PROPOSED: IIP-110: Forming a Liquidity Pod

Status: PROPOSED
Author(s): @edwardk , @Cavalier_Eth
Reviewed by: @Matthew_Graham , @jdcook , @overanalyser, @mel.eth
Discussions-to:
Created: 19 November 2021

Foreword

We’d like to acknowledge the great work of @pepperoni_joe and the many others who have been blazing a trail with Index 2.0 | Leadership, Governance, and Decision Making. We believe that their efforts will make cross-functional decisions like the one this IIP aims to address a whole lot easier in the future. This IIP should be viewed as independent but wholly compatible with the Index 2.0 vision.

Summary

Index Coop’s mission is to make crypto investing simple, safe, and accessible for everyone. Product growth is a core pillar to achieving that mission. Without sufficient liquidity, our index products are less compelling to customers and product adoption is hindered. This slows our growth as a business and the negative effects only compound over time.

There have been many discussions on how to improve liquidity for our products, as well as the INDEX token. These conversations have tended to focus on how to improve liquidity for a specific product in a specific way. Despite good intentions and lots of trying, we’ve been unable to move quickly to solve our liquidity problems, as there is no clear authority or mechanism except IIPs for each suggested strategy.

We propose that the community grant broad executive power to a group of owls to manage liquidity for all products and the INDEX token. The specific goals they set and how they go about achieving those goals should not have to go to IIP every time they want to take action.

Motivation

As of Nov. 19, 2021, the approximate USD trade size on 1inch.exchange for 1% slippage on Index Coop tokens are:

All prices paired against ETH Mainnet Polygon
DPI $127,000 $3,000
ETH-2x FLI $760,000 $0
BTC-2x FLI $100,000 $0
MVI $21,000 $3,300
BED $30,000 $0
DATA $8,000 $0
INDEX $25,000 $0

Note: 1% slippage includes fees to liquidity providers which is typically 0.3%. Liquidity can change significantly from day to day.

We can see from the table above that some of our products suffer from illiquid markets. Users are facing significant slippage, and anecdotally choosing not to invest rather than start their position at a loss. This is made worse by the high gas costs on mainnet. Some of our products can be found on Polygon, but there’s not enough liquidity available to make it a viable alternative.

Liquidity also comes into play when we launch new products. Having initial liquidity is important for getting early adopters. It’s a chicken and egg problem. If we don’t have liquidity on new products, no one will want to trade. And if no one is trading, then there are no fees to attract liquidity providers.

What can we do about it?

The short answer is a lot, maybe even too much!

The toolbox for managing liquidity is expanding rapidly as DeFi matures. While this should be a good thing, too many choices are leading to analysis paralysis. This is magnified when trying to reach consensus among a large group of stakeholders.

It’s clear that we need a better process for making liquidity decisions and that process should favor decisiveness and action. The clearest way to do this is through delegated responsibility to a Liquidity Pod.

Scope

  • Pod will have the ability to draw funds as needed from the Operations Account Multi-Sig
    • Precise funding amount will be determined as part of a broader budgeting process
  • Pod will set liquidity goals for new and existing products
  • Pod will decide the best way to reach those goals
  • Pod will execute the transactions, deploy rewards contracts etc.
  • Pod will make a liquidity performance dashboard available, and log decisions

Who will be in the Liquidity Pod?

It’s important that the pod is a cross-functional team. Making quality decisions around liquidity requires an analytical skill set and a high degree of specialized knowledge. It also requires balancing growth with financial discipline. Members of the following working groups will be included in the decision-making process:

  • Analytics
  • Growth
  • Product
  • Engineering
  • Finance

Inside of the pod, decisions could be made using the RAPID framework. An example RAPID could consist of:

  • Analytics will Recommend
  • Growth will Agree
  • Engineering and Operations Multi-Sig signers will Perform
  • Finance and Methodologists will provide Input
  • Product will Decide

Closing Remarks

We have the expertise within Index Coop to manage liquidity, but without a clear delegation and decision-making framework, spirited discussions often result in no action. We want our experts to be able to work through options, run experiments, and get results without the friction of going through the IIP process. For the success of Index Coop, it is crucial we empower the right group of people to meet our liquidity needs.

Voting

For

Form a Liquidity Pod with the authority to spend from the Operations Account to set and achieve liquidity goals for new products, existing products, and the INDEX token.

Against

Do not form a Liquidity Pod.

Temperature Check Poll

  • For
  • Against

0 voters

Please leave any feedback in the comments!

6 Likes

Yes - this is urgently needed!

Would like to see Analytics (@jdcook) and Finance (@Matthew_Graham) drive this forward in consultation with each product’s Index Coop owner and methodologist.

6 Likes

I am FOR this proposal, liquidity is an extremely important factor when choosing how to invest your capital. One of our driving principles here at IC is making crypto investing easy and accessible for everyone; and anyone looking to make a sizeable purchase of our products should not have to face the inexplicable issue of being unable to enter or exit a position due to slippage. Index products are some of the most liquid assets in any type of financial market, and I hope to see this reflected in our own products. Looking forward to seeing a liquidity pod swiftly address this issue.

2 Likes

Strongly for this – IMO it’s essential for product performance and financial health of the coop. Great job putting this together all!

3 Likes

Strongly FOR. There are so many options and competing desires wrapped up in liquidity discussions that a multi-functional POD combined with RAPID implementation makes sense.

I think that this pod working alongside the INDEX council / Wise Owls will be a huge sep forward.

2 Likes

I am particularly excited to see the precedent for the Operations and Investments accounts (similar commercial value) to move in the same direction.

The general shift to place large chunks of capital in the control of a select few is empowering and with this proposal, precedent is set to enable Finance Nest to fly solo, independent of the governance forum process. Finance Nest has already presented guidrails to the community which is further along the path to autonomy than a Liquidity Pod. So it should be easier to implement :slight_smile:

If this vote passes, Finance Nest will move in the same direct seeking autonomy and empowerment. After all the value of spend is similar, both require agility and both attract massive debate.

Does the Liquidity Pod need to present high level policies to be followed? Something similar to what Finance Nest did for the managing Stable Coins positions. This acts to enable the community an opportunity to buy into how the funds are managed and what the goals are ? Also, creates accountability and ability to generate OKRs for performance tracking/reporting.

6 Likes

Strongly in support of this and with the comments made above! This Pod is definitely needed.

Good input @Matthew_Graham, having a high-level policy including guidelines and describing a reporting function would bring this proposal to perfection. I appreciated the guidelines that @AcceleratedCapital laid out back in July, which might serve as an example.

2 Likes

Yes, I think early on the Pod will communicate their goals and broadly how they plan to get there. This along with a performance dashboard to track those goals. The bias here is to INFORM, rather than ASK the community.

1 Like

@mel.eth can we assign this draft IIP a number and update its status to proposed? I don’t think any changes to the language are required.

2 Likes

gm @edwardk

IIP No. 110 has been assigned and the status has been changed from DRAFT to PROPOSED.

Please indicate your preferred date and time for a snapshot vote, following the required 48-hour discussion period, per guidance here.

3 Likes

Hi @mel.eth can we schedule the snapshot vote for Monday, Nov 29? Thanks! cc @sixtykeys

1 Like

gm @edwardk and @Cavalier_Eth

This proposal has been queued for voting to commence on 29 November 2021 and will be open for 72 hours.

Please click Hootie to vote: :owl:

cc: @sixtykeys

2 Likes

Strongly agree with this proposal. As a GTM partner we should have a better idea of what liquidity situations are ideal for product growth. This team helps us understand these scenarios much better.

1 Like