Index Coop is at a turning point in its evolution. A lack of clear direction has led to a culture of zero-sum games, and our operational runway is not keeping pace with our spending. This is an open call to action to the Index Coop community, which we are all a part of, to address these issues within six months.
This post reflects our viewpoint based on the data accessible to us - we welcome questions and additional information to sharpen these views.
According to the February financial report, in the past six months revenue has fallen 52% while contributor expenses have increased by 19%. Since the start of the year, we have spent $1.2mm on contributors but have only generated $600k in streaming fees.
Comparatively, our spending is far in excess of most leading protocol DAOs relative to TVL and on-chain revenue flows (note in particular the monthly revenue over total compensation expenses ratio is 6x worse than the nearest comparable) :
Source: Reference spreadsheet
In addition to the above expenses, Set currently bears the gas cost for our products and software costs for our operations, but this is something Index Coop will likely be taking over in the future. This will bring an additional large monthly outflow into the equation on top of any liquidity mining incentives we intend to provide, potentially contributing another $110k/month or more to the costs of the Coop.
Contrary to this spending, the pace of our innovation has been slow (although we recognize some great products are being launched/built like icETH, BASIS, and FIXED) due primarily to long and convoluted process, and our collective focus has shifted to complex side projects and issues unrelated to our core strategy (e.g. DSM, investment initiatives, Governance House, etc.). Contributor ownership is a noble goal that seeks to address some core issues as laid out by the Index 2.0 initiatives, but this can’t come about by putting Index Coop’s future at stake.
In order to move forward as an organization, we collectively encourage the following actions are taken within the next six months to improve the Coop:
We need to find a way to properly align incentives for both in-house product development and external methodologists. We succeed as an organization when we provide the most innovative products from both types of providers and can distribute those products in an expansive and cost-effective manner.
By clearly defining a strategy for in-house and external product distribution, we will have a guide to our strategic decision-making (e.g. talent curation, customer procurement, internal processes, etc) going forward.
- Create and vote on a document that identifies how we intend to move forward with methodologists, in-house products, and distribution.
- This should identify who our customer is, what specifically we offer them, and how we will address things the IC is doing today that doesn’t support and/or distracts from that. We should also identify a differentiated strategy to effectively compete with emerging protocols and DAOs building in the structured product space.
- Incentives need to be aligned along the organization. This is especially critical in answering these questions:
- How are we prioritizing growth of one index vs another?
- Will in-house indices be favored over external indices in growth activities?
- Why would an in-house product builder launch their product as an in-house builder vs leaving the coop and build it as an outside builder (e.g. the revenue split is higher)?
- How do we prevent in-house builders from using politics/comradery to influence the growth pod to prioritize pushing their index?
- How do we make sure we are not only pushing our biggest indices, but also balance promotion of our smaller indices?
- What could be second and third order effects of any new introduced incentives?
We recognize that some version of this conversation is happening today via Do we want to become a Product DAO, partnership platform or both?.
As noted above, the rate of our spending is not in line with our growth. While we often defer to start-up culture financials which tend to operate at a loss, we have seemingly divorced ourselves from a lean approach that performs many experiments with small and highly specialized teams.
We recognize that the Finance Nest states that part of their mandate is “safeguarding the sustainability of the DAO.” To us, there seems to be a disconnect between that statement and some actions. For example, our Finance Nest has moved into investment related activities, which could significantly reduce our operational runway if a single misstep or exploit were to occur. This would inevitably result in selling pressure on the INDEX token to fund expenses at a time when it is already significantly depressed. We worry that risk is not appropriately accounted for here: $6.7mm of our stablecoin position (which is the entire stablecoin balance after Season 1 budgeting expenses) is earmarked for yield generation across 3 primary protocols - a single exploit could reduce our runway by months. The Coop does not have this margin for error.
While income generation does tend to make sense, this is detracting focus, time, and resources away from our core goals and may not be properly accounting for expenses: the February investment account report has an annualized yield of 5.19% (~$350k a year assuming all ~$6.7mm was invested and there were no additional outflows) yet we pay the Finance Nest $626k annualized from the Season 1 budget. This is only 2.21% of relative outperformance vs the Aave/Compound benchmark. Some of this compensation of course goes to financial report preparation and Operations Account management, but we may not be receiving much of a net benefit relative to risk at the end of the day.
The Finance Nest has spent a considerable amount of time on financial reporting and likely understands our sustainability situation the best - many in the Finance Nest have even highlighted these issues in the past. Here, we are relying on the information available to us, so if there is a mistake or missing context, please do let us know.
- Improve our monthly revenue over total compensation ratio by 100%, improving it from 6x worse than our nearest comparable to 3x. This will likely require some Pod consolidation, a reduction in flexible rewards, and disbanding initiatives that lack clear value.
- An initial suggestion is to reduce the size of the Growth, Governance and Community Nests, and limit fixed stipends in favor of defined bounties and grants.
- Disband the Investment Account and consolidate assets into the Operations Account with its much stricter mandate.
Effective strategic decision-making ultimately starts with curating and hiring top talent. A tightening of our financial spending should not preclude properly incentivizing our community leaders. Both proper incentivization and empowerment of those leaders in the community is how we will be able to grow sustainably as an organization.
We worry that compensation today is too focused on the short-term. Contributors are compensated on their monthly or quarterly workstreams which conflicts with long-term goal and strategy setting. In addition, mismatches in performance and pay have led to turnover at the Coop. This was sought to be remediated by the core hire program, but we think there are better options than just token vesting incentives available to us today. Most notably, we believe KPI options that directly reflect core Index Coop strategy goals could incentivize the kind of collective effort we need to achieve our goals. We are aware that a version of this idea was previously floated in the community but did not take hold.
In addition to incentives around compensation, we recognize the need for key contributors to receive larger amounts of influence in the DAO’s decision-making, something noted throughout the Index 2.0 process. 1kx and Set intend to delegate significant amounts of INDEX to community members we feel best imbue the DAO with leadership and reflect the values necessary to collectively thrive.
- Create a program that more properly aligns long-term focus and objectives with compensation (e.g. KPI options).
- 1kx and Set will delegate significant amounts of INDEX to product and growth leaders within the community that are best aligned with this vision to empower them.
- Provide clarity as to who leads core create/grow/maintain functions in the Index Coop: growth/bd, product, and engineering.
- Each nest should vote in its own Nest Lead to ensure there are accountable individuals for decision making.
Not having a clear mandate has led us to creating antagonistic relationships with our external methodologists and other partners. We have developed a win-lose mentality on certain issues that doesn’t need to exist at all. This space has so many win-win opportunities, but we tend to focus on playing zero-sum games that push potential partners away from the Index Coop. This harms the Coop both short-term (not launching products) and long-term (bad reputation/brand will repel potential partners).
Paraphrasing an anonymous potential partner:
The amount of governance we would need to go through and the time to launch a product with Index Coop has us looking at other providers as an option for our product.
And from a second anonymous potential partner:
We asked other methodologists whether we should launch an index with Index Coop, and everyone we spoke to recommended against it.
We need a cohesive plan to tackle this head on. In our opinion, our ecosystem will flourish if we work with our stakeholders instead of against them.
- Create a new process for product decision-making that is methodologist friendly, follows software development best practices, and addresses the underlying causes of late stage blowups.
- Create and pass a specific framework for negotiations with external methodologists. This should address streaming fee splits, the methodologist bounty program, the renegotiation process, and ideally has quantifiable metrics for offering more favorable terms to a provider.
- Evaluate the introduction of a Partnership Pod that solely focuses on building and maintaining positive relationships with our partners and providers. We need a dedicated team of specialists helping secure and engage with stakeholders.
- Note: we are seeing the early stages of this development here as highlighted by Joseph Knecht: "We’ve started to take operational steps by appointing relationship managers for our existing external methodologists and have Growth do the partner identification for our upcoming thematic indices.”
Looking at the forum, less than 30% of all recent posts are actually product-related. This shifts a significant amount of attention away from our core functionality: building the best products. How do we expect our product leaders to operate at their best when so much time and energy is placed in non-product related queries and proposals?
When we do create products, we rely too heavily on others to engineer solutions in order to launch them. When we create or decide to onboard a product, we should be in charge of building the necessary infrastructure to ensure it can be executed. By relying on Set for adaptors, contract maintenance, and rebalancing, we create a bottleneck for both of our organizations.
- Bring rebalancing and contract upgrades/maintenance in-house to avoid bottlenecks with Set. Index Coop should formulate a plan and be ready to execute its own rebalances for simple indices (aka composite indices) by May 31st, 2022.
- Take control of the Keeper network, such that all leverage products are maintained by the Index Coop May 27th, 2022. The Index Coop should be prepared to own the operation of the Basis Trading Keeper by June 15th, 2022.
- Evaluate other complementary technology platforms to launch products where the technology stack aligns with the product architecture.
If Index Coop is unable to successfully incorporate these actions within six months, we plan to begin drafting and proposing changes to more quickly shift the organization to meet these needs. This would likely require a reorganization to effect substantial change. In addition, we hope to see the financial sustainability goals implemented by the time we vote on the Season 2 budget if that proposal is to receive our support.
As a note, the burden should not fully rest with the newly-elected Wise Owl council, but they can help guide these issues. Ultimately, the burden rests on all of us to engineer solutions as a fully functional DAO. We prefer bottom-up innovation philosophically, so we would like to see the DAO accomplish this together.
The Coop is considered by many in our industry to be a model DAO, operating as one of the flattest hierarchical organizational structures to ever exist. We are frequently used as an example to showcase how to successfully structure and operate one of these new organizational forms. In a way, we collectively represent the entire DAO ecosystem.
Unsustainability, a return to tribalism and politics, and a reduction of our efficiencies into bureaucracy and bloat could be used by critics to highlight how DAOs are unable to succeed in the long-run. Let’s silence these critics and show that DAOs improve upon all other forms of human coordination. We bear a responsibility to this industry to become a shining example of success.