PROPOSED: IIP-113: Index Coop Product Launch & Maintenance Gas Costs

[dylan]

iip: 113
title: Index Coop Product Launch & Maintenance Gas Costs
status: Draft
author(s): @cavalier_eth, @dylan, @Finance
created: 2021-11-24

Simple Summary

Index Coop will maintain wallets used to pay gas costs for Index Coop product launches & product maintenance. Set Labs will utilize these wallets in the interim to perform product launch & maintenance work until the Index Coop is ready to own these operations.

Abstract

Set Labs currently pays for most of Index Coop’s product launch & maintenance gas costs. As Index Coop transitions towards becoming an autonomous DAO, product launch costs, rebalancing and code base upgrades shall be passed from Set Labs to Index Coop. This proposal represents progression towards autonomy with Index Coop taking over financial responsibility for on-chain product costs.

Motivation

This IIP follows the forum post Product Performance - Surfacing Gas Costs.

During the early months of Index Coop, there was no clear agreement on who would be liable for gas costs, and as the performers of rebalances and in the spirit of a startup, Set Labs bore those costs. In the months since, AUM and product maintenance costs have grown considerably, and Set wishes to pass these costs to Index Coop.

It is important to move these costs to the Index Coop. Set cannot pay for gas costs indefinitely and not having product maintenance costs borne by methodologists or Index Coop is distorting the profitability for Index Coop products.

Projected Gas Costs

Average monthly gas costs are expected to be around 60k - 80k USDC, with 20k - 30k USDC in Automated Index rebalancing expenses and 30k - 50k in Composite Index rebalancing expenses. In a month of high gas and price volatility, Automated Index rebalances can increase to 80k-90k on its own.

For a more detailed breakdown on the kinds of transactions incurring these gas costs and their susceptibility to low liquidity/high price volatility environments see the Product Performance - Surfacing Gas Costs forum post.

Gas costs in ETH terms for the previous 4 months

Gas costs in USDC terms for the previous 4 months

The above tables have been pulled from a more detailed analysis on total product gas costs. You can read that here.

Specification

Overview

To launch Index Coop products, an EOA will be shared between Set & Index Coop. This EOA will be used for contract deployments of all Index Coop products.

To rebalance Index Coop products, multiple EOAs (eventually, one for each product) will be shared between Set & Index Coop. These wallets will be used strictly for conducting Index Coop product rebalances.

It will be the responsibility of EWG in conjunction with the Finance Nest Operations Account to ensure each wallet is sufficiently funded & ensure smooth launch & maintenance operations.

Finance Nest will be responsible for auditing the costs & making these costs known to INDEX holders via it’s monthly Operations Account and Financial reports.

Rationale

The primary reason for managing one wallet per product is to prevent multiple products from being blocked by a single unmined transaction. If ETH2x-FLI submits a rebalance transaction with too low of a gas cost, it will block all subsequent rebalance transactions. Getting a single transaction unblocked alone requires some coordination. Having multiple product rebalances potentially blocked because they are all waiting for a single transaction to mine quickly multiplies complexity.

Work has already been completed to separate ETH2x-FLI/BTC2x-FLI keeper rebalance wallets. Extending this wallet setup to Simple Indices infrastructure will help further scale the product rebalancing system.

In addition, managing one wallet per product simplifies accounting. Each product’s cost center is divided by wallet and easily auditable.

Voting

FOR

DO adopt the above wallet system for Index Coop product launch & maintenance.

AGAINST

DO NOT adopt the above wallet system for Index Coop product launch & maintenance.

[dylan]

PS: The topic of how best to socialize gas costs among IC product holders will be covered in a separate upcoming forum post. Additionally, @prairiefi is crunching the numbers on what the expected costs are for managing each IC product. We will get that added to this proposal for IC visibility as soon as it’s ready.

[dylan]

@sixtykeys @mel.eth Requesting an IIP number be assigned & for this to move to “Proposed”.
I’d also like to request that this IIP be called to vote Monday November 29th at 18:00 UTC.

[mel.eth]

I’m going to make an effort to build more context around this. My first blush, and again, please take this as such, is that this proposal has nothing to do with autonomy really. We can be autonomous while Set pays for gas costs.

@dylan

During the early months of Index Coop, there was no clear agreement on who would be liable for gas costs, and as the performers of rebalances and in the spirit of a startup, Set Labs bore those costs. In the months since, AUM and product maintenance costs have grown considerably, and Set wishes to pass these costs to Index Coop.

It is important to move these costs to the Index Coop. Set cannot pay for gas costs indefinitely and not having product maintenance costs borne by methodologists or Index Coop is distorting the profitability for Index Coop products.

I’m concerned about implementing a technical solution that skips the broader challenge of determining how these costs should be borne. Rather than type a bunch to take an edge off, I’ll just ask: What is the sense of responsibility for ongoing costs by Set given that the initial token allocation to Set was 28%?

I think the sense here on my part, is that if Set are going to take the position that their initial allocation was already earned, that should be made explicit so we can discuss. Set received 34.8% of the allocation between Set and IC (28:52.5) and I don’t think it makes sense for IC to bear all ongoing operational costs under that arrangement for activity occurring inside Set vaults. IC products account for something like 80% of Set AUM; and IC owes it’s existence to Set Labs, but I want to make sure were setting both organizations up for long-term success.

The ask here is that the full plan and splits be made explicit prior to dedicating resources to implementing a technical solution that bakes in some pretty hefty assumptions.

[mel.eth]

I’m on mobile and can’t do this until later today, I’ve pinged @sixtykeys to see if he can address it in my absence. The above reply was in draft and I hit it rather than delay given the call for IIP no and proposal. The intention isn’t to slow this down at all, just working within tech constraints given the US holiday. Thanks for understanding.

[dylan]

Thanks for raising this @mel.eth, I realize some context was lost while we went through a couple drafts this IIP.

This does directly affect Index Coop autonomy in a couple different ways. Currently, Set is paying for product rebalance gas costs. These costs are increasing with ICs AUM. Because of this Set is incentivized to interfere with the IC product maintenance process (which should be the responsibility of PWG) in order to cut costs. This takes the form of asking Methodologists to make trade-offs to reduce trade counts, or asking for concessions on what trade slippage IC’s willing to take on product rebalances.

This is not a good way to manage IC products. Rebalance costs priorities should be balanced with product performance & everything should be communicated with product holders. By moving these costs to IC, PWG is in the drivers seat on making all these decisions. Then Set can move to a more technical operations role where it can focus on building systems for better trade execution rather than negotiating rebalance execution parameters on a monthly basis.

[mel.eth]

I think I follow the logic and it makes sense; Set doesn’t currently have control of the costs but bears them.

I’m a big fan of getting incentives aligned and this seems to be a step in that direction. Thanks for the quick response and I’ll work on my side to get the full context while this progresses.

[Matthew_Graham]

Surfacing this forum thread here.

Eagerly awaiting a response from @verto0912 who was publicly in favour of post gas revenue sharing on FLI products. I hope to see the MVI agreement, only a few months old, pivot to something that better aligns incentives.

Product Performance - Surfacing Gas Costs

Just tagging @verto0912 and @DarkForestCapital here to ensure this is brought to there attention. It would be great to get feedback on the above and I welcome the dialogue that is forthcoming. No doubt that as MVI grows the rebalancing costs of the less liquid tokens will really hurt Index Coop’s profitability. This is occurring at a time when the Methodologist Incentives allocation starts to ramp up as MVI’s growth outperforms its peers. A few months ago, these costs and incentives were alig…

[sixtykeys]

This IIP has been queued for snapshot. It is set to go live later today at 1800 UTC.
Snapshot here

[sixtykeys]

Confirming that this IIP has failed with 470.49k INDEX (81.05%) voting AGAINST.