Title: Leveraged (Meta) Governance
Date: July 3, 2021
With recent talk about other protocols considering large purchases of INDEX at least partly for meta-governance reasons, I thought it would be useful to provide a very simple introduction to meta-governance at Index Coop and identify the value proposition meta-gov provides to INDEX holders. INDEX can currently be used as a mechanism to lever up governance influence.
Background on Meta-Gov at Index Coop
Meta-governance refers to the ability of INDEX holders to vote not just on INDEX governance proposals (IIPs and new products), but also to vote on governance proposals in those protocols in which DPI owns tokens (though at this time, only UNI, AAVE, COMP, YFI and BAL allow for meta-gov voting).
Impact of INDEX
Through DPI, INDEX holders control an average of approximately 0.75% of the currently circulating token supply of each of the protocols within DPI (a recent analysis of Q2 meta-gov data can be found here). As of July 3, 2021, this ownership translates to INDEX holders controlling approximately 1.6 million UNI (~$30.8 million), 92,207 AAVE (~$24.3 million), 38,420 COMP (~$14.4 million), 260 YFI (~$8.75 million) and 77,800 BAL (~$1.75 million).
How INDEX is Leveraged Governance
The meta-governance voting power described above is wielded by INDEX holders. Quorum for votes is 5% of INDEX circulating supply (today, 1,921,132 * 0.05 = 96,057). If quorum is reached, the full ownership of the tokens held by DPI is voted in accordance with the outcome of the vote—votes are not split proportionately.
Assuming hypothetically that no other INDEX are voted, with 96,057 INDEX a holder can make a far greater impact on governance proposals than they otherwise could have by simply buying the tokens of the underlying protocol. For example, acquiring 96,057 INDEX at the current price of $21.34 costs approximately $2.05 million. With a $2.05 million purchase, that holder can theoretically control how $30.8 million worth of UNI are voted—15x’ing their impact. Impact is also materially amplified for AAVE, COMP and YFI.
This governance arbitrage opportunity exists so long as INDEX meta-governance vote participation remains low. As broken down here, quorum is not reached in ~75+% of meta-gov votes. In those votes where quorum is reached, an average of ~110,00 INDEX vote (looking at data over the past 3 months, and recognizing that INDEX circulating supply and quorum have increased materially over that time).
Other Meta-Gov Value Add from INDEX
Beyond participating in meta-governance votes (as described above), ownership of INDEX allows holders to vote in IIPs in which a protocol’s tokens held in DPI are used to put forth a proposal at that protocol. For example, in IIP-34, the AAVE held in DPI were used to make a proposal on Aave (seeking to list DPI as collateral). This is valuable because many protocols require a certain amount of their tokens to be controlled (either be owned or have been delegated) in order to put forth a proposal. Aave requires 80,000 AAVE to put forth a proposal. Through DPI, Index Coop alone now controls >92,000 AAVE, allowing Index Coop the ability to put forth proposals without requiring other AAVE holders to delegate their votes. Compound similarly requires 1% of outstanding COMP tokens to be controlled/delegated in order to put forth a proposal—DPI’s COMP ownership alone gets approximately 3/4ths of the way there.
Meta-governance is a unique value proposition of the INDEX token. The ability to wield INDEX tokens to control the tens of millions of dollars worth of votes at top protocols such as UNI, AAVE, COMP and YFI allows for the opportunity to direct tangible value, and current INDEX ownership and voting allows this to currently be done in a “leveraged” way.