Request for Discussion: Activate Intrinsic Productivity (IP) for DPI as a Standalone Product

Summary

The purpose of this governance post is to address the community’s concerns with IIP-29, galvanize support for Intrinsic Productivity (IP) for DPI, and ensure quorum is reached when Decision Gate 2 (DG2) voting takes place.

@kiba outlined an actionable plan for the DeFi Pulse Index (DPI) to earn yield in IIP-29 Active DPI Intrinsic Productivity.

IIP-29 was advanced to Decision Gate 1 (DG1) and voting on Snapshot happened between May 3 and May 6. The community was overwhelmingly in support of the proposal with over 80% of voting INDEX voting FOR.

If implemented, IIP-29 would be the Coop’s first step towards implementing IP for DPI. It would immediately generate ~50 bps in passive yield for DPI holders from SUSHI and YFI, and create an iterative process for generating yield from the other assets in DPI. All yield generated from IP would be returned to DPI holders, making DPI more attractive to hold, and therefore fuel AUM and revenue growth for the Coop.

This governance post summarizes two possible approaches to implement IIP-29 for the community to comment and discuss (see Community Sentiment Polls below).

I put out a call for feedback to those who either voted AGAINST or who abstained from voting, and learned that many influential contributors and community members were AGAINST the proposal. I sought to understand and learn from their concerns.

There were 3 common arguments AGAINST the proposal:

  1. Extrinsic Productivity (EP) integrations: IP for DPI may risk DPI being added as collateral to DeFi lending protocols like Maker, Aave, CREAM, etc.

  2. Centralized Exchange (CEX) listings: IP for DPI may risk DPI being listed by CEXes like Coinbase or Binance, and even potentially risk delisting from KuCoin and BitMart.

  3. Product Prioritization: IP should be implemented for SMI or MVI before DPI.

Importantly, none of these arguments are against IP for DPI in principle, but about how best to implement IP in practice and when to do it.

One approach to break the impasse is to implement IP for DPI as a separate product (iDPI). The following is intended to summarize the arguments in favor of a one product approach vs a two product approach for activating IP. In other words, should IP be activated for DPI or should it be implemented as a separate product?

One Product Approach: Arguments to activate IP for existing DPI product

  • Liquidity: Prevents facturing of liquidity across separate products.

  • Lower Internal Costs: Lower development, maintenance, and marketing costs for Coop stakeholders (Set, Pulse Inc, and Community) than for two products. The two product approach would require the Coop to repeat Extrinsic Productivity (EP) proposals for the iDPI product; the one product solution does not require duplication of work.

  • Speed: Faster to activate IP for DPI than to launch a new product, iDPI.

  • Avoids Cannibalization: If iDPI largely cannibalizes the DPI product, then launching two products would be a waste of Coop resources.

Two Product Approach: Arguments for separate product with IP (i.e. iDPI)

  • EP Integrations and CEX listings: Does not further complicate or risk EP integrations or CEX listings for DPI.

  • Lower External Costs: Activating IP for DPI may impose costs in terms of smart contract development, risk analysis, security/legal analysis, on EP integrators (Maker, Aave, etc.) and CEXes (KuCoin, Bitmart, etc.). Having two products lets EP integrators continue using DPI and allows them to integrate iDPI as collateral and / or CEXes list it after iDPI has proved product-market fit.

  • Unlock New Market: Potentially serves two different customer bases and increases revenue for the Coop.

Community Sentiment Polls

  1. Do you want the Coop to move forward with IP for DPI via a one product or two product approach?
  • One Product: Introduce IP features to the existing DPI product
  • Two Products: Launch a second product so we have DPI and iDPI

0 voters

  1. If the Index Coop decides to run two products (DPI and iDPI) in parallel, we can choose one of the following options to implement:

    a) Launch a new iDPI product and facilitate migration (deposit DPI in contract, then x Days later receive iDPI once product is launched)

    b) Migrate all current DPI to iDPI unless holders actively opt out.

If the Index Coop decides to run two products in parallel, would you prefer?

  • Option A: Existing contracts / tokens etc should remain DPI and iDPI use new contracts etc with migration.
  • Option B: Existing contracts / tokens should be converted to iDPI unless holders opt-out.

0 voters

Edit for Clarification Purposes: The “vault model” described in the comments below would be a subset of the two product approach (options 1a and 2a.). The vault model is intentionally not included in the voted as it needs to be vetted among other technical implementation options from an engineering perspective.

Request for Comment:

  • Maker Risk and MOMC - @monet-supply: In your view, does the one product solution risk or push the prioritization of DPI being added as collateral by Maker (it’s currently #8 in Maker’s Collateral Framework)?

  • Index Coop, Business Development - @reganbozman: Do you agree activating IP for DPI (1 product solution) would further risk or jeopardize exchange listings? Do you view this as a legitimate reason to pursue the two product approach?

  • Pulse Inc - @scott_lew_is / @Jo_K : Does Pulse Inc have the resources to support the two product approach at the present time? Can Pulse Inc support maintaining both DPI and iDPI or would that require too much operational overhead?

  • Set Labs - @richard: You had suggested pursuing IP for SMI as a path forward to activate IP. Punia said in the Product Working Group meeting on May 17th that the possibility of implementing IP for SMI should not be considered as part of the analysis for IIP-29. Other than prioritization considerations, does Set Engineering have reasons to favor the one product or two product approach from a technical standpoint?

  • @oneski22 : Does the two product approach above mirror what you outlined in the IIP-29 governance post?

  • Additional Commenters: @trx314 , @DarkForestCapital , @verto0912

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Long-form comment coming soon, cc’ing: @fallow8 & @Metfanmike who have been working on the legal end as there are considerations there.

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My two product approach was not to build an entirely separate set, but was a “vault model” based on Yearn. DPI can be deposited into the iDPI vault. Any number of strategies can be used to put the underlying tokens to work, and the yield is converted into more DPI units. The INDEX token would govern the strategies used and can balance the tradeoffs between meta-governance and return.

If we do split, I would strongly advocate leaving the existing DPI alone and creating a new one that is opt-in. Customers purchased a specific product and vision and to force them to upgrade is poor UX.

As for the BD/Legal side of things. We have received advice from a leading US firm, Reed Smith LLP (@Metfanmike can correct me but they are working on a memo for us on the legality of DPI without IP), and clients of mine have received advice from another leading firm Latham & Watkins. They both had strong reservations against adding IP to DPI. Given these firms are very closely connected to major exchanges and work with some of the top crypto projects & VCs and advise many custodians, market makers, and other players I take their opinions seriously. @Metfanmike can give more insight into our efforts at Coinbase and some of their specific requirements but there was some damning evidence in the Discord showing how this could endanger many of the partnerships and initiatives the Investor Relations team has been working on for several months.

This is not hypothetical, there are several US-based firms and individuals that own DPI that will be forced to liquidate their holdings should this pass.

To those who say "DeFi is extra-governmental and we shouldn’t let laws or other regulations dictate our strategy, NGMI playing into the old system, we make the rules" :

I am against adding IP as I think it is an unnecessary addition that will endanger DPI’s ability to be accessible to everyday investors, violating the core mission that we read at the start of every weekly standup.

We’re on a mission to make crypto investing simple, accessible, and safe for everyone.

Telling 45M Coinbase users “NGMI”, isn’t making crypto investing accessible to everyone.
Telling institutions and other holders who bet on our vision and product, but want/need to stay compliant “NGMI” isn’t making crypto investing accessible or safe.
Telling responsible investors who want an easy entry point to DeFi who follow good practices DYOR, research, and understand risks/rewards of complex yield strategies “NGMI” isn’t making crypto simple or accessible.

There is no simpler, easier, safer, and more accessible passive DeFi strategy than just holding tokens.

To cut off new users, force early holders to make uncomfortable legal decisions, and add additional smart contract and economic risks for 40-50 bps is a violation of our mission and sends the message that we are building products for the DeFi native and not the everyday person.

With IP today the following does not happen: Goldman Sachs doesn’t make a $200M buy (@BigSky7 mentions this a lot). Jessica in Tucson AZ doesn’t buy it because they don’t see it on Coinbase. Aiko doesn’t buy it because they can find it on bitFlyer. Joshua dipping their toes into Crypto/DeFi doesn’t buy it because they can’t understand how it works.

I hope the Index Coop stays true to its mission and principles and considers the people not in the forums, not in the discord, and not currently using our products, as they are the target market.

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@oneski22 and I had a conversation discussing his comment. Here’s my quick summary (@oneski22 please correct me if anything is not correct!):

  • Adamantly AGAINST One Product Approach.

  • No Issue with the Two Product Approach: However, there may be better ways to implement it. For instance, a partnership with Yearn may be the right approach.

  • Community Call: There should be a Community Call to discuss IP for DPI before another governance vote takes place.

  • New IIP: After obtaining community consensus, the proposal should be rewritten and a new DG1 vote should take place.

  • Low Priority: Implementing IP for DPI does not move the needle for the Index Coop.

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new IIP if 2 product approach is taken. The original IIP was for adding IP to DPI, if we are taking another path let’s fully commit and design the best solution for that path.

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@TenaciousTerrier, this post is very nicely laid out, and I appreciate the ongoing effort to get feedback and to look to specific community members who have expertise in a particular aspect of this proposal for their perspective.

Ultimately, I wholeheartedly agree with @oneski22. If we implement IP as a default for DPI and meaningfully risk listing DPI on major centralized exchanges and/or lending protocols, we take DPI out of contention from serving the mainstream market (which is ultimately the real AUM prize) and deprive the product of all the benefits that lending protocol listings would bring (i.e., the increased AUM from users levering up on DPI, the ability for us to create a DPI2x-FLI, the ability for users to earn passive yield). That would be a tragic, self-inflicted wound. The fact it’s for merely 50 bps makes it even clearer that we should not alter our flagship product, at least not until we have much more clarity from centralized exchanges, lending protocols, and crypto legal experts that IP poses no issues.

That all said, I’m also sympathetic to the points you’ve outlined on why splitting the baby as an alternative is also an undesirable outcome and don’t believe that’s worth the 50bps either.

As a reminder to the community, this conversation has been ongoing for months but really flared up when a competing product was launched mimicking DPI and providing IP. This product also came with aggressive incentives. We watched as AUM drained from DPI over to this IP-infused DPI copycat. How much of the AUM drain was due to the allure of IP vs. the (fleeting) incentives? We didn’t know for sure what was driving it.

But I think we may now have a clearer picture:

The product we’re contemplating is actually in the market right now…and bleeding AUM. If this is a must-have for a DeFi ETP, why would this be? What better market validation could we ask for? And why is our product (putting aside last weekend’s bloodbath) continuing to increase its AUM over time in the face of this alternative? I would argue it’s because DPI is seen as the trusted, simple solution in the space, with a great brand, strong community, and a professional methodologist. And as we secure exchange listings and lending protocol listings, this lead will only grow.

On the proposed questions for community feedback, a couple of suggestions:

  1. Include @oneski22’s proposal for the vault structure as a third option. This option avoids splitting the baby and threatening CEX and EP listings. (Honestly, I’m really struggling to see why this option isn’t getting more love and is excluded from consideration. I would love to hear if there is a good reason).
  2. A DG-1 vote in favor of a proposal can mean full support of a product - or that simply more work and analysis is worth doing. Your first question assumes that, given that subsequent research and community feedback, the community is still 80% in support of fully implementing IP (not just proceeding with research), and that’s worth validating. I would recommend asking upfront: “Should the Index Cooperative move forward today with IP?” Then the next prompt becomes “If the Index Cooperative voted to move forward today with IP, which of the following three approaches is your preferred approach?”

Always happy to discuss further and again, you’ve done a great job driving this conversation.

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@Metfanmike This is really great input - I would love to have a 1-on-1 and deeper conversation discussing what you’ve outlined in your detailed comment.

My Discord Handle is Thomas Hepner | Token Terrier#6506 - do you mind reaching out? (Could not find you on Discord).

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@TenaciousTerrier, reading @oneski22’s comment, I think there is a confusion with what would be considered as “one product” or “two products” approach, and maybe it should be clarified in the description before submitting the vote. This is how I understand it:

one product approach

intrinsic solution: the yields are added to the underlying tokens positions (as described in the last version of IIP 29)

external solution: implies the use of a staking contract where DPI can be deposited, giving rights to claim the yields to the stakers. Whatever the token associated to this contract is named (stkDPI, iDPI, …) it is not a second product in my opinion, just a new token linked to the staking option.

two products approach

Here, there is separate TokenSet smart contract to manage a second product (which gets intrinsic yields), while DPI stays as it is. I believe this is the iDPI you described in your text.

Is it correct?

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the external solution you described is a subset of the “two products” approach as the staking contract will be a “second product”… one product describes IIP-29, purely adding yield to the existing DPI product.

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I think it is confusing to consider a staking smart contract as a “product” in the context of the Index coop. I see it more as an option offered to complement the DPI product.
Anyway, I think it should be clarified in the text.

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@trx314 I agree with what @oneski22 said here:

The goal of this post is to gauge community sentiment around implementing IP in the existing DPI product vs. implementing IP as a second product/feature available to DPI holders. Community sentiment poll #2 addresses whether launching a second product (iDPI) would be opt-in (2a) or opt-out (2b) for DPI holders. I believe that @oneski22 is strongly against the opt-out option (2b).

I am not suggesting how the second product would be implemented in this post. I think there are several ways to do this like the Yearn Vault described by @oneski22, as a separate TokenSet, or some other idea I have not thought about. It would be good to hear from @richard and @puniaviision on possible options and trade-offs for the two product approach.

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Thank you and will do!

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I still think that the vote should show clearly an option for DPI + staking rather than “2 products”

Regarding the risks of being considered as a security if IP is added, would it be possible to request a formal legal opinion?

I am still not convinced that adding IP in a “neutral” way (by using the “default” yield option that each project proposes, without an active strategy) would increase significantly the risk of DPI being seen as a security. This risk is not null anyway, with or without IP.

If really the risk is as high as described in @oneski22 comment, then implementing a staking contract would probably be the most balanced solution. A second product, on the other hand, would be a bad idea, actually deserving DPI and not solving the initial problem (how to ensure that DPI holders can capture the whole value of the underlying assets).

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I join @oneski22 in being adamantly against the One Product Approach. It puts our US-based centralized exchange listing at risk. Intrinsic Productivity within the DPI token itself unequivocally pushes it towards the line of being both a security and a derivative under US law. That’s a reading that has been confirmed by several attorneys at large firms.

We won’t get that clarity under the current regulatory regime. The most anyone can say without an SEC enforcement action is “it gets us closer to the line.” That said, two things could happen that would make me revise my stance:

  • Major US exchanges say they think DPI is too much like a security regardless of IP. This would make the point moot. It’s unlikely based on preliminary conversations with counsel and exchanges and the number of DPI components listed on US-based CEXs.

  • The SEC releases guidance or clarity that changes the equation This would be slow and depends on what’s put out there. The closest thing we’ve got is this proposal. And that doesn’t speak directly to the DPI/IP question.

Until then, I think this would be a step back for the Coop.

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@oneski @Metfanmike Thanks for your comments and feedbacks over the course of IIP-29

  1. IIP-29 is intended as an initial stepping stone. Yes 50 bps is small but we are only using ~10% of the assets in DPI and some of the bigger tokens like AAVE and SNX have higher APYs available. Once IIP-29 is passed we can do more auditing and research into the best strategies for those assets and increase far above 50 bps.
  2. At a smart contract level i don’t think staking strategy is any different from 1-product solution legally since farming would still be done with assets in collective DPI vault. The two layer system turns vanilla DPI into a productive asset with a theoretical promise of yield through staking anyway right? Where as two product approach is two distinct pools of assets that are managed individually with no intrinsic link between IP and nonIP tokens.
  3. All the lawyers have to say is a strongly worded “I dont know”. It’s entirely fear-based instead of on facts. It also comes from a stance that centralized platforms will be the only option available to retail and institutional money which is the opposite, self-hosted wallets are increasing from new comers and they are interacting directly with protocols. You also say institutions wont put money into it but look at all the theoretically illegal farms/securities that major trading firms participated in during DeFi summer with no repercussions.
  4. Using the yield farming strategies selected, I don’t believe IIP-29 will delay extrinsic productivity at all. xSUSHI is already listed on AAVE, xSUSHI is ahead of DPI for MakerDAO collateral, MakerDAO has yearn vaults (including yvYFI) whitelisted for oracle access because they rely on their vaults for DAI generation so much, yearn vaults have been used as collateral on money markets before e.g. yCRV, etc. This was part of my consideration for selecting only these 2 strategies for IIP-29 and will be part of the methodology for selecting future strategies as well
  5. Optimizing for US regulation is shooting where the puck is, not where it’s going. Ethereum is already on track to settle over $10T dollars in 2021. If you look bigger/longer term we are sacrificing a better product to a global audience for an inferior product that targets a somewhat dying/lagging audience. The unclarity in US law could mean it eventually works in our favor if they say yield farming doesn’t make it securities and we’d have lost all that potential revenue for nothing. The opportunity cost is too high in my opinion but other people believe US > ETH as global dominance.
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To me, the following questions remain unanswered from those in favor of a non-@oneski22 approach:

  • Why isn’t @oneski22’s vault option - which seems to satisfy all the folks against the proposed IP options - while still allowing for IP - a perfect compromise?

  • Why is BDI failing if this is so attractive?

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@Kiba I appreciate you taking the charge of this issue.

  1. I think overall IP is incredibly useful and makes sense on many of our products, I just happen to think DPI is different given the way it has been pitched and marketed. SMI, SYI, and more which are targeted to crypto native folks make better candidates for the initial exploration of IP. I also would argue that the IndexCoop could and should partner with experts in the space such as Yearn for strategies if we are to do IP. Look at Badger for example, partnering with Yearn for the byvBTC vault.

  2. Not a lawyer or a smart contract engineer so would love to hear from the #dev team. When using a “Yearn style vault” which is what the staking contract idea was, the assets would be transferred to the staking vault prior to being farmed via the associated strategy, so there is a separation.

  3. The lawyers are not speaking from fear, they speak from analysis of the law, that is what they are paid to do. The reason we have not gotten more than a “We need to do more research but this is our thoughts” is that no lawyer will give a memo/opinion without paying them. Crypto lawyers are really expensive. Opinions can be upwards of $50k. The fact we have had DPI holders retain crypto lawyers and pay for advice at all, even if it wasn’t a formal opinion, should speak to the legitimate and serious concerns they hold. I do not disagree that self hosted wallets are going to be the future, but again 45M+ Coinbase users speaks to the current market we are actively trying to address. Major trading firms, like the major major ones (Goldman, JP Morgan, Morgan Stanley, etc) aren’t doing that form of degen trading yet. This also isn’t just US-focused for the law, we just happen to have US lawyers who are easily accessible. I think securities concerns are real in many jurisdictions. The Singapore opinion we currently have has a massive loophole “we assume none of the underlying are securities or derivatives” when there is a very valid argument that yvYFI and xSUSHI are derivatives. If the Coop wants to fund a multi-jurisdictional opinion which would be a very very large sum of money that is a possibility but I don’t think it is the best use of our resources.

  4. Can’t speak much on this, defer to others who worked on the AAVE/Maker proposals.

  5. This is bigger than US regulation. I agree with you that ETH will settle a lot and that it will be the global settlement layer. However, stepping back… for at least the next 12-18 months. Is the yield gained and the philosophical stand of having IP added to DPI worth all of the lost revenue from steaming fees that could be used to build the DAO? Is the yield gained and the philosophical stand worth missing out on the 45M+ users using centralized services? Do we ignore them and gate our products only to the DeFi native? I would argue no, as I feel like that is abandoning our mission of making things easy, safe and accessible. Should the global regulatory climate change we can change as well. Using the insights gained from SMI, SYI, and other products we won’t be far behind on knowledge and infrastructure. BUT for our flagship product that we are trying to get to everyone everywhere, I think adding IP would be a disservice to our real users.

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On the opt-in and opt-out point I want to add another thing to consider. Users were sold on a methodology that we are implementing. Assuming they are responsible investors and did their research, explicitly in the methodology it states:

The token must be a bearer instrument. None of the following will be included in the index:

  • Wrapped tokens.
  • Tokenized derivatives.
  • Synthetic assets.
  • Tokens that are tied to physical assets.
  • Tokens that represent claims on other tokens.

IP would be a departure from that, which is within the rights of the Coop as we implement the methodology, but would be a really bad look to a holder, who bought something expecting a certain methodology, that was all of a sudden changed without them opting into the changes.

Any departures from the methodology should be opt-in in my opinion.

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@Metfanmike I’m not sure I understand what you mean - what would you like me to clarify here?

image

On BDI’s Losing Market Share - I’m not sure the fact that it is losing market share to DPI means anything other than yield farming incentives can only go so far in attracting capital. From my perspective, DPI has legitimacy that BDI never will. Personally, I would not exchange my DPI for BDI even if it offered 100%+ yields. BDI’s anonymous developers, forking DPI methodology, and not using Set Protocol’s battle-tested infrastructure are all serious red flags. @oneski appeals to the value of maintaining trust as a reason to not implement IP via the one product approach:

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Not much to add on my part, I think this conversation has covered most of the concerns.

I’m personally against default IP implementation for DPI and we should probably focus on figuring out the way to implement it as an opt-in solution.

Although I don’t see much of a point in doing this for 50bps of yield. And I mean both solutions seem like too much work for 50bps. I think even if we used most of DPI’s assets, we’d get to maybe 2.5%-3% over the next 12 months which would be nice to have but certainly not mission critical.

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