There has been a fair amount of discussion about the token economics of the $INDEX token, here and here. For the most part, we all agree that while $INDEX is a governance token, it should nevertheless have a clear value accrual mechanism.
To date, we have argued a lot about streaming $DPI fees to $INDEX holders. It’s fair to say that there is no consensus on the issue and forcing a vote would split the community. Furthermore, the core of the argument is not really about whether $DPI fees should be streamed to $INDEX holders, most of us believe that they should be. The main point of contention is timing.
Some in the community feel that it’s too early to start streaming $DPI fees to tokenholders and that the fees would be best used to build out the platform, introduce more products, as well as add distribution points for people to buy our products.
The opposite side argues that in the absence of the streaming fee, the $INDEX token has limited value in the eyes of the market.
In order to keep our community intact, we should consider other options for value accrual to the $INDEX token that satisfy both camps.
Smart Treasury could be one such option. As fees from our products exceed our outdoing expenses, the Smart Treasury will use excess funds to buy back $INDEX from the market. We can argue that Treasury funds are already included in market cap calculations, so this mechanism, as opposed to burning the buyback token, won’t do anything to reduce supply and thus will not accrue value to the $INDEX token. However, it is also fair to argue that Treasury tokens are less likely to enter circulation. Especially if our income through fees exceeds our expenses. In this case, Treasury tokens in our Smart Treasury will never enter circulation at all. To some degree, this acts similar to the buyback and burn strategy, only tokens are retained in the Treasury for sustainability purposes.
Frankly, I see the Smart Treasury as a cornerstone of our $INDEX tokenomics at this point in our journey.
There are other ways we can add value to the $INDEX token. In order not to reinvent the wheel, here’s an excerpt from a Maker forum post, where Maker is replaced with Index.
“There is also no denying participation in Index governance comes at a cost. At present I estimate that it takes between 5 and 10 hours each week with relatively high mental intensity and no small ability to stay on top of things and being able to cast reasonably informed votes. With the participation cost being measured in time it forces the topic of prioritization as each of us, however poor or wealthy, only has 24 hours in a day. It is simply not for everyone to be able to spend this amount of time on Index.”
Governance, especially informed and thoughtful governance, comes at a cost. And it’s only fair that $INDEX holders who participate in governance are rewarded for their time and contribution. “Governance mining” has also been discussed previously and I believe that “staking for governance” will allow us to 1) increase participation in governance and 2) make $INDEX productive. We can set rewards for governance staking at roughly the level of $INDEX inflation, or add a couple of % on top of that for the work that goes into governance. I think that the proposal by @DarkForestCapital works well and it also addresses some of the less tangible governance issues for us as well.
From my perspective, these two strategies are short-term wins. They will allow for some value accrual to the token via market buyback AND turn $INDEX into a productive asset via “staking for governance”.
Over the medium to long term, there are other mechanisms for value accrual:
- Intrinsic productivity has been discussed extensively and we are going to eventually implement it. Here, a portion of the income from farming the underlying tokens will go to the $INDEX holders.
- Once we build a reasonable buffer of non-$INDEX funds in the Treasury, we can move forward with streaming fees to the $INDEX holders.
- In the meantime, we can consider a tiered fee discount system for $INDEX holders, which will essentially act as streaming the fees through. We could start with a small trial here.
- As we grow our content and investment insights platform, we can make it free for $INDEX holders and either charge a fee or make limited content available for free. This is similar to what APYVision did with their token.
Overall, we have a solid token economics roadmap. Pursuing the Smart Treasury and the “staking for governance” initiative are the lowest hanging fruit. We should aim to execute these two strategies first and continue to build out our platform, introduce more products, as well as add distribution points for people to buy our products.
@DarkForestCapital and myself have discussed this roadmap with Mason at Messari and Maple Leaf Capital. Both were positive on the Smart Treasury and were also behind the governance mining idea, once we dug into the details of the proposal as well as our meta-governance responsibility.
One thing that kept coming up in our discussions is using $INDEX as a backstop / safety module. While this is an obvious idea, the numbers here don’t line up. $INDEX is $10m market cap. Even if all $INDEX is staked in the safety module and with 30% slashing, this gives us $3m of insurance funds. DPI is at $55m so we can backstop about 3% of it. This just doesn’t make sense. However, we should revisit this as a way to backstop intrinsic productivity experiments, when we get there.
If we do want to explore insurance options, pursuing external insurance via shield mining would be a viable option.