Is it time to stop using external methodologists for new products?

This is something I’ve been wondering for a while and I think it’s time to share my thoughts.

The coop was launched 9 months ago based on the technical expertise of Set Labs and the data analytics capability and high profile of DeFi Pulse. They combined to create $DPI which has been a tremendous gift to the INDEXcoop.

The founding structure of the coop was based on a separation of the index design (Methodologist), the smart contracts (Set Labs) and the overall management and marketing of each product (INDEXcoop). The objective was to “follow the principles of progressive decentralisation” with INDEX holders eventually taking control (with Set Labs and DeFi Pulse being significant community members, but not being a majority of INDEX holders)

The “INDEX Methodology Bounty” was created as part of the coops genesis structure with an allocation of 750,000 INDEX allocated over 18 months to attract the attention of external groups wanting to partner with INDEXcoop. I understand that the intention was to become an attractive partner for Major DAO’s and Analytics companies who can raise the profile of INDEXcoop and lend credibility to our products.

With the benefit of hindsight, I believe that the methodologist bonus programme was a flawed design and that it has created incentives that may have harmed the growth of (and alignment within) the coop. In addition, it has failed to produce any high-quality products from any additional blue-chip partners.

However, the Methodologist Bonus is not my primary concern looking forward.


I believe that the current structure with external methodologists creates a flawed system with little benefit to the coop and thus INDEX holders.

Ideas for products are plentiful, and the creation of most structures / detailed methodologies is straightforward (I would even say that such work can be fun / mentally stimulating).

For me, the majority of the work/costs are around:

  • Preparation of the Product Requirements Doc and scoping the technical implementation.

  • Contract development, audit and deploying.

  • Rebalancing and maintenance.

  • Responding to market turbulence.

  • Modelling, documenting and improving the underlying code.

  • Publicity and marketing

  • Analytics support

  • CEX integrations

  • Being a Decentralised organisation to provide legal “cover”

  • Extrinsic productivity

  • Liquidity mining

All of which falls largely on the coop.

In addition, in the event of an exploit / smart contract failure (Leveraged products, intrinsic productivity, staking contracts), it would largely fall upon the INDEXcoop to manage (and INDEX holders to ultimately pay the price). I have seen no indication that the current structure includes any Methodologist sharing the financial liability/goodwill compensation in the event of one of our products failing.

Maybe I’m in a bad mood, but I have the impression that the current structure means that prospective methodologists look at the coop as “an organisation who will do the heavy lift to make me rich while providing the legal cover of a DAO” and look to game the (admittedly vague) process as much as possible, in order to secure a high fee split that has no end date:

  • Promise marketing support

  • Promise liquidity for underlying tokens

  • Promise seed liquidity and support for liquidity mining

  • etc.

While in actuality, there is little scope for holding a methodologist to account and there is often scope creep:

  • INDEXcoop asked to provide liquidity mining at odds to DG2 proposals.

  • Failure to provide underlying liquidity.

  • Minimal marketing of launched products (other than “brand awareness”)

  • No support for ongoing publicity.

In addition, the financial incentives of the current system means that methodologists are encouraged to compete with each other, to push for priority, higher liquidity mining rewards, and deployment of higher risk strategies in order to capture AUM. Many of these may be to the detriment of the coop.

In addition, the current distinction between community methodologist and external methodologists means that community members are incentivised to partner with 3rd parties in order to improve their bargaining position when dealing with the coop and so negotiate a larger fee to the detriment of INDEX holders.

I think that the only tangible benefit that reliance on an external methodologist brings is that it allows the coop to say “No the product doesn’t contain token XXX, the composition is decided by the methodologist, they can be found over there….”. However, as $MVI has shown, the coop is capable of creating robust methodologies (i.e. ones that are resistant to such social challenges).

I don’t want fund design to become a community vote system used in some protocols. Rather we could form a pod of community members to describe a methodology for a particular market gap, and then appoint community members to maintain the methodology.

Note, there may well be occasions where the INDEXcoop doesn’t have the capabilities to design a financial product to fill an identified opportunity. In such a case, I think this could be better solved by a bounty, recruitment or contracting to specialists rather than an agreement for a perpetual streaming fee.


Please note, I’m not suggesting that INDEXcoop cancels the Methodologist Bounty programme. I feel that it was designed in good faith, and I see no net benefit in trying to rescind on that part of the coops genesis. Rather, I would allow the bonus programme to run as intended (which means that DeFi Pulse will capture the majority of those 750,000 tokens) and is closed to all future products.


What I am thinking is that it may be time for the coop to close the call for external methodologists and assign 100% new product streaming (and other fees) to the coop. Then we rely on our own capabilities for all aspects of running INDEXCoop and our future products. This includes:

  • Identifying market opportunities for financial products.

  • Iterating to improve the product design

  • Smart contract development

  • Product launch.

  • Liquidity mining/provision.

  • Marketing

  • Business development

  • Financial backstop in case of any exploits/code failures.

I believe that we, the community, and INDEX token holders (both categories which include SET labs and DeFi Pulse) can do this without the addition of external methodologists for future products.

I also believe that by removing the external relationship with methodologists we will better align the interests of the community, SET labs and DeFi Pulse in the long term growth of INDEXcoop and INDEX token value.

I am interested to hear your thoughts.

Respectfully

OverAnalyser

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@overanalyser appreciate you sharing something that has been on your mind a lot lately! I think I can confidently say this question is on a lot of people’s minds at the moment.

I don’t presume to know the ins and outs of this conversation as well as others, though. Some people/comments that I think would be helpful to the discussion are below - obviously no direct obligation for any of these people to respond directly, my intention is not to call them out in a negative way, just to bring their perspectives to the conversation if they choose to do so. They seem to be the people experiencing the core of this, so probably have the most insight.

@Matthew_Graham What was the process of PAY being rolled out in partnership with DFP? Did that feel necessary in order to get the product out?

@Thomas_Hepner @Kiba Why did you decide to become “external” methodologists as you were already active community members when starting to build DATA? Was there just more earning potential / negotiation power as an “external” player? What were other considerations?

@Jo_K @snasps Can you provide more clarity to what work/effort is done on a weekly/monthly basis for DFP as external methodologists for DPI and FLI products?

@DarkForestCapital @verto0912 Why did you decide to go the “community methodologist” route? Did you consider becoming “external” methodologists? What have you learned through that process?

@puniaviision Having a seat on lots of Coop <> Methodologist discussions, what are your thoughts? Also curious how the FLI product was ideated? Was that a joint effort between DFP and the Coop? (I just don’t know that back story so trying to assess if we would have FLI around without an “external methodologist”).

The overarching questions I am investigating here are:
Does the Coop have the capability right now to drive all new product discovery? If not, what are we still reliant upon?
What do we need to do now to move toward the future where the Coop does control the methodology of all products? What capabilities do we need to build? How high of a priority should that be?

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@jdcook

@Kiba and I both joined Index Cooperative with the intention of becoming External Methodologists. In fact, @Kiba first proposed DATA in October 2020! When we joined, there was no conception of a “Community Methodologist” yet and it was not our intention to become employees/full-time contributors to the Index Cooperative.

@overanalyser

Are you saying you think @Kiba and I should become Community Methodologists?

While I agree with you that the External Methodologist mechanism design creates perverse incentives (forum post incoming), I do not agree that the Community Methodologist Program incentives long-term value creation. In fact, it does not.

It’s absurd that I would receive the same amount of INDEX tokens regardless of whether the products I created generated $10B in AUM or $1 in AUM. That arrangement is extremely value extractive for the Index Coop if we do well, and leaves the Coop with almost all of the downside if we do poorly.

What the External Methodologist Program gets right - Market actors care more about the success of their products than employees.

@overanalyser

This effectively completely decouples the success of the Methodologist’s products from how they are compensated.

This is why @Kiba and I are not interested in the Community Methodologist Program under its current form and had originally suggested compensation for DATA based on reaching AUM targets.

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Very big topic here and likely will take a while to figure out. I think it’s actually related to the autonomy conversation. Because if we bring in the methodologist capability in-house, we are no longer reliant on external parties for new and existing products. Some initial thoughts.

We felt that if we become external methodologists, it will effectively push us outside the Coop. Instead, we wanted to continue contributing across the board, not just being MVI methodologists. At the time, we did not seriously consider going the external route.

I’m generally in agreement here. If you think of any tradfi asset manager, they all launch & manage products internally.

I think it would actually be helpful to draw parallels to tradfi asset managers in terms of structure. A lot of tradfi expenses and headcount is in operations, backoffice and legal. Crypto helps us minimise the costs here through smart contracts. In terms of the front office, you have:

  • Portfolio managers aka methodologists

  • Product managers (basically people with deep understanding of the product they cover but w/out the portfolio management responsibilities aka the FLI pod maybe)

  • Sales

  • Marketing

I think if we automate the backoffice through smart contracts and largely replicate the front office structure, it will still give a massive financial advantage over tradfi asset managers. This is what mark cuban is always talking about with operational efficiencies of crypto businesses relative to their trad counterparts.

In our case, I do think that there’s room for like buying a methodology - maybe paying an ongoing fee for licensing the IP (albeit at nowhere near the current level of fee share) or buying it upfront with a lump sum. Or effectively acquiring a methodologist and bringing them in-house (in tradfi this is done by bringing the PMs in-house and launching a suite of products around their methodology).

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A question I always think about in relation to our products, is what happens in 3/4 years (less maybe) when TradFi forks the code and offers the same products with a Vanguard sticker on it and annual fees of 0.01%?

The revenue generated on our products is a competitor’s incentive to enter the market, and in a crowded market where each product is largely interchangeable, the market price for the product has to converge on the marginal cost of producing it. Otherwise your competitor undercuts you and you exit the market.

A major selling point for traditional index funds is that you pay minimal management fees. The SPDR has an annual fee of 0.03%. I expect the same will be true in defi over time. How do we stay competitive if we are locked into massive compensation packages?

Long-term compensation packages usually involve some sort of sunsetting clause. Designing long-term compensation packages that funnel income towards mostly passive participants, with minimal operational expenses into perpetuity seems abnormal.

Is it sustainable?

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@jdcook Some great questions. Thank you.

@Thomas_Hepner Thank you, it’s great to see your perspective on this.

I think I am. AMainly because I think that would result in INDEX holders accruing more value.

However, I acknowledge such route additional value to the coop would come at a cost to potential external methodologists such as @Kiba and yourself.

@verto0912 As ever some great insights.

@afromac looking forward the market is going to become more competitive, but we are building a huge moat.

I suppose one of my concerns is that as we grow and add more products and external methodologies, we are going to be devoting more time and attention to our relationships with external methodologies. This organisational is in addition to the financial aspects of each partnership.

Thank you all :pray:

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I was in the middle of writing a very similar post to OA so i guess he saved me the time of finishing that up.
I agree with basically everything said. The deeper underlying issue is that there really are no tokenomics behind INDEX token to coordinate/incentivize people and accrue value.

So one thing I realized while thinking about my forum post is quite astonishing:
The methodologist rewards are so much higher than contributor rewards and the competitive incentives of the methodologist program means that I would make more INDEX by destroying DPI as a fellow methodologist than any single Coop contributor has ever made building DPI. So going outside the coop just pays a lot more than working in the coop even if you don’t sabatoge other products.

I also made this meme:


The coop also doesn’t pay people well enough to come in-house, we’d have to at least 4x community methodologist salary and double INDEX reward i’d say

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@jdcook @overanalyser

Providing some additional context to @Kiba 's comments.

Firstly, @kiba literally got paid like $1,000 by the Index Cooperative for getting DPI listed on CREAM. Now about 20% of DPI TVL is in CREAM. This is grossly unfair to Kiba given the huge contribution he has made to the success of the Index Cooperative.

(Not a threat, just an explanation!) In Crypto, we always need think to be able to think from an adversarial mindset. The Methodologist Program actually incentives @Kiba to use his influence on CREAM listing committe to delist DPI and list DATA to game the INDEX rewards payout. Yikes!

Set Labs earns ~77.8k INDEX per month from 28% vesting contract and DFP earns ~47k INDEX per month between their 2% vesting contract and the Methodologist Program rewards whereas all contributors combined earned only 7.5k INDEX in June.

To put this in clear terms, combined these two entities are earning >16x voting INDEX of all Index Coop contributors combined on a monthly basis because the Community Treasury cannot vote on governance decisions. This means the Community Treasury is effectively controlled by these two entities.

This has serious implications for both governance (how do we reach quorum if Set Labs doesn’t vote?) and centralization concerns.

The Index Cooperative is becoming more centralized over time; DFP + Set Labs will control >50% of all voting INDEX by end of year on the current trajectory.

image

This is the opposite of progressive decentralization.

See Analysis Here

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I think the opposite question is almost more seriously worth considering.

I think the evidence that 9X% of our AUM, revenue, etc comes from external methodologists is a pretty compelling case for no.

Maybe in a few years as Index Coop improves its brand perception, but slapping DFP on the title of an index has tangible benefits towards achieving escape velocity as a product, curious to see how this plays out with Bankless and MVI.

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100% agree! Right now, DeFi Pulse brand recognition and awareness is FARRR higher than Index Cooperative.

Part of my thesis for investing in INDEX, was that Index Cooperative’s distribution (i.e. brand recognition and awareness) would eclipse that of all other TradFi index distributors (i.e. Vanguard), but we are a far cry from that now.

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Not sure this is stark as you are suggesting. Why do you think so? When people talk about DPI and FLI on twitter I rarely see DFP next to it - almost always see @indexcoop next to it?

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MVI has ~0.11% market share of its constituent assets and DPI has ~0.55% market share. What accounts for this difference? I am not sure. I believe the most likely explanation is that DeFi Pulse’s brand has enabled DPI to capture a larger share of its total addressable market than MVI.

DATA might be a good litmus test for this. My best guesstimate is that within 3-4 months of launch that DATA will somewhere between 0.11% (~$20m AUV) and 0.55% (~$100m AUV) market share based on what we’ve seen so far from MVI and DPI in terms of market penetration.

Would ask the question around why this is the case. Massive incentives to lift DPI and engineering prioritisation for FLI are some of the answers imo. Realistically, we haven’t been able to properly test this hypothesis.

Would say liquidity mining incentives, the entire Index Coop community focused solely on DPI for months and months, and the depth of liquidity for the underlying allowing us to push growth & marketing.

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@verto0912 You make an excellent point!

For instance, MVI and DATA would be a lot more attractive as products with intrinsic productivity given the high native staking yields for their tokens.

Maybe it’s worth figuring out how to test these hypotheses quickly, especially now that there is slew of new products from external methodologists in the pipeline (DATA, LDI, PAY, iROBOT, etc.).

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Great post OA which brings up some interesting questions. Fundamentally it seems to be poor tokenomic design and legacy decisions which means we are stuck in a sunk-cost mindset and feeling the only way to win is with our current direction.

I want to respond to the question from @Thomas_Hepner as it highlights more generally the skewed perception of product success. $DPI received 1.14m INDEX tokens in LM incentives since launch, roughly $26m in total or $3m/month at today’s token price of $22.92. $MVI has received roughly 11,500 INDEX which is $262k total or $87k/month. So with 100x less value thrown at it, and 35x less on a monthly basis, $MVI managed to capture 2/5ths* as much respective market share, and grow to 110k units. *$MVI currently has 0.215% not 0.11% share.

ETH2x FLI cost us nothing on the LM front but has been a wonderful addition to the stable in terms of revenue. The cost for this one was hidden in the background as Set paid the gas for rebalancing. At some point that will become the Coop’s cost to bear, and the external methodologist will be off into the sunset having kept their split of the fee and received methodologist bounty tokens for the privilege.

I think we need a tokenomics overhaul to better align incentives, although that clearly won’t be allowed to happen until the methodologist bounty ends. Something akin to the setup Yearn put in place whereby strategists were highly incentivised by an increase in fee split going to them, then the entire DAO switched to a buyback and build model, meaning everyone holding YFI was aligned to bring in more revenue.

In short - bring in more revenue, more goes to you through fees, some portion of the rest goes to token thru buybacks.

Clearly the IC setup would differ in the details, but we could do with a way to incentivise whole life product design, including how the thing works in the background and how much LM is used to grow it. Perhaps a design whereby methodologists are paid in INDEX tokens (amount TBD) with the IC keeping fee income to use for growth or market buybacks a la Yearn, everyone then becomes a community member and is incentivised to grow the whole pie, not just their own portion. If this sounds familiar its because it can be achieved by a Balancer Smart Pool.

We need people who consider themselves Index Coop methodologists, not External methodologists. The distinction is a negative one, exacerbated by current incentive misalignment.

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Seeing this being put so clearly wrecks my heart. I guess we’re all 16x less competent/productive/important/wtv you wanna call it than these two entities.

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Have the people claiming methodologists rewards have been artificially co-opted or there could be holding back of rival methodologists come to terms with the likelihood that FLI product revenue far outpaces simple indices products, including DPI and the liklihood of competing with them for methodologist rewards is unlikely as all heck anyways.

Lastly to the point of no more external methodologists: have we seen anything in the forum that remotely compares to FLI from a methodologist capacity standpoint? Is it so wise to shut the door on things like this?

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Yes, definitely aware that DPI was only ~38% of June revenue and MVI was only ~1.5% of June revenue.

To be clear - I don’t think DeFi Pulse has the intention of voting against products due to concerns about INDEX rewards from Methodologist Program. I think they are a great partner and have a long-term view of the relationship with Index Coop.

I think what you are saying actually reinforces the point I have made elsewhere that the Methodologist Program does not incentive methodologists other than DFP because of how successful DeFi Pulse products (FLI suite especially) have been. Those rewards also help DFP increase their own capacity as a methodologist.

In my view, DATA, PAY, and LDI all have a lot of potential for success.

FWIW - I am not in favor of eliminating external methodologists. DFP provides immense value to Index Cooperative. Just think we need better incentive structures for all methodologists.

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Thank you @overanalyser for thread. I’m a big believer in using external methodologists and view them primarily as distribution partners. Ideally external methodologists are established data providers capable of reaching a broad audience.

DeFi Pulse is the perfect example of this. They have a massive audience and this audience buys the products they support. Backless will be a further addition here. In the future as we partner with more and more large data providers (specifically platforms like Token Terminal, The Block, or Galaxy Digital) we need to be comfortable that there will some overlap with these methodologies and that the primary benefit each methodologist brings is the distribution platform.

We need to evaluate external methodologists based on the strength of their distribution platforms and ensure that our incentive structures highly incentive them to distribute our products. While anyone can be a methodologist and design an index, the real differentiator for external methodologists is the strength and size of their distribution platform.

I plan to actively start recruiting more significant methodologists over the coming months as part of my efforts with BD.

I also want to re-affirm my commitment to supporting DeFi Pulse as a methodologist @scott_lew_is and @Etienne are great supporters for our community and have built one of the strongest distribution platforms on DeFi- the future success of our protocol is closely tied to our ability to recruit and retain industry leading methodologists.

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Going to clarify a bit here in case my final comment in the post above is misconstrued but I am not hostile toward external methodologists (or current ones - DFP). When I say we need Index Coop methodologists not external methodologists, that means designing incentives to better align all parties within the Coop.

If we look at the current state of the product pipeline there is no shortage of talented and ambitious methodologists, but a lack of transparency in prioritisation leads potential methodologists to elbow each other out of the way, trying to shout loudest and bring their launches forward because the process is unclear and the Methodologist bounty is running out. This is an example of how the current setup is adversarial more than communal, and we are striving for individual success rather than positive sum.

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