IIP-XX: INDEX-ETH Balancer V1 Private Pool
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
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.
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
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.
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.
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)
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)|
|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.
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.
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.
- Do create a 90/10 pool that converts to a 70/30 Balancer Private Pool that is funded from the Operations Account
- Do not create a 90/10 pool that converts to a 70/30 Balancer Private Pool that is funded from the Operations Account