Title: Product Profitability Model v1
Index Coop is seeing an increase in potential product launches and we believe it would be helpful to provide a standardized tool for evaluating the potential profitability of each product. The benefits of this tool include:
- Ensure that each product has transparent modeled inputs, considering costs such as rebalancing or the opportunity cost for the Coop to provide initial liquidity.
- Help Methodologists evaluate the effect of certain parameters, such as rebalancing size, on profitability.
- Educate the broader community on IC’s business model at the product level.
- After a product launch, provide benchmarking opportunities to see where actual results vary to assumptions to continue to improve the evaluation process.
We are not suggesting anyone is required to use the tool. Rather, we hope it will be a useful aid.
@JosephKnecht prompted this discussion by seeking a way to evaluate the NFT Blue-Chip Index (JPG) and created the initial model. After further discussion and generalizing the inputs for broader use, we believe it is appropriate to bring the tool to the community for consideration for feedback, improvements, and general sentiment check.
We are seeking community feedback on the proposed use of this calculator to evaluate Index product launches.
The calculator includes a forecast of revenue and expenses by month, as well as a trad-fi approach to discounted cash flows to evaluate the Internal Rate of Return (IRR) and the Net Present Value (NPV) of the project over various horizons, with the latter measure dependent upon the Required Rate of Return input.
While it is challenging to estimate 3 months of crypto, much less several years, this approach could provide a framework for consistently evaluating projects. If, for example, the Coop is resource constrained with respect to Engineering or capital to fund the initial liquidity to launch two new products, this process could help prioritize or determine how much one or more variables would need to change in order to launch both products.
- Starting Net Asset Value: the expected size of the product at launch, as the primary driver for the revenue and the base on which growth assumptions are applied
- Index Coop Funding: affects the IRR and NPV, and becomes increasingly important if we are capital constrained
- Start-up and Issuance Costs: affects early net income
- Rebalancing Costs: affects net income in perpetuity (not designed to change through time, though could be changed if there is a good suggestion)
- Rebalancing Cost split between Coop and Methodologist
- Streaming Fees and Fee Split between Coop and Methodologist
- Other expenses, including liquidity mining and/or market maker
- Minting growth rates (staged, with different growth rates applied at different points)
- Token price growth rates (also staged)
- Required return rate
To be clear, the variables supplied shown in the current model are not meant to be interpreted as proposals. Further, we are not proposing a rigid financial prioritization of products. Rather, we hope it will be a useful tool for evaluating product profitability, profit optimization, and broader education.
We’re mindful there are many factors missing from the model. This is very much a work in progress. If you feel there are any important factors missing from the model, please feel free to add those to the To Do sheet.
I think this is worth pursuing if we can use to develop high level guard rails of what is required to be successful, i.e. “with $X AUM starting, keeping rebalance costs under $Y, and growing to $Z AUM” we can be profitable
Scrap for an alternative approach.