Product profitability and retirement framework

[overanalyser]

Thanks @Cavalier_Eth

This provokes a few (unstructured) thoughts and maybe a few suggestions.

It’s great to see the analytics and more visibility on the costs we are incurring.

Low AUM products have a number of costs:

• Gas to rebalance.
• Time to rebalance
• Time to market / promote
• Liquidity incentives / liquidity provision costs (for coop liquidity)
• Reputational cost to having "Unsuccessful " products on the market.
• Reputational cost due to access costs (high slippage buy and sells) for our users.

They do, however, have some advantages:

• We still dominate the market, for each sector (DeFi, balanced, metaverse, infrastructure, small-cap DeFi).
• We have a full (and growing) suite of product offerings.

So, it could be a case of during a bear market, nothing will grow to the size we desire. However, they are maintaining market dominance (and Lindy) ready for the next Bull (which may be sector specific).

There is always a danger of cutting a product, and then launching something very similar in 12 months’ time when market conditions change.

Suggestions

1. If we can build a product on L2 and rely on exchange issuance it can save liquidity costs (but has other costs as we educate our users).
2. We need to have all the sector products with a post gas fee. Then Methodologist and the coop are aligned in controlling costs.
3. We can try to reduce the gas cost of rebalancing via technological uses. This could include:

• rebalancing using an aggregator (0xMatcha etc).
• Adding more dex’es with deeper liquidity allows fewer rebalance trades (Bancor v2.1 has much better liquidity for some tokens, but is inaccessible at the moment, Bancor3 should fix this).
• Rebalance via on-chain auctions
• rebalance via L2 / zk roll up solutions.

4. Adjust the methodology so rebalances have less turnover each year.

Larger and more frequent rebalances may allow a more responsive tracking of market movements. However, I feel that many of the methodology choices have created a significant turnover that adds little value to our products.

Note Liquidity weights in product methodologies, may help reduce the cost of issuance/redemption arbing and so keep closer to NAV. However, the benefit may be small compared to the cost of rebalances.

Prelaunch suggestions

1. post rebalance gas fee splits.
2. methodologies should try and reduce the annual turnover of the product (fewer rebalances, only rebalance to add or remove tokens). I personally wonder if using MCAP bands rather than square root would be better

This is something that IIP-138 proposed for MVI (which I supported):

@DarkForestCapital

Rebalancing quarterly allows for 4 inclusions per year, which we see as inadequate for at least the next 12 months given the growth in the space. It also doesn’t leave much room for exclusions. However, while we might want to include more tokens, sometimes market conditions and the underlying liquidity make it rather challenging. A flexible rebalancing frequency will allow us to strike the right balance between a product that can move with and adequately represent the space, while still responding to market conditions and taking the costs into account.

Post-launch suggestions (say 6 months)

Assess AUM and profitability.

My intention is to allow us to maintain low AUM products with minimal support in case they get a better market fit in the future. If we reduce the costs to the coop to zero, then it becomes a (softer) discussion around customer experience/sector combination /offering a broad portfolio.