Title: Request for Discussion: Methodologist Accelerator Program
Authors: @Thomas_Hepner
Created: 8/3/2021
“Show me the incentives and I will show you the outcome.” - Charlie Munger
The goal of this forum post is to receive community feedback and consensus around a proposed alternative model of incentivizing and compensating Methodologists that aligns the interests of all INDEX tokenholders and stakeholders.
Full Disclosure: I am a member of Titans of Data, the DAO that has proposed the Data Economy Index (DATA).
Summary
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Name: Methodologist Accelerator Program.
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Goal: Align the economic interests of INDEX tokenholders with Methodologists to drive long-term value creation.
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Principle: Methodologists are only rewarded for generating Unincentivized Revenue for the Community Treasury.
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Proposal: The Community Treasury invests in new products launched through Index Coop. Through the Methodologist Accelerator Program, new products launched by Methodologists unlock successive investment (i.e. INDEX rewards) from the Community Treasury for achieving Unincentivized Revenue milestones.
- Key Results:
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More New Products & Methodologists: The program incentivizes the creation and ongoing development of many new products by External Methodologists.
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Value Accrual to Community Treasury: The USD value of INDEX held by the Community Treasury increases by ~10x more than the cost of the Methodologist Accelerator Program so that the program can be sustained indefinitely for all future products and methodologists.
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What is the goal of the existing Index Methodology Bounty Program?
“Index Methodologists are data providers which publish research and data on compelling Index strategies.” - Index Coop Community Handwork
The goal of the Methodologist Program was stated to:
“…to attract and reward index methologists a share of emitted tokens based on the success of their indices.” - Introducing the Index Cooperative
In the first 8 months of the 18 month program, over 98% of the program’s rewards have gone to DeFi Pulse and only two additional External Methodologists have been onboarded thus far (Bankless launched the BED index on 7/22 and CoinShares CGI was deprecated).
Early in the Coop’s history, many community members expressed reservations here, here, and in many other venues before the start of the program. DeFi Pulse is the only External Methodologist that has earned rewards from the program.
It is now abundantly clear that the program has failed to achieve its publicly stated goal of attracting and rewarding Methodologists.
Let me be clear - the intention of this proposal is NOT to renege on the Coop’s commitment to Honor the Methodologist Program. In June, DeFi Pulse products accounted for ~98.5% of the Index Cooperative’s revenue. I am NOT proposing any change to the existing Methodologist Program that would adversely impact DeFi Pulse, the Index Coop’s most important Methodologist partner.
I am proposing a new, alternative program, the Methodologist Accelerator Program, that all Methodologists, including DeFi Pulse, may choose to opt-in to, for both existing and future products.
Important Reference Points:
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Existing Program: A Methodologist launching a simple index product with the standard 95 bps streaming fee at a 30% fee split would need ~$20m in TVL for the remainder of the program to earn as much in annual fees as the income of 2 Community Methodologists supporting a product at Index Coop’s current revenue levels.
For additional context, DeFi Pulse earned ~166,667 INDEX, or ~41,666 INDEX per month in the first 4 months of the program, when DPI was the Index Coop’s only launched product. DeFi Pulse introduced ETH2x-FLI in mid-March, and by June the product was generating ~55% of the Index Coop’s revenue compared to ~38% for DPI. Despite more than doubling the Coop’s revenue without using additional liquidity mining rewards, DeFi Pulse earned less INDEX tokens per month from the Methodologist program because MVI was ~1.6% of revenue from April through June. The program isn’t even properly rewarding DeFi Pulse for introducing new, profitable products to the Index Coop!
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After Program Expiration: A Methodologist launching a simple index product with the standard 95 bps streaming fee at a 30% fee split would need $163m in TVL to earn as much in annual revenue as the income of 2 Community Methodologists supporting a product. This is unreasonable, even DPI, the Index Coop’s flagship simple index product, currently has ~$138m in TVL.
We must improve the incentives for External Methodologists if we want them as first-class partners in the Index Cooperative.
What is the principle for the proposed Methodologist Accelerator Program?
Methodologists are only rewarded for generating Unincentivized Revenue.
This principle aligns the economic interests of INDEX tokenholders and other stakeholders with Methodologists to drive long-term value creation.
Desired Outcomes
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Reduce Expenses: Methodologists are incentivized to grow TVL and revenue of their index products using the minimum required resources from the Index Cooperative. Costly and unprofitable programs like liquidity mining incentives are discouraged and used strategically and sparingly at the Community’s discretion.
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Better and Faster Product Onboarding:
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Reduced Urgency: Methodologists feel less urgency to get their products out the door as quickly as possible at the expense of other Community priorities.
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Simpler Negotiations: Negotiations are more objective, reducing the time during the product onboarding process from DG1 to DG2.
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More Products: Many new Methodologists and new products can be onboarded at minimum financial cost to the Community Treasury.
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Experimentation with New Revenue Models: Methodologists will be incentivized to experiment with new revenue models to increase the unincentivized revenue of their products.
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Decentralized Governance: INDEX is distributed to a wider array of stakeholders and partners.
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Increased Value for INDEX tokenholders: Increased revenues and profits are returned directly to the Community Treasury.
Proposed Specifications
- Fee Split: Builds on the Methodologist Fee Menu, but excludes liquidity mining incentives as part of the criteria.
The minimum score available to a methodologist is 0.5 and a maximum score is 3. Each 0.25 increase in the score corresponds to a 5% change in the fee arrangement.
- Score 0.50 - fee split 70% Index Coop & 30% methodologist
- Score 1.00 - fee split 60% Index Coop & 40% methodologist
- Score 2.00 - fee split 50% Index Coop & 50% methodologist
- Score 3.00 - fee split 40% Index Coop & 60% methodologist
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Methodologist Accelerator Program Framework:
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Removed from Existing Methodologist Program: The product cannot be included in both the pre-existing program and the Accelerator Program. The product is opted-out of the existing Methodologist Program. The product’s revenue is not included in the Methodologist Program calculations for rewards so that existing partners (i.e. DeFi Pulse and Bankless) are not negatively impacted by the Accelerator Program.
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Products that have used or plan to use Liquidity Mining Incentives are ineligible for the Program. DPI and MVI are ineligible for the the program, but ETH2x-FLI, BTC2x-FLI, and BED would all be eligible for the program.
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Accessible to all Existing Partners: Existing External Methodologists (DeFi Pulse and Bankless) will be able to participate in the program with both current and future products .
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New INDEX Rewards Framework: A new INDEX rewards structure that awards INDEX tokens based on USD value relative to the Unincentivized Revenue created for the Index Community Treasury in the trailing twelve months.
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Notes:
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Rewards are based on USD value and awarded via equivalent market value of INDEX tokens when unincentivized revenue milestones are reached.
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Unincentivized Revenue is only the unincentivized revenue collected by the Community Treasury; fee revenue earned by the Methodologist is excluded.
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Each product can only participate in the Methodologist Accelerator Program one-time; it is not an ongoing program. It is intended to accelerate growth and development of new products launched by the Index Cooperative in collaboration with External Methodologist partners.
Frequently Asked Questions
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Why use unincentivized revenue (TTM)? Why not use TVL or just revenue?
The existing Methodologist Program incentives Methodologists to extract resources from the Index Cooperative. Calculating unincentivized revenue over the trailing twelve months locks in Methodologists as long-term partners and disincentives behaviors like providing short bursts of TVL to quickly earn INDEX tokens that are not representative of market success.
Under the existing program, the Index Coop pays INDEX for liquidity mining incentives that boost revenue of a particular Methodologist’s product, which increases their share of Methodologist Program rewards. Under this incentive structure, the Index Coop is effectively paying the Methodologist twice!
Unincentivized revenue disincentives Methodologists from requesting liquidity mining rewards to boost the TVL and revenue of their products.
It is a closer metric to Gross Profit (i.e. Revenue - Cost of Sales) generated for the Community Treasury than TVL or Revenue alone.
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Isn’t this program expensive? Won’t it deplete the INDEX from the Community Treasury?
The program is designed so that the USD value of the INDEX held by the Community Treasury increases by ~10x more than the cost of the Methodologist Accelerator Program. Rewards are calculated in USD and distributed in INDEX so that the program can be sustained indefinitely by the Community Treasury for all new products and methodologists.
Based on June revenues, Index Cooperative’s Community Treasury generates ~$2.3 million in annual revenues. The fully-diluted value of INDEX tokens is >$250 million, implying that INDEX tokens trades at ~120x total product revenue.
Assuming a 100x revenue multipler, a $100m TVL product generates $50 million worth of market capitalization to INDEX tokenholders at a cost of $5 million in Methodologist incentives, resulting in a net benefit of $45 million to INDEX tokenholders. Assuming a conservative 25x revenue multiplier still results in $7.5 million net benefit to INDEX tokenholders.
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Isn’t this program risky? Won’t it cost the Index Coop a lot of money if a new product fails?
This is actually the beauty of the proposal.
The Index Coop does not pay any INDEX tokens to a Methodologist unless their product reaches unincentivized revenue milestones that indicate there is strong product-market fit and a path to long-term profitability.
If a product fails to achieve $25k in unincentivized annual revenue for the Coop, then the program has cost INDEX tokenholders nothing more than the time and effort that went into onboarding and launching the product.
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Should there be a new product launch bonus for Methodologists?
Methodologists go through a lengthy onboarding and vetting process to launch their products. With this proposal, it would likely take at least 1 year to earn the first INDEX reward (~$250,000). A launch bonus could be analogous to a “seed round” from an Angel investor or Startup Accelerator, or to the salaries Community Methodologists receive, to create and develop the index product before achieving its first revenue milestone.
just an Owl wishing to understand more. Hehehe. Cheers~