is $500 or $5, as the ratio will stay the same.

2 Likes
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Dumping $55k of index per day?! What exactly is the thought process here? We already have $6 million usd in the treasury. How much do we need to be ‘diversified’. I feel like the thought process of the index is entirely off. We are a dao and index is the token that governs it. Why are we pushing price down before ever creating a utility for the governance token.

Shouldnt making the token is useful and appealing to the defi community come before selling the token? Why not synch these two actions up and create and deep demand for the coin while diversifying the treasury.

2 Likes
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I agree - thank you for the clarification, @verto0912. I am strongly in favor of this proposal. Will be great if this substantially increases INDEX liquidity!

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Hi @philipinosis,

Thank you for raising these questions. I am sure a few others will be thinking the same. Hopefully I can provide some context here.

Selling $55K each day - this is like one maybe 3 retail traders per day. At 5% of trading volume, it is very likely this pool will naturally rebalance on very low trading volumes, much lower than normal daily trading volume. We believe at 5% of daily volume there will be little to no influence on the INDEX to ETH price.

We have considered what happens if things don’t go to plan. By electing to go with a Private Pool on Balancer, we can pause trading on this pool any time we want. Ie: turn swap functionality off.

I disagree. I believe this is prudent, responsible and in line with our core objective to sustain Index Coop. We are transition from a concentrated position in a high risk, illiquid speculative asset towards a more balance asset portfolio. Naturally, having some ultra sound money fits in with this approach.

Good point. Whilst the governance token sits idle in our treasury it has zero governance utility. The governance utility only exists when an entity other than Index Coop owns the token. From a governance perspective, having a wide even distribution of a governance token is a good thing.

Utility - with on chain liquidity INDEX becomes eligible for inclusion in DPI. That would absorb some supply and create a passive holding. On chain liquidity is needed for various integrations within DeFi. Most obvious use case is as collateral. For liquidations to occur efficiently, there needs to be sufficient on-chain liquidity. The current Sushiswap pool does not achieve this. If we prioritise liquidity via a different means, we need to buy ETH to deposit a significantly large enough amount of capital into a pool. The Balancer pool is a more capital efficient way of achieving deeper on chain liquidity.

The most efficient DEX pools require active LP management. We a) Don’t have this functionality in-house, b) Would need to sell a good portion of our limited non INDEX tokens to seed this pool.

Don’t forget we have 2,375,000 INDEX tokens in our 2 and 3 year staking contracts and we gain access to another 950,000 INDEX tokens between now and October 2021.

  • 950,000 INDEX tokens become available to Index Coop between June 2021 & October 2021
  • 1,425,000 INDEX tokens become available to Index Coop between October 2021 & October 2022
  • 950,000 INDEX tokens become available to Index Coop between October 2022 & October 2023

We have a lot of exposure to the upside in INDEX.

8 Likes
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Well said, Matt. We will continue to have plenty of upside exposure through INDEX. But without building out a cushion for downside protection, we face existential risk. I think this proposal very thoughtfully helps address that.

3 Likes
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I understand the need for liquidity but the index has yet to establish itself as a meaningful investment in itself and its an entirely separate question from dumping on the current holders.

Have there been any discussions ab using this as an opportunity to introduce ourselves to different communities?

For instance Alchemist is doing a really interesting LP incentive with their crucibles, essentially incentivizing to LP for longer periods and they have a thriving community. Maybe we could talk to them about integrating our LP tokens?

Why not drop a road map for the use cases of index and simply provide liquidity for index through the tradition farming?

First we sold to private investors, sure makes complete sense. Diversify, make sure we pay our people through the inevitable bear. But to then use those funds to LP and slowly dump over 10% of the market cap of the coin! You couldnt conceive of a better way to drive down the price.

And sry for seeming like a neg but i dont have much time to devote to the index but i want to see it thrive and theres such a huge chance here for us to be on the forefront of defi w the AUM we have on hand and the revenue stream it pains me to see actions taken that i feel are detrimental to the coop.

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Today we published an income statement that shows revenue growth from $11K in November 2020 to near $445 in May 2021. Then there is the metagovernance aspect of Index Coop. I encourage everyone to try be across everything that is happening at Index Coop. I really believe we are building something unique with a strong moat.

5% of daily trading volume is drip feeding INDEX into the market. It is structured, controlled and aligns with the goals we set when we created the Treasury Working Group.

Sure. When opportunities present themselves an IIP is drafted and presented to the community. This proposal is just like any other proposal and is subject to the same governance process.

Screenshot 2021-06-10 at 21.21.34
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This data uses an INDEX price of $30 (APR_MAY) and makes the assumption 30% of INDEX circulating supply is deposited into a staking contract receiving just 5% APR in INDEX incentives. $850K per month is what that would cost. That offers no diversification, no ROI and would be a large expenses to incur. If we did LM on INDEX, then we would probably go Sushiswap as there was SUSHI incentives on INDEX-ETH already. SUSHI incentives did not create a very large pool.

This option creates liquidity, diversifies a small portion of our treasury and is a lot cheaper. Some may argue we are socialising losses. The counter view, we believe 5% of trading volume will not determine the direction of INDEX’s price. If anything doesn’t go to plan, then we can pause swaps on the Balance Pool.

I will go as far to say by being sufficiently well capitalised - INDEX is actually a lower risk investment. INDEX’s risk profile is reduced by holding ETH. I am glad you hold INDEX, we both do :slight_smile:

4 Likes
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Thoroughly and absolutely FOR. Well presented and the replies have covered any nagging concerns I might have had. Thanks for your leadership here @Matthew_Graham!

2 Likes
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Just to be absolutely transparent, we envisaged the Balancer Pool to be funded from the Operations Account and this proposal hinges on the Operations Account being created.

3 Likes
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Following up here from my recent comment in IIP-46

The main concerns here are that the result of this proposal is moving $20MM++ without proving it out first.

Instead, we could start small (say, $500k / $1M), test it out, and phase in more funds over time.

3 Likes
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@Matthew_Graham I agree with Greg’s comment and Set team’s concerns about the size. Could we modify the proposal to start with $500k and phase in over time? Does the Coop lose anything from starting small at first? I’d rather have rapid progress with $500k in 1 month than wait 6-12 months for the $20m to get approved.

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Hi @anon10525910

I think we loose a lot of the liquidity and diversification benefits by scaling back the size of the Balancer Pool.

Alternatively, may I suggest executing the proposal as laid out in the IIP post but from the Treasury Wallet direct and not from the Operations Account. We can then achieve the two objectives, creating the account structure and executing the Balancer Private Pool proposal.

TWG will proceed to continue working through the planned publications for the Operations and Investment Accounts independent of the Balancer Pool.

If we are aligned on the above, then I will amend the IIP proposal to reflect these changes. Just let me know and I’ll action it right away. :slight_smile:
Thank you :slight_smile:

1 Like
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to be honest, even if executing this proposal from the Treasury Wallet direct, there is a strong recommendation to start small first to test it out before phasing in more funds over time.

This is not to minimize the liquidity/diversification benefits to the Coop (Treasury Management Goals), instead this is to prefer dipping our toes into the water before diving in.

Is there a smaller sum of money we could test this out with first?

2 Likes
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I don’t have the answer but I would suspect that if a pool is too small and there isn’t enough volume, it would be rather hard for it to rebalance itself. So there’s probably a minimum viable level here. My guess is that we would still want this pool to be the deepest source of INDEX liquidity on market (to attract enough trading volume).

Current pool sizes:

Sushi - $850k
Uni - $610k
Balancer - $575k

Maybe starting with $3m 90/10 pool and rebalancing to 80/20 over 30 days? That’s $10k of INDEX selling pressure per day. We can then consider scaling it up.

3 Likes
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I will go as far as to say by being sufficiently well capitalized - INDEX is actually a lower-risk investment. INDEX’s risk profile is reduced by holding ETH. I am glad you hold INDEX, we both do :slight_smile:

^ Just highlighting this again as it is a great point well made.

In terms of the size of the pool… @anon10525910 what exactly is the driver of the hesitancy? Is it the operational movement of a large amount of capital? Technical setup of a balancer pool? Or potential price impact in the market?

I totally understand that moving large amounts of capital around can be unnerving but I am concerned we launch a small pool that makes us FEEL comfortable but is in actual fact ineffective, not objective / strategic and affects our secondary decision making. (IE. The initial allocation is too small to be effective therefore we shy away from a large pool that was required in the first instance)

1 Like