Request for Discussion FLI-Fee Split

[snasps]

Big thanks for @BigSky7 and @verto0912 for opening this up for discussion. Here is a quick answer on the points raised:

@BigSky7

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).

Gas costs were indeed discussed & taken into consideration during the fee split discussions that happened with Set Protocol’s product team prior to the product’s launch. Ethereum transactions were even more expensive when initial discussions took place. Still, everyone agreed that FLI products will thrive and gain much more traction when deployed on L2’s , since they are heavily traded, minted and redeemed. Considering that Set is already close to deploying on different L2s (2-3 months latest estimate for FLIs), we think that gas costs are only a circumstantial issue. At the same time, we think that the costs are irrelevant when compared to the massive adoption of FLI products , and their impact in increasing the value of the network we bootstrapped together. It seems non-optimal to make long term decisions on fee splits based on conditions that are circumstantial.

@BigSky7

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.

I am not sure this is accurate. As Dylan mentioned in Monday’s meeting when replying to Matthew Graham, the engineering lift for new FLI products, as well as the maintenance of current FLIs, is minimal. On several occasions, the Set team has mentioned to us & in public that they are ready (from a technical standpoint) to spin up as many FLI products as possible when this discussion about fees is over.
It is also important to note that, due to economies of scale, the engineering cost decreases with each new FLI product, whereas the ROI increases… Finally, all of the long term infrastructure investments (like the trade splitter) can be used in other products as well, further decreasing costs. Please take under consideration that Set asked to include DPI on this new infrastructure to improve their own (and ultimately the Coop’s) operating efficiency. It’s already a win-win to everyone.

@BigSky7

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.

First of all I’d like to point out that the creation of this group was a great decision by the Coop.

Any new product being launched by the Coop requires an upfront investment to educate target users & ensure smooth operations. We believe that this is baked into any new product being launched, and we are thankful to the leverage indices POD for supporting this new line of products.

Please consider that FLI products are a unique design from DeFi Pulse which represent around 60% of the Coop’s revenues with no liquidity incentives, and little marketing efforts from the Coop when compared to other products.
The 40/60 split agreement was agreed upon by following the guidelines set by the methodologist fee menu post by @verto0912 . According to these guidelines, the Coop was supposed to provide liquidity mining for the FLI products, but this never happened due to their success. We are happy that this is a net saving for the Coop which can be used to bootstrap other products. Factoring in that info, FLIs definitely classify as the Coop’s most sustainable & profitable products.

@BigSky7

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.

Direct marketing is only the tip of the iceberg from a go to market and cost structure point of view. We believe that the FLI products are leveraging the value of the DeFi Pulse brand, which is one the most recognized brands in DeFi and has been built throughout more than four years.

It’s also important to consider that, the joint work of the Coop & reputable methodologists, has shown time and again to be a large driver of success for products, and this is a large differentiator for the Coop from competitors.

@BigSky7

What specifically is the value add of external methodologists for exchange-traded products outside of the formula used in initial product specifications?

What’s the key differentiator between all indices providers in the DeFi space? External Methodologists and a flourishing DAO have proved to be a great match that is generating excellent results and benefiting all the stakeholders. Why change it now? Why consider changing a winning recipe that’s beating everybody else in the market?

@BigSky7

What is the cost of creating this formula and does that match the costs incurred by Index Coop?

I have a few points to address here :

• The value a partner is bringing to the table is never measured by their cost. This seems like the wrong way to approach this discussion. I think the right question to ask is what is the value of the innovation in FLIs, and the answer to that is clear through their un-incentivised TVL & revenue streams growth. On a different note, why are we debating costs, whereas the upside is virtually unlimited if we keep on succeeding like we currently are? The DeFi space is still a niche space with, barely, hundreds of thousands users. We should be focusing on growing the space by onboarding millions of new users instead.
• Now on the cost, (cost =/ value) the innovation is a result of all the contributions that Defi Pulse has made in the space during more than 4 years. Defi Pulse is a 20+ person company that is working & is trusted by hundreds of partners. The company’s trajectory plus the contribution of every one of its employees’ since inception has ultimately led to the creation of this product in some way.
• Never take the simplicity of a product for granted, as some of the most innovative products and services in the world are the simplest ones! Think of the Iphone abstracting away all the clutter from smart-phones. Products like this did not exist before in their innovative form and took Apple years of experience to be able to nail right.

@BigSky7

Given the costs highlighted above - what does DFP see as an equitable long-term fee split?

The current fee split was a revision of the initial 50/50 split that was discussed during preliminary negotiations with Set, on the premise that the Coop would provide liquidity mining incentives to bootstrap the FLI products, which never happened. As I mentioned above, this was modeled according to the guidelines discussed in the methodologist fee menu proposed by the community at the time.

The current fee split gives the majority of the fees back to the Coop, whereas, as the creator of the Index (which is unique), we only keep 40%. As discussed with a few members of the Coop.We will keep launching new FLI products with the Coop only if we stick to the fee split agreed.

@BigSky7

How can we improve direct and public communications between outside methodologists and our community?

A few months ago, we circulated the idea of creating a methodologists committee. All methodologists would meet together with the Coop’s representatives to discuss common concerns, set working standards, and build on top of each other. This seems like an excellent way to set a formal channel for discussions between the Coop & the methodologists to happen. It could also help drive a more collaborative relationship between the different methodologists to create even more value for the Coop.

Big thanks again for everyone at the Coop for their support, especially @BigSky7 for driving this discussion, and looking forward for everyone’s ideas & comments.