This forum post is meant to begin a community discussion around the fee split for the FLI suite of products.
This is a community-wide issue that needs further discussion to reach an equitable solution for all parties. We encourage every community member to provide comments and further context.
For starters, we want to highlight the tremendous support our community has received from DeFi Pulse up to this point. They are one of our most trusted and valued partners. We are lucky to have them as both community members and methodologists. Index Coop would not be where we are today without them.
As a community, we strive to prevent an “us vs. them” mentality with these discussions. We are all true believers in the long-term vision of Index Coop. No single person or entity is solely responsible for the success of Index Coop - everyone and every organization has a valuable role to play. We must ensure that we work through these problems collaboratively and not adversarially.
The purpose of this post is to lay out the current methodologist fee split in relation to the FLI suite of products and set the groundwork for further discussion around the distribution of streaming fees for these products.
Currently, FLI streaming fees are split 60/40 between Index Coop and DeFi Pulse. These products have been tremendously successful for both organizations and generate strong revenue. Due to the technical complexity of these products, maintenance costs are higher than for other products, in terms of both rebalancing as well as product maintenance by the Leverage Indices pod. They also require a significant engineering lift from our partners at Set Labs. While launching new FLI products is relatively straightforward at this point, Set had to invest in significant infrastructure updates to improve the security of the FLI suite and will likely continue to do so as these products grow.
At the time of this post, both the gas costs for rebalancing and the engineering work are handled by Set. With the completion of the recent treasury diversification alongside our rapidly expanding engineering capabilities, IC anticipates transitioning to handling both rebalancing expenses and engineering over the coming months.
DeFi Pulse is a valued partner for Index Coop. We want a long-term relationship and envision a thriving partnership that will continue for decades to come. Both organizations thrive through collaboration and mutual trust. Index Coop is committed to fair and equitable partnerships with methodologists based on mutual value creation.
Designing and launching methodologies with Index Coop should present an attractive value proposition for our partners. We want to see that continue and evolve.
We believe that the current FLI fee structure is misaligned for the Index Coop given that the Index Coop & Set are contributing more than 60% of the work. This includes:
- Gas costs for rebalancing are high, especially during periods of significant market volatility. Over the past four months, the ETH2x-FLI product has incurred a cumulative total of $158k on rebalancing costs. The total revenue generated during that time period is $401k, leaving total profits for the Coop at $83k after factoring in the $160k paid to DFP for their share of revenue. The two graphs below illustrate these expenses. (Further FLI information can be found here).
We are working with AWG and the Leverage Indices pod to get data on the BTC2x-FLI for additional context.
The current fee structure does not account for the gas cost of rebalancing as fee split is done on the revenue, not profit basis. At the time of the launch of ETH2x-FLI and BTC2x-FLI we had limited data for the magnitude of these costs. Now that we have the data, it should be taken into consideration.
Costs also extend beyond simple gas costs. The FLI suite requires significant engineering work from the Set team (soon to be IC team). An example of this would be the AMM trade splitter for faster rebalancing, which improves the safety of the FLI products. This work is a consistent drag on valuable engineering resources and contributes to a slower product release pipeline. This is not to say that the FLI suite has not been incredibly valuable - however, these considerations highlight that the costs incurred extend beyond simple gas costs.
Leverage Indices pod + Set team is doing the majority of work around the actual monitoring and maintenance of the FLI products. We are lucky to have a cross-functional team of community and Set experts that can take this on. In June, contributor rewards for the Leverage Indices pod were $20k and @overanalyser has budgeted $35k per month for Q3. Further, scaling the FLI pod to support more FLI-type products is not easy. The current processes are manual so the only way to scale fast is to onboard more people, and/or to invest heavily in automation over the next few months. Which will lead to a higher budget and more technology to maintain. More thoughts on this from @afromac here.
DFP contribution beyond the initial formula for FLI-style products is understood to be limited. As far as the Coop is aware, DFP doesn’t provide any meaningful assistance on engineering, marketing, or sales efforts and doesn’t bear any costs associated with the FLI products. If this is incorrect, we would love to hear it. As you’ll see below, we are very open to understanding the full-picture.
Here is a list of some examples of the work being done by the Coop:
- FLI Operations Updates - 2x-FLI Operational Response, Challenges, and Next Steps
- Discord Bot in #fli-parameter-status
- Twitter bot for FLI products (soon to be launched)
- FLI Educational materials: Everything You Need to Know About FLI Product Parameters, Understanding the Risks of Owning FLI Tokens, How Volatility Drift Affects FLI Products
- Product improvements i.e. IIP-47: Upgrade FLI to use Chainlink oracles, IIP-50: Upgrade FLI to Support Multiple Exchanges
- Volatility decay calculator, ETH2x-FLI modelling, dynamic risk model, FLI tokens dashboard web app, FLI profitability dashboard
- Parameter updates:
- Management of the Discord #fli-discussion channel, including addressing technical questions about the products
All these costs add up on the Coop side. The below analysis (thank you @allan.g ) highlights the impact of these costs on the long-term profitability of these products for the Coop.
We believe there’s near unlimited potential to launch more of these products in the future. However, the current fee split does not seem to fairly represent the level of support the Index Coop provides for FLI products. We believe there’s a need to further discuss the fee split for the FLI suite of products before moving forward with the exciting prospect of launching more of them together
We are excited to learn from DFP. The continued success of DeFi Pulse’s business is vital to the long-term success of the Coop. We suspect that there are ways you support FLI products that we may not be aware of as well as major business expenses incurred as methodologists.
To move this conversation forward, answers to the following questions would be tremendously useful for the Index Coop community.
What specifically is the value add of external methodologists for exchange-traded products outside of the formula used in initial product specifications?
What is the cost of creating this formula and does that match the costs incurred by Index Coop?
Given the costs highlighted above - what does DFP see as an equitable long-term fee split?
How can we improve direct and public communications between outside methodologists and our community?
We are excited to see this conversation move forward. Ultimately we believe that Index Coop and DeFi Pulse will be partners for years to come. We want to see the DFP business succeed and we want to ensure that both parties have long-term clarity and trust in the relationship. Hopefully, this post helps build a solid foundation for the relationship between Index Coop and DeFi Pulse and contributes to a shared understanding between us.