Over the past two months, the BD Working Group and the Product Working Group have been working together to negotiate a new fee split for FLI products. The current fee split between the Index Coop and DeFi Pulse is not economically sustainable and does not accurately reflect the work done by each party in launching, growing, and maintaining these products. This post proposes the official fee split offer for future Flexible Leverage Tokens (FLI).
Before diving into the offer and the reasoning behind it, we would like to reiterate the principles upon which the offer is based.
- We strive for value-accretive, successful, long-term relationships with our methodologists and other partners.
- In our negotiations, we strive to be more than generous.
- With whatever terms we produce, we understand that the market changes rapidly, our organization is changing rapidly, and we are more than willing to rediscuss previous terms in light of new information.
Borrowing heavily from @setoshi’s Methodologist Economic Agreement Principles we have three frameworks from DeFi and traditional business contexts which we can use to shape our thinking about a fair fee split for the FLI Suite.
- Yearn Strategists
- Index Licensing Deals
- Traditional Licensing Deals
Yearn Strategists (reference: YIP-52)
“Yearn charges a 2% management fee and a 20% performance fee for its vaults. From YIP-52, strategists earn 50% of ONLY the performance fee. Yearn does not split the management fee as: “There are a lot of constant costs on the protocol side. Operations, Development, maintenance, and R&D. These require a stable source of funding and should not be affected by Strategists.”
That said, strategists are expected to cover their own development, testing, gas, and monitoring costs. Note that development costs are one of the most rare/expensive commodities in this industry.”
Index Licensing Deals (reference: SPDR S&P 500 Index License Deal)
“When looking at the SPDR S&P 500 agreement, S&P Global receives an annual fee of $600k + 0.03% of AUM for the right to “use the S&P500 name and duplicate the index with its ETF”. In this case, SPDR’s take-rate is 0.065% - in which the total fee is 0.095% (awfully similar to the arrangement with the DeFi Pulse Index!). S&P does not need to do any of the heavy lifting, which includes fund management, marketing, and other expenses.”
Traditional Licensing Deals (reference: Patent Licensing Royalty Rates, Product Licensing 101)
“There are a number of approaches one could take, but the most common rule of thumb for licensor take-rate is the 25% of income (revenue less costs). Typically, this arrangement requires a clear understanding of the product’s revenue and costs. That said, fair market royalty rates of an invention are typically based on: uniqueness of invention, profit margins, risk, strength of IP protection, exclusivity rights, and availability of competing technologies.”
Common licensing fees:
- Aerospace, 4%
- Apparel, 6.8%
- Automotive, 3.3%
- Computers, 4.6%
- Consumer goods, 4.8%
- Electronics, 5.1%
- Industrial goods, 6.4%
- Pharma and biotech, 6%
- Software, 9.6%
Using the framework described above, we believe the FLI Suite resembles these Traditional Licensing Deals. Simply stated, DFP developed the equation that dictates the behavior of the leveraged product during rebalancing. Everything else - implementing the equation, creating additional security parameters, auditing, maintaining, scaling, etc. - has fallen to the Coop.
This work has consumed significant R&D resources related to developing and implementing a full-stack solution, as well as a 2-month product and engineering moratorium where all efforts were directed towards improving the safety and scalability of the products. Such engineering resources are the most scarce and expensive resources in the entire DeFi space.
That said, we believe that an 80/20 revenue fee split is a more-than-generous offer that amounts to a 75/25 profit share once expenses are taken into account; this mirrors the licensor take-rate of 25% outlined in the Traditional Licensing Deals example above. We conducted the following analysis using pre-split, historical data for existing FLI products and modeled out the implied profit share based on a series of revenue splits.
We believe this offer is more than fair as it does not include the R&D expenses related to scalability and safety improvements; only gas costs and maintenance costs are factored in. Borrowing / lending protocol rewards (ex. COMP, stAAVE) are also excluded from this analysis because they are temporary, but these rewards will also be split 80/20 between Index Coop and DFP. It is also worth noting that ETH2x-FLI will most likely be the largest and most profitable FLI product, while the performance of other FLI products will more likely resemble BTC2x-FLI.
80/20 revenue fee split on future FLI products, including borrowing / lending protocol rewards.