A Perpetual Motion Machine
The problem statement (the existing scenario) and some table-setting for a hypothetical conversation:
Currently revenue streams to the treasury and anyone can make a proposal suggesting its use. The tokenomic model outlined below does not stream anything to or from the treasury; ad-hoc requests and diversifications would still be subject to INDEX holder vote. The model below addresses how revenue can be programmatically used to leverage competing interests to accrue value to a network and allow INDEX-holders to productively participate in the conversation around what adds more value to The Cooperative: The DAO (building and shipping new products, enhancing and building distribution outlets, improving composability, and improving product utility), OR, using (holding/trading) our products.
The tl;dr: if the DAO canât improve the value of the network, governance should default to the product holders that can deploy resources otherwise more effectively.
Enjoy a hypothetical conversation exploring a dedicated revenue-stream concept.
What does Index Coop do, exactly?
We build and distribute the worldâs best on-chain index products.
Why do you do it?
Weâre users and doers that believe every person in the world deserves access to well-constructed financial products.
What makes Index Coop different?
We believe that community feedback is a better mechanism for organizational input and decision-making than top-down or more centralized means. An open-source ecosystem deserves an evergreen source of community input into the indexing products that are bought to market. We view partnerships and integrations, as well as our ability to scale, as our massive competitive advantage in this new paradigm.
So youâre now streaming INDEX, purchased with revenue, to all product holders on Ethereum and Polygon; why give away ownership? (this is where it gets pretttty hypothetical for anyone new)
We firmly believe that those interacting with our products in the ways theyâre meant to be (holding composite products, trading leverage products) should be given a feedback mechanism to improve this community, this is why our community governance token accrues by default, programmatically and agnostically, to product users. Claimed or not, tokens can still be used to vote. This always provides a path to meaningful community participation for product users; as we see it the purest expression of, âthe UX is the productâ.
What if I want to just buy some INDEX?
Thatâs fine. There are governance and meta-governance utilities. Given that governance is a feature of the INDEX token, it is not rewarded (feedback via voting should be discretionary). Governance and meta-governance are the only features provided at this time.
How does the DAO fit in?
The DAO, the productive engine for product creation and distribution is by itâs nature a centralized growth entity, so in effect there are competing tokenomic motivations between the Index Coop DAO and INDEX token holders that force the DAO to be productive or risk having itâs overall stake diluted (by the product-holding community); the working-theory being that the overall community is in a better governance position to then allocate capital than the DAO (through restructure or otherwise).
Foundationally the revenue generation is a function of competing interests. The default flow of network value and governance is to product users, who have discretion to channel degrees of value to the DAO to improve the network (better products and integrations), should the DAO demonstrate through execution that they are well-suited to that purpose.
In the words of Jack White, âyou gotta have a problem if you want to invent a contraptionâ and well, weâve got a problem. We here at Index Coop DAO believe weâre better allocators of CAPITAL than you are (FOUNDATIONAL ASSUMPTION 1), and well, itâs a bit join or die in that sense, otherwise we would all just go buy ETH and live our lives in social DAOs. We also believe that we here at Index Coop DAO are better allocators of GOVERNANCE than programmatic or arithmetic methods (FOUNDATIONAL ASSUMPTION 2). Absent a well-run centralized entity (the DAO) to build and maintain the product suite, governance should default to product holders (FOUNDATIONAL ASSUMPTION 3). Put plainly, the efficacy of the DAO at improving the value of the network relative to distributing the network to those providing the most utility otherwise (product holders) are the two forces that will force the DAO to stay effective or programmatically return governance power to those most interested in a positive outcome.
So what happens to revenue, in practice?
It is programmatically split into three streams as decided by the INDEX holding community once a year to effect three different desired outcomes:
- DAO alignment
- Optimized decentralization
- Operational sustainability
Why three streams?
- The DSM is the mechanism that bolts the DAO to the community; continuously. In order to align interests through time, governance must continuously be heavily redistributed to those actively producing with the highest context.
- The GDM (governance distribution mechanism) is the cleansing mechanism of the INDEX communityâs governance system. It both incentivizes new participation and redistributes governance (from weak hands) to those providing core utility (revenue through AUM or trading) for the community.
- The Operations stream directs product revenue directly into the DAO operations account; this is practical consideration more than a tokenomic one, but can be used to spur growth.
The floor on any individual stream is set to 20%, dictating an effective maximum of 60% to any outcome. With the minimum amount earmarked for DAO alignment, governance distribution, or operations set to 20% of revenue, it leaves 40% to be purposed for maximum impact as determined by INDEX-holding voters. The idea is that if the DAO is doing a good job, they can be further incentivized operationally, if alignment is needed (DAO ownership is low) it can be increased, and if further distribution of the network is required, that can be expressed; INDEX token holders decide if the organization feeds âgrowthâ (The DAO) or rewards âvalueâ (product users).
Why not just buy-back-and-burn?
Itâs all about desired outcomes. An INDEX burn increases the net effective governance of every INDEX holder. The statement there is pretty clear, âExisting holders deserve more governance.â The tokenomic model of redistribution to product holders and traders rewards those doing the activity this community finds most valuable: holding and using our products. The DAO may reward other activities from time-to-time, but these are timeboxed considerations intended to further the DAOs mandate, not a tokenomic feature of rewarding product users with increased ownership and governance.
Whatâs the worst case for the DAO?
INDEX holders vote for the minimum streams toward âDAO operationsâ and âalignmentâ (or this is defaulted due to an inability to reach consensus), and the DAO effectively maintains the product suite, launches what new products it can, and fosters the community of contribution as best as possible. Existentially, the INDEX community could constrain the DAO, but never kill it, as the DAO maintains the product suite (additions, rebalances etc.).
Why 1-year cycles?
Planning. There needs to be some predictability to income streams. If the DAOâs growth and product strategies are largely dependent on funding, the yearly KPI and Fee Request report address performance and provide the insight required for INDEX voters to make a forward-looking decision about fee splits.
Given that another IIP can undo, how do you protect the overall tokenomic system in place?
Tokenomic changes have elevated quorum and passing requirements.
Thanks for reading!
I believe that tokenmics should do the heavy-lifting and create a positive-sum flywheel that expresses individual motivations for wholistic benefit, with the influence flowing to those that best improve the network, but otherwise distributed broadly. Establishing what a baseline of broad valuable community contribution looks like (holding products) and working out from there, a sustainable tokenomic model can be crafted, implemented, and calibrated. Itâs a discussion that seems timely as elements of token redistribution are being discussed; I look forward to feedback on the concepts floated here.