Proposed: IIP-95: Beta Finance - DPI, MVI, BED & ETH2x-FLI Incentivized Lending & Borrowing

Governance Proposal
1

Status: Proposal
Author: Matthew Graham (@Matthew_Graham)
Created: 15 October 2021

Simple Summary

This proposal is to approve a spend of $105,770 to joint incentivise lending and borrowing of DPI, MVI, BED & ETH2x-FLI on Beta Finance’s platform. Index Coop will acquire $105,770 of BETA tokens on market by swapping ETH for BETA from the Operations Account and transferring it to the address shown below:

Operations Account: ‘0xFafd604d1CC8b6B3B6CC859cF80Fd902972371C1’
Beta Finance Wallet: ‘0x38a466b5C0F1d09918Fc8e795945bf3aD32D0080’

Initially, the products will not be whitelisted as collateral as a risk precaution and in time, this will be re-evaluated when Beta considers listing new collateral.

Index Coop will initialise the MVI, BED, and ETH2x-FLI markets on Beta Finance, this will require some ETH for processing the transactions and can be performed by anyone.

Abstract

The permissionless lending platform Beta Finance launched on the 18th August 2021 and entered into Phase 2 of the launch cycle with the introduction of liquidity incentives and the permissionless listing of assets on the 11th October 2021. Index Coop has the opportunity to list the following assets with the support of the core team at Beta Finance.

The target TVL at launch and at the end of the incentive program is shown below:

Screenshot 2021-11-11 at 08.47.07
Screenshot 2021-11-11 at 08.47.071398×206 29.1 KB

As part of the listing process, Beta Finance has asked if Index Coop is able to support the initiative and provide BETA incentives. Initially, Index Coop considered providing INDEX incentives to compliment the BETA incentives in a dual incentive program. However, we learnt this requires a new contract to be written and as developers time is a premium, we are opting for an alternative solution. The newly proposed solution is for Index Coop to acquire BETA tokens on market and transfer the same USD spend value to Beta Finance in the form of BETA tokens. This enables the existing distribution contracts to be used and avoids any Index Coop developer lift.

Beta Finance and Index Coop are to provide joint incentives in the form of BETA tokens to support lending and borrowing of the four Index Coop products.

The initial across all pools is assumed to be ~$5M with the vision of growing the pools to ~$20M thereafter. The total cost for this incentive program is $105,770 and the durations is estimated to be around 3 months. At the end of the 3 month period, we will revert and advise the actual Index Coop portion of the spend. Beta Finance will distribute all BETA rewards for lenders and borrowers of Index Coop products.

Beta Finance audit by OpenZeppelin and PeckShield details can be found here.

Motivation

Beta Finance is in the launch phase, recently listed on Binance and was the 21st team to go through the Binance Launch Pad. Beta has an aggressive growth strategy that involves expanding across other ecosystems, including L2. As the first partner to list assets on Beta Finance, and with incentives, Index Coop is investing in a relationship for the future that will help integrate Index Coop products across other ecosystems. As Beta Finance expands and a solid relationship is established, it will be easier for Index Coop products to be integrated and attain extrinsic use cases in other ecosystems.

Another benefit of partnering with an early launch phase community is DPI, MVI & ETH2x-FLI holders now have the ability to earn yield by depositing or borrowing Index Coop products on the platform.

  • Beta finance will be the first lending protocol to list MVI.
  • 10% yield on MVI rather appealing for an otherwise unproductive asset.
  • Beta Finance will be the first lending protocol to provide incentives on ETH2x-FLI and DPI.
  • Market participants can deposit DPI and short any other listed asset.
  • It is possible to Long DeFi and Short the Metaverse in a single trade.
  • Traders can hedge their ETH portfolio by shorting ETH2x-FLI. This could create a fixed income like product strategy with minimal ETH price exposure.
  • Traders can deposit stables and short ETH2x-FLI, giving them a leverage short position.
  • During Crab season, the ETH2x-FLI decay can be turned into a profitable strategy by shorting ETH2x-FLI (this would be risky and hard to execute)

Will this drive N$F to Index Coop products ? We haven’t tried anything like this before and therefore don’t know. This is an experience and this IIP is to spend $105,769.23 to find out what happens. When we offered 10%-15% Liquidity Mining rewards on DPI-ETH, we had a lot of Liquidity providers deposit into our staking contract. With 10% on just DPI deposits, this is equivalent to 20% on a 50/50 DPI/ETH LP token and 20% on a MVI/ETH LP token without the impermanent loss risk.

Specification

Index Coop and Beta Finance are targeting a $20M across the DPI, MVI, BED & ETH2x-FLI pools. Incentivising all the mentioned products is expected to occur during the week starting 22nd November 2021, subject to Index Coop’s governance process being complete.

Incentives are distributed based upon the target APR. The APR is expected to drift lower as capital enters the pool and every two weeks the distribution of incentives will be adjusted to revert back to the target APR. The initial target pool sizes at launch are as shown below:

  • DPI - $3.25MM deposits and $1.28MM borrowed
  • MVI - $425K deposits and $167K borrowed
  • BED - $230K deposits and $90K borrowed
  • ETH2x-FLI - $1MM deposits and $425K borrowed

Details for how this was determined can be found here.

The above is different to what was originally proposed, which is shown below:

1% lending APR on $10M for 2wks + 2% APR on $10M for 2wks assuming only 75% is borrowed = $7,143

1% lending APR on $20M for 10wks + 2% APR on $20M for 10wks assuming only 75% is borrowed = $96,154

Total cost is $105,770

Since, the original USD spend figure was determined, the initial launch pool size has drifted from $10M TVL to $5M TVL. The methodology applied is more comprehensive than the original approach.

However, expected spend is anchored at $105,770 and it is important to recognise Index Coop’s spend is considerably less than Beta Finance’s spend. What does this mean, well, it means Index Coop will incur the same spend with the same end objective of $20M TVL in Beta Finance. The distinction is that rewards are distributed based on APR which is determined by TVL and this can be rather fluid with prevailing market conditions. The variables in the cost estimates is TVL and APR.

What happens if we hold the APR around the target level and the TVL does not come? Then we can decide to increase the rewards distribution in an attempt to boost the TVL- this discretion will be Beta Finance decision as they are spending 10x Index Coop’s rewards.

Incentives are expected to last for an initial 3 month duration. Both Index Coop and Beta Finance are committing to an initial 3 month term. Towards the end of the 3 months, both communities will reconsider the next step.

The funds will be administered by Beta Finance to lenders and borrowers. $105,770 in BETA from the Operations Account will be allocated towards this initiative. The Operations Account will sell ETH for BETA tokens.

Operations Account: ‘0xFafd604d1CC8b6B3B6CC859cF80Fd902972371C1’
Beta Finance Wallet: ‘0x38a466b5C0F1d09918Fc8e795945bf3aD32D0080’

Voting

FOR:

DO offer $105,770 in BETA incentives across all Index Coop products when Beta Finance lists DPI, MVI, BED & ETH2x-FLI. BETA is to be purchased using ETH from the Operations Account and sent to Beta Finance.

AGAINST:

DO NOT offer incentives on any Index Coop product when Beta Finance lists DPI, MVI, BED & ETH2x-FLI.

Copyright

Copyright and related rights waived via CC0.!

13 Likes
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Thank you @Matthew_Graham This is a very thought provoking proposal.

More extrinsic uses for our products (AAVE, Maker, Fuse, Alpha) is good for the long term growth of our products. (Particularly as we know many of these vaults become sticky as people go hands off on profitable vaults due to gas costs and tax considerations :thinking:).

The challenge then becomes how do we incentivise such vaults? Paying holders to hold, is unsustainable, particularly when looping such vaults to harvest both lending and borrowing fees means we would be paying > the 0.66% (per #DPI) we get from the streaming fee (and L1 gas means it’s a whales game).

However, the fact that Beta Finance will be x15 our contributions on DPI (and extra for MVI and ETH2-FLI) makes it hard to resist.

OK, some initial thoughts from me:

Pros

  • gives three core products extrinsic use cases and builds composability.
  • x15 contribution from Beta finance lowers cost to the coop.
  • lending 15% APY on DPI is attractive to our customers.
  • Beta want to go multi-chain. builds a relationship for lower cost lending income.

Cons

  • $100 k expenditure
  • new protocol - contract risk.
  • Will pull AUM AAVE, Fuse and Cream vaults
  • Could pull AUM out of liquidity pools.
  • Gas will price out smaller holders on L1 - but we know the majority of holders are Dolphins / whales.

Personally, I’m for this experiment.

11 Likes
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Strongly supportive.

Any new extrinsic use case is key, Beta, while new fels like a great candidate for a long term partner.

Audits by OpenZepplin and Peckshield reduce the smart contract risk of a new protocol

would like to see other tokens get listed first, and not in love with the reliance on UniV3 oracles for MVi/FLI but we use them on rari today. That said, first mover advantage is huge, Beta is willing to put a lot of tokens in our pools, that speaks to desire of them to have IC involved.

3 Likes
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I’m strongly supportive of this proposals.

It has the potential to significantly move the needle - for only relatively minor cost.

General I LOVE this type of experimentation - thanks for the initiative @Matthew_Graham.

@Beta Finance - looking forward to working with you :muscle:

4 Likes
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Great work on this @Matthew_Graham. I love to see initiatives like this to really enhance our products and to provide the ability for these to become productive is huge.

$100k in terms of expenditure is small in relation to the potential traction this could have.

I am in strong support of this proposal.

1 Like
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I am voting for. Strongly in support of this proposal. I also believe this is the first incentivized lending initiative I would like to see what this will do to our metrics. It would be good to track mint volume and net inflows into our products when this program is launched.

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Hi @mel.eth, @sixtykeys

Can we please have an IIP number assign and the Snapshot vote scheduled for Wednesday this week?

2 Likes
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I really like this proposal @Matthew_Graham . Noting that if the borrow is 100% with the same assumptions of lending pool, the cost is ~ 127K. Still small relative to the value of making DPI/MVI productive.

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Hi All,

Just flagging here that changes have been made to the original post. Most notably changes:

  • Index Coop spend remains the same in $ terms
  • Target TVL is lowered
  • BED has been added
  • DPI is not collateral at launch (wen soon, TBA)
  • All Index Coop products are incentives with INDEX with 1% for Lending and 2% for Borrowing

Reason for the changes, perhaps the initial offer was a little ambitious. The currently offer, still a great offer, is something both communities are more comfortable with.

3 Likes
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Hi @Matthew_Graham -

IIP-95 has been assigned to this proposal; pending no further edits, snapshot voting will be queued for Wednesday, 20 October 2021.

Of note, the post title has been edited to reflect the addition of ‘BED’ per edits within the body of the post.

cc: @sixtykeys

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Per request by @Matthew_Graham this will not be queued for snapshot pending potential updates. The IIP number (IIP-95) remains assigned; please re-request a vote when the proposal is in its final form.

3 Likes
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Appreciate the proposal @Matthew_Graham ! I do have some questions / concerns that I would love to get feedback on:

It feels easy to mask a $100k cost with the fact that Beta will be doing 10x that cost - but we should remember that Beta is in the process of bootstrapping their whole product - this is still in their best interest as well. I just want to highlight that because I think is it the ~$100k cost to the Coop that we really need to focus on.

What exactly is the experiment? Our products don’t have inherent borrow demand. There is $60m in DPI liquidity on AAVE with a 0.5% utilization rate. Our Fuse pools don’t have any activity. Putting the incentives aside - what does Beta solve for users of our products? Because the incentives are going to run out. And I feel like the “experiment” as laid out only helps us learn what happens when you throw a bunch of incentives at something - I think we already know the answer to that.

To focus on the $60m in Aave - there is so much borrowing capability there - why is it not happening? The crux of lending and borrowing protocols is borrowing demand. I think the $60m in liquidity on Aave is our most important experiment on this front, and I am not convinced that this incentive experiment on Beta helps us learn anything that we can’t by continuing to push on Aave.

But even with that said, the Fuse pool may be a closer direct comparison. It may be that what we have on Fuse right now is what we would expect on Beta if there were no incentives. I do think the counter point to my arguments might be that if the pools are boosted with incentives (which Fuse hasn’t been) it can kick off a positive feedback loop that will keep borrowing up even as incentives go down - but I don’t think we need to spend $100k to learn that. I go back to the liquidity in Aave - it’s all right there for borrows to have at it.

Some of these are driven directly by the incentives and are short-term (10% yield on MVI, incentives on borrowing, etc). But, and this goes hand in hand with earlier points, are these core use cases for our customers right now? If users were looking to use our products in these types of ways, wouldn’t we see more utilization on DPI in Aave?

Also, with single-digit million $ pools for MVI, BED, and ETH2x-FLI wouldn’t only smaller holders be able to utilize strategies like this? And aren’t they the users that would be least likely to utilize strategies like this?

I am not an expert in the money markets, so please correct me if I am mistaken anywhere - as is, I don’t feel a strong need to spend the ~$100k here, but open to the discussion and being convinced otherwise.

6 Likes
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HI @jdcook,

There are load of great questions in your post. I will do my best to respond to them.

Index Coop to date has listed products on Rari Capital, Aave V2 and Cream Finance. Cream and Aave at various time have seen a lot of capital deposited into those pools. On Cream, Rari Capital and Aave, DPI can be used as collateral. So although we do not don’t see great demand for shorting (borrowing) DPI, we do see DPI being used as collateral to borrow stables. This is especially true on Aave V2.

Initially, DPI, MVI, BED & ETH2x-FLI are not listed on Beta Finance as collateral. Similar to when DPI lists on Compound, it will not be as collateral. Enabling our products to be used as collateral will come later. By listing now, we position ourselves to enable our products to be listed as collateral later. Collateral is not all about leveraged trading, debt can also be used to make assets productive. ie: Borrow cheap, farm high and generate a profit creating an APR on the collateral holding. Yield arbitrage.

As Index Coop’s products mature, liquidity >> oracle >> lending >>productive use cases >> asset managers >> incredibly sticky holdings. To create run ways like this, lending protocols offer a very valuable building block. Lending protocols are a building block in the composability of developing asset management strategies. For instance we could borrow DPI from Aave V2 or Cream and deposit in Beta Finance to earn ~10% yield just by arbitraging the lending rates.

Beta Finance intends to expand their protocol into other ecosystems, this gives Index Coop a relationship and platform to list our assets in other markets once we have sufficient liquidity. Rari Capital will likely offer this functionality as well, the concept of using liquidity pools on two networks, allowing near instant transactions, via balancing a ledger on both sides becomes possible with integrations that have liquidity both sides of the various bridges.

Reading through Rari Capital’s discord, there is talk of incentives being applied. When Aave started offering incentives and TVL grew rapidly. Aave is now the largest lending platform in DeFi, surpassing competitor Compound and with the highest TVL ranking. Incentives make a difference is the key takeaway. Hopefully we see incentives on Aave V2 in the form of stkAAVE soon. If Aave, Beta Finance and Rari Capital all offer incentives it will be interesting to see where AUM accumulates.

Beta Finance is bootstrapping liquidity into their protocol and their incentive rates are the best in DeFi atm, especially for our products. I would like to see what incentives do to Index Coop products on lending platforms. Do we see yield arbitrage strategies play out. Do we see productive use cases stimulate units of circulating supply for our products. We don’t have any data on this to understand if incentives will drive us closer to our north start. Will asset managers create vaults and then add incentives for users to deposit our products. Most non Yearn asset managers offer incentives enticing users to deposit capital.

To date, we don’t see much borrowing of our products and we don’t see a lot of lending on Rari Capital or Cream. Whilst there are no ROI influencing the decision of where to lend, it makes sense to use the most established and battle test protocol, Aave V2. This is why I think we see DPI lending TVL accumulate on Aave. Possibly this and that DPI is listed as collateral and Aave offers incentives on borrowing stables.

There are some unique features to Beta Finance which are pretty cool, like super easy to use shorting which then allows 2x ETH short positions. That is an interesting trading tool to experiment with. We can now short the metaverse space. This could allow us to hedge our treasury holding if we wanted to.

The pool size targets are just that, targets and we can pivot on these whilst reacting to market conditions.

TL;DR

  • Beta Finance plans on expanding across multiple ecosystems. With an established relationship, it will be easier to list our assets on future Beta Finance lending markets
  • Initial listing are not as collateral, this will come in time which unlocks borrowing stables
  • We do see a lot of stable coin borrowing against DPI as collateral on Aave V2
  • MVI is not listed on any lending platform
  • BED, DPI, ETH2x-FLI & MVI are unproductive assets and incentives on Beta Finance changes this
  • Lending platforms are building blocks for asset managers, more listing the better.
  • Asset Managers typically have very sticky AUM
  • Projects like Alchemix use asset managers as the backbone of their protocol
  • Index Coop has not experimented with incentives on lending platforms before
  • We provide productive use cases for our products
4 Likes
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Where are we seeing this? The ~$61m on Aave is 95.86% from one whale. So without that whale, we would only have ~$2.5m deposited in Aave - I don’t think we are seeing this from our users right now. Like, even without knowing the exact collateral/stable borrowing numbers - the fact that less than 2% of the DPI AUM (taking out the one whale from both sides of the equation) is even deposited on Aave tells me this isn’t something DPI users care about right now. At least not enough to be spending money on incentives. I am thrilled we have what we have on Aave.

I just want to be wary of claiming things like this that aren’t actually happening? And this is core - if our products don’t have borrow demand without incentives when there is a completely open opportunity (talking about AAVE) then I think we should be focused on things other than incentives.

I understand that these are things it enables - my question is more around if our users actually care about this right now? I think we need to stop thinking as much about what users could or can do, but what they are doing or what do they want to do. And again, they can do this with DPI right now - and they aren’t.

I think the key experiment taking place here is already happening on Aave. I think the most likely outcome of a Beta Finance experiment is that we learn that incentives drive deposits until they run out and then the AUM leaves. We know that our users will take passive yield if the chance arises. And I don’t think the more sophisticated strategies you mentioned are constrained by incentives - probably more largely by the sophistication of our users, the size of our products, and the fact that there are much more liquid assets to implement these strategies with. Index products are passive by design. Also, it feels unlikely that single-digit million $ pools will provide enough liquidity/opportunity for anyone to design strategies like this?

2 Likes
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It should also be noted that the MVI v3 Liquidity Incentives cost should be baked into this as well - the only reason that is being pushed right now is to facilitate the Beta experiment.

2,400 INDEX @ $30 = $72,000

OA proposed this a few weeks ago (just 700 INDEX) and you were against it, Matt.

But now, you want to do it at 3x the original cost.

So the real cost to pulling off this experiment is ~$175k. We would have to sustain ~26m in new unit supply for over a year to make that cost back in revenue.

Thoughts? @Matthew_Graham @overanalyser @Pepperoni_Joe @Mringz @anthonyb.eth @sidhemraj @jackiepoo

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Hi @jdcook,

The original proposal for consolidating liquidity on V3 was for 700 INDEX.
The new proposal for consolidating liquidity on V3 is for 2,400 INDEX.
This proposal includes incentives to the value of $105,770. Paid in INDEX at $35 is 3,022 INDEX.

At the time of the original proposal to move MVI liquidity from V2 to V3, the data indicated LPs would migrate to V3 by themselves. When the staking contract ran dry the month earlier, we seen an increase in the V3 LP positions. This then faded and we started seeing MVI move to other ecosystems. Most likely in search of yield or being used productively.

With the Beta Finance opportunity the is a more immediate need to ensure there is adequate Uniswap V3 liquidity. This is needed for all lending protocols not using a Chainlink oracle price feed. A Rari Capital, Cream and Beta Finance all have the same oracle price feed needs.

If there are productive use cases for MVI holders beyond just being a liquidity provider then the incentive for being a liquidity provide must take this into consideration. What we have with this proposal is a second productive way of deploying MVI. Because of this I think we should see units of circulating supply increase. LPs receives INDEX + Swap Fee income, with BETA incentives available, then we should see greater trading volume that boosts the return for LPs.

There is also a subtle change in how we approach Liquidity Mining, we are trying something more burst like in nature. Higher APR, shorter duration. If this has good success, it may lead us to think about how we launch products. Rather than long draw out campaigns, we may find a lot of success in short, sharp campaigns. Then in time, we may have a net cost saving from refining our approach to liquidity mining. But we don’t know if the market will react this way, better to experiment with MVI than say a new product launch.

There is also around 15% of LP still in the Uniswap V2 DPI-ETH staking contract and I think after the original incentives to move liquidity from V2 to V3 were implemented 25% of LPs remained in the staking contract. MVI liquidity on V2 is a lot less than DPI’s was and we need a higher portion of LPs to migrate across to V3. I believe a higher incentive is needed for this. The main objective to to attain a reliable oracle price feed which them enables us to build out MVI integrations, expand the products surface area in the market with the goal of becoming as dominant as DPI. With a reliable oracle feed, we can seek listing integrations with Cream and Rari Capital. These objectives were not mentioned as part of the original objective.

FWIW - You are right this proposal did lead me thinking we a higher APR to be more effective at migrating LPs from V2 to V3. There are other considerations, as mentioned, but ultimately the need for a solid price feed is more urgent with this proposal.

IMHO - I suspect the net affect is for MVI holders to LP, achieve solid APRs and then remain sticky like we have seen on the V2 contracts. I also think the BETA rewards will help stimulate new circulating supply.

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I’ve just got off a call with Allen at Beta Finance. Unfortunately we won’t be able to simply send the INDEX to them, since they have no capability to distribute those INDEX rewards alongside their own. Distributing INDEX to Beta Finance users would be an engineering lift on our side, probably a decent one too since we’d have to do all the tracking of rewards. I can get more precise around level of effort but my hunch is it would be more involved than our previous staking contracts.

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Hi @edwardk,

Thanks for sharing the details here. I shall amend the forum post with some language to reflect what was discussed yesterday. I think we can then move the IIP forward to Snapshot and if passed, proceed to schedule in the work.

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Hi @mel.eth, @sixtykeys,

The proposal has been reworked to highlight the engineering lift that needs to be performed in order to follow through with this initiative.

Can we schedule a snapshot vote for Monday 25th October 2021.

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Hi @Matthew_Graham -

Pending no further edits this proposal will be scheduled for a snapshot vote commencing on Monday, 25 October 2021.

cc: @sixtykeys

1 Like