Request for Discussion: The Coop & Methodologists

Executive Summary

The Coop and prospective Methodologists are both in need of a clearer understanding of the financial relationship that each can expect when launching a new product.

There has been a lot of confusion regarding Coop / methodologist agreements for 3 primary reasons:

  1. The history of the methodologist bounty program
  2. the community methodologist experiment
  3. there is no standard process or benchmarks for negotiating fee splits prior to product launch

One effect of the initial methodologist bounty program was that it created the notion that methodologists should be paid on an order of magnitude higher than what the Coop probably has ever intended. While the methodologist bounty program was an effort at bootstrapping a network, it was not ever intended to set a permanent benchmark for methodologist rewards.

Growth and improvement is one of our guiding principles. It is ok for the Coop to take what we have learned and set new standards.

The majority of methodologist remuneration should come from the fee split, and all negotiations between the Coop and methodologists center on the fee split.

This post proposes the following:

  • A new standard fee split of 75/25 (Coop/Methodologist) prior to negotiations
  • Methodologist bonus structure based on revenue at AUM targets.
  • The methodologist bounty program stays in effect throughout its duration, with no plans to put a new bounty program into effect
  • Negotiation on the fee split occurs prior to DG2 to allow for the Coop to stay flexible to meet the varying conditions of each product launch and methodologist capabilities

Some history

This section was meant to serve as a brief “catch-up” on the major things that have led us to the current state surrounding the Coop / Methodologist relationship.

When @setoshi’s brought the Coop forward in his post, Introducing the Index Coop, he wrote:

“To achieve this, we hope to see the Index Coop collaborate with the world’s best traditional finance experts, crypto experts and brands to launch/maintain desirable indices, govern critical system parameters with growth in mind, and embed the protocol into as many distribution channels as possible.”

From inception, it has been a core strategy for the Coop to build a network of brands, experts, and strategists. This remains one of the Coop’s strategies today.

In order to “bootstrap” this network from literally nothing, a Methodologist Bounty program was created. The description of which is also in the post:

“7.5% of all INDEX tokens have been allocated to an 18 month program (beginning at the end of the DPI liquidity mining period) to attract and reward index methologists a share of emitted tokens based on the success of their indices. Rewards are distributed pro-rata monthly based on the total fees contributed to the cooperative by the methodologists’ indices (counted every Ethereum block).”

Now, a lot of debate has happened over the past months surrounding this methodologist bounty program. The intent of this post is not to debate it further, but to explore why it was created and what impact that has had on the current perception of the Coop / Methodologist relationship.

Through launching DPI and two FLI products, DeFi Pulse has dominated basically the whole bounty program, and has earned roughly ~40k INDEX every month through the bounty program. Again, not to debate the positives and negatives of this specifically, but this is to call out the perception that has been created around what a methodologist should earn.c v

On the other end of the spectrum, we have run an experiment with two Community Methodologists, DFC and Verto. While developing the MVI methodology, they also wanted to continue contributing in other areas across the Coop as they already were. The idea was to hire them full-time as high-level Coop contributors as well as MVI methodologists and have the fee split and bounty rewards be returned to the Coop. Again, the point is not to debate the pros and cons of this specifically, but to understand why it was created and what impact that has had on the current perception of the Coop / Methodologist relationship.

There is a current on-going discussion now to re-negotiate fee splits on FLI products moving forward as the Coop has realized the lopsided nature of the cost burden (both dollars and operational) of running FLI products smoothly. Not arguing for or against that here, but calling out that it is being re-visited and is directly related to this conversation.

In the midst of all this, the methodologists behind DATA have also proposed the Methodologist Accelerator Program as an effort to provide significant upside to Methodologists outside of the confines of the original methodologist bounty program and community methodologist structure.

The current state of the Coop

Even with whatever mistakes/iterations we have made, the Coop finds itself now with more momentum than ever. Our product and engineering capabilities are continuously growing - even when the original vision was to be more of a marketing and distribution engine. Our community is vibrant and brilliant. The organizational structures continue to be improved allowing us to operate more efficiently.

We are in a position now that we were not in when the Methodologist Bounty was created. We have a history, a brand, and a community that partners can trust.

It is ok for the Coop to take what we have learned and set new standards.

The current problem(s)

  1. The “methodologist” role from inception has been broad - are they a data provider bringing a methodology to light and passing it to the Coop? Are they a brand that has unique audiences, or massive audiences? Are they an organization with specific distribution channels? Are they a combination of all these things? Fundamentally, the Coop needs flexibility to accommodate a wide range of methodologist capabilities.
  2. One effect of the initial methodologist bounty program was that it created the notion that methodologists should be paid on an order of magnitude higher than what the Coop probably has ever intended. While the proposers of the new Accelerator Program say it is independent of the old bounty program, I argue that it is not. It is an attempt to construct a new model that rewards methodologists on the same magnitude, but with fairer constructs. I think the constructs themselves are fair and well-thought out, but it is just not reasonable for the Coop to reward methodologists on that scale in perpetuity.

Essentially what we have so far at the Coop is a few experiments that haven’t really worked as intended, but have provided learnings that we can now build a more stable foundation for the relationships between the Coop and Methodologists.

Proposed Coop / Methodologist Relationship

The basic foundation is: the majority of methodologist remuneration comes from the fee split, and all negotiations between the Coop and methodologists center on the fee split.

Now, deciding on a “standard” fee split shouldn’t actually be that hard. It is hard to imagine a scenario where a methodologist is excited by anything less than a 10% revenue split. It is also hard to imagine why it would be in the Coop’s best interest to go further than a 50% revenue split (not saying it can’t be done, just not standard). So the common ground seems likely to be 15-40% split for a methodologist. I believe the base fee split rate should be 75%/25% (Coop/Methodologist), but really it is up to each negotiation to determine where that number actually falls. Maybe we don’t actually set an exact standard, but rather it is a range, like 10-50%, but the expectation is that the split will fall closer to the middle of that range.

This is the base consideration for the Methodologist as a Data Provider, and the Coop as the execution engine. However, we recognize that each Methodologist will bring unique attributes to the table - audience, eng resources, distribution channels, etc. It is on those merits that the fee split should be negotiated. Methologists with the capability to provide more resources and greater distribution post-launch should be considered for a higher fee split.

It is in the negotiation process that we realize the flexibility needed to account for all the factors that come from such a broad definition of “methodologist”, along with all the other factors derived from launching a product.

It should be recognized that in most cases the Coop will take the majority of the burden of growing AUM - so adding Methodologist Bonuses based on AUM doesn’t actually change the incentives at all, because the Coop and the Methodologist are already incentivized to grow AUM/revenue. However, I believe that strong ideas and commitment should be rewarded. The following Methodologist Bonus structure is proposed (roughly 10% of one year’s revenue at each AUM benchmark, essentially it is prepaid to the methodologist when the AUM benchmark is hit):

AUM Bonus
$10m $10k
$50m $50k
$100m $100k
$500m $500k
$1b $1m

The current methodologist bounty program stays in effect and any methodologist with a launched product(s) will receive INDEX through that program throughout its duration. However, the Coop is making no commitment now to create a new bounty program outside of the bounds of the fee split and bonus structure above.

An Example

I want to give an example of what this might look like in order to illustrate the effects outside of just a table of numbers. I am going to use numbers similar to what is being proposed around the DATA index, since that is the product where most of the discussion has happened recently.

A simple index product is launched and revenues are split 75% for the Coop and 25% for the methodologist. The product has a 50bps streaming fee, a 10bps mint fee, and a 20bps redeem fee. According to math done by the DATA team (which I trust) this should result in a 50% increase in revenue over a straight 100bps streaming fee.

Under these terms, the following AUMs are hit for the first 4 years of the product’s life (will average AUM across the year):

Year 1: $10m

Year 2: $50m

Year 3: $100m

Year 4: $200m

The rough revenue this would generate for the methodologist:

Year 1: $37.5k + $10k

Year 2: $187.5k + $50k

Year 3: $375k + $100k

Year 4: $750k

That is a total 4-year revenue of $1.51m for the methodologist.

The rough revenue this would generate for the Coop:

Year 1: $112.5k

Year 2: $562.5k

Year 3: $1.125m

Year 4: $2.25m

That is a total 4-year revenue of $4.05m for the Coop.

Now, this is all before you have the costs taken out, which the Coop has strong reason to suggest that the majority of costs and effort post-launch will land on the Coop. And again, if it is the case that the methodologist is expected to take on more of that burden, then a fee split can be negotiated more in their favor.

The main point here being that while we do have some methodologist bonuses in place for AUM targets, the majority of the financial relationship is determined by the negotiated fee split. By relying on negotiation prior to launch of each individual product, the Coop maintains flexibility in each case while maintaining attractiveness to potential partners.

Options in the future

By setting this as the standard now, we do not bind ourselves in the future. If at any point the Coop felt like we were struggling to attract high-quality partners as methodologists, we can either alter the bonus structure, or design another bounty program. But those should be proactive efforts to bootstrap new effects, not the common standard. What is proposed here is setting the new “normal”, or a foundation for Coop / Methodologist relationships.

Next Steps

It is my intention for this to be heavily debated on the forums over the next week. If we show positive momentum as a community, I think we can move this to an IIP, maybe with some modifications to set standards or structure around how we negotiate and who leads negotiation with methodologists.

14 Likes

@jdcook ive been searching for clarity on this issue and a way forwards for a little while and you’ve just opened a door for me. Thank you - this is an outstanding post and I’ve found myself nodding along with constant agreement (and satisfaction) as I read it.

I’m strongly in favour of this new middle ground approach which I think is equitable and sensible, yet also ambitious.

Sure there could be some edge stuff to polish, but it feels like an excellent approach. Let’s debate it and vote.

6 Likes

Hi JD,

Really appreciate the effort and time that has gone into this post. As a community we are certainly starting to think very deeply about methodologist rewards. I really like the idea of framing expectation for what the fee split could look like before starting negotiations. There are some edge cases that need consideration but lets not digress that way and keep with the overall outline of setting expectations - which is a great :slight_smile:

I do have some concerns though. Please help me understand why are we not looking to restructure the existing methodologist incentive scheme and instead opting to allocate additional capital to the scheme ?

What is the marginal value add for this scheme?

  • Extra cost is clear
  • Unlikely to influence if a methodology choose Index Coop or a competitor
  • We are communicating that rather than tackle the root cause of an issue, we will incentivise our way out of a problem.

If this notion is wrong, I think it is. Then rather try bridge and find middle ground Index Coop is better squashing this concept. I don’t like the precedent this sets of applying additional incentives to bandaid over past mistakes. I would rather see the existing methodologist program be overhauled along with the genesis distribution to better reflect how the community has grown and where we see future value being created. I say this as someone who would benefit more so from this proposal and less so the bold text scenario. That is an indication of how strongly I feel towards the topic and my vote at any IIP will reflect this.

I don’t like a streaming fee business model with an incentive scheme on top. What is the incentive for, is the streaming fee not sufficient enough to motivate both parties. If business partners need an additional incentive to find motivation, are they the type of business partners we want ?

For me the real issue is the existing methodologist program. We should be addressing the root cause. Why not make this something for the Autonomy Group to solve ?

IMHO this entire conversation kicked off after new methodologists realised the existing scheme is heavily geared towards early AUM contributors. If we had four different methodologist and four similar sized products we would not be having this discussion.

3 Likes

Thanks @jdcook for an excellent and thought-provoking piece. Echoing @DevOnDeFi’s analogy to a nodding dog.

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That being said, @Matthew_Graham’s point really resonates with me:

It feels like we are at a crossroads, about to ask ourselves a deeper question about what sort of organization we want to be:

  • One that honors all prior agreements and obligations. This ensures we maintain a reputation of “trust” and “reliability” with key stakeholders. Even if this binds us to honour agreements that are largely considered defunct and will cost the coop 10s of millions.
  • Or one that has the flexibility and agility to renegotiate agreements, have tough conversations and ultimately pursue a strategy that serves the best interest of Index Coop. We must then recognize that this risks promoting a perception that Index Coop is “unreliable” and will no doubt create significant tension with key partners

Fortunately, I have total faith that whichever direction we go - Index Coop will continue to mature, grow and dominate the crypto-native index market. BlackRock we’re cumin for ya!

3 Likes

Some follow up:

  • IF altering the original methodologists program is on the table, I feel we should look at the unallocated proportion of it only. Ie - what would be paid out of the remaining months of the 18 months run. Altering this would be quite significant for previous methodologists, who could be expecting some portion of this program’s future flow - but their prior bounties from this program remain in tact and are significant.

Hopefully this steers between the teeth of the issue @Pepperoni_Joe lays out below.

  • Whether this IS on the table should be debated and voted on, even if indirectly via a larger IIP covering more details

  • Streaming fee alone vs streaming fee and threshold bonuses: @Matthew_Graham @jdcook I’m actually pretty relaxed about either option here, it’s just accounting and defining what mechanics deliver value to the methodologist - and tweaking levers to deliver a total amount of value to a partner. Having the thresholds adds some work to track and pay out at, but I’m feeling it might have good marketing and signaling value. We can post here and promote on social that methodologists just hit $100m with product Index 5 and just received their bonus, with a nice GIF (fireworks?!), links to our methodologists page and docs.

  • IF thresholds are used, given prices are volatile, the rewards should be for the first time TVL exceeds a threshold only.

3 Likes

This is a great post JD and thank you for taking the lead on this conversation.

My conserns are around implemention of a improved program. And stopping the existing one. I would like clarity as to weather we can change the original INDEX distribution contract as the 7.5% distribution is baked into the original contract.

My other issue is the AUM incentives, I believe having AUM incentives should only be allowed to community methadologists because there is a trade of they have made. Forfeiting the Methadologists bounty and the fee split to the Index Coop and getting the full time contributor role instead.

Lastly, I agree with that we need a program the will work in perpetuity so a change definitely needs to happen. My question is around timing, do we implement this new program after the current one which ends in less than a year. Or allocate resources to change the current one?

2 Likes

Blockquote
@Mringz
Lastly, I agree with that we need a program the will work in perpetuity so a change definitely needs to happen

I support your idea of looking for a program that will work in perpetuity, but I think there should be established somewhere in the program the steps to take just in case we need modifications to the program. This will allow us to adapt to new circunstances that will appear as we evolve as community in a quick and efficient way