Some thoughts on incentives for INDEX coop and the wider co-operations

OK, some (potentially naive) thoughts on incentives with respect to growing AUM, Liquidity and long term INDEX coop income.

Starting from the the launch Medium post only 6 days !!! ago.

First, I have no problem with the 30% allocation to Set labs and DeFI pulse. They have created the underlying protocol, launched DPI and bootstrapped the INDEX coop with expertise and (as I understand it) plan to integrate the DPI set into INDEX coop (a live project with $13 M AUM and generating $300 per day income to INDEX coop).

I’m not concerned about the founders vesting schedule. Maybe I’m naive, but I’m not expecting people with reputation to rug pull or dump on us. I hope that they are looking at INDEX as a longterm investment.

I don’t like the 7.5 INDEX allocated to index methodology bounty. Certainly not for suggesting a IIP. Suggestions are easy, EFTs are well established in TradFi, and it’s unlikely that a co-op based on Indexes is going to create many proposals that are novel in this world. Promising large incentives to IIP authors for indexes could just result in a tsunami of indexes that cannibalise each others and add complexity.

I’m a big fan of simplicity, 10 INDEX sets that complement each other and allow the next generation of crypto buyers to get exposure to a diversified portfolio easily would be my initial objective. Then we grow each Sets AUM.

We have 60 days liquidity mining DPI ahead of us. This should create a nice track history of DPI AUM / security / tracking vs NAV and performance and encourage other exchanges / protocols to build DPI into their DeFi systems. Letting money Lego work for us.

Personally, I would like to see a large part of the INDEX coop treasury of INDEX locked and eventually burnt. Then I would like to see INDEX buyback and burning as the principle reward mechanism as I like the passive nature, tax and gas efficiency of burning governance tokens.

For long term adoption, I thing we need to be able to demonstrate that a set is capable of having minimal price error compared to the underlying assets (minimal tracking error to NAV). This means we need large liquidity pools, and need to make the primary market efficient (minting a token from 10 assets costs much less gas than minting from 100). To me, large pools relative to exchange volume implies that we need fewer large sets.

Liquidity mining is for INDEX is a good starting point, however, I wonder if we can incentivise LP’s in other ways to compensate for potential impermanence loss. One way could be to take some of the streaming fees and use them to periodically market buy matched trades to generate additional fees (i.e. DPI --> ETH and ETH to DPI int he same block). If we did it everyday, the LP’s would get additional fees compared to the natural volume. Is there anyway for a 3rd party to inject value into a pool without getting LP tokens? If not, can we ask Uniswap to add it?

I think the common theme is that we should aim to pay incentives from streaming fees, and not INDEX mining / give aways. So that makes out goal increasing AUP and identifying an optimum fee structure so we get income without encouraging forks or copycats.

We already have a fantastic resource in access to Set labs technical skills, Defi Pulse market knowledge and the reputations of both of these. We should be working on building bridges to others in the ethereum eco system (DeFI and others). Let others work on automated farming /stable coin interest rates while we become the vanguard of the crypro world. I want to see a yDPI vault to use the collateral tied up in DPI, but we don’t have to be the ones to build it.

So, we should be looking outside our own protocol:

  • Can we get yearn to build a PDI vault?
  • Can we get DPI listed on coinbase?
    *Can we get DPI listed on robinhood?
  • How about a MakerDAO DPI vault?
    *Can we provide white label index’s for others (There are many FTSE 100 EFT’s from different providers), why not multiple DeFi indices all feeding into the same set. i.e. let Coinbase market a “DeFi pulse” on coinbase which is DPI on coinbase pro and build directly on.
  • How do we make our indexes a core component of any mature crytro portfolio (along with ETH, BTC and stable coins)?

We can also look inside:

  • EEFT’s are ~20% of total stockmarket value. The coingecko top 100 DeFi is currently worth more than $14 billion (excluding LINK, BTC, ETH and stable coins). The 11 tokens in the DPI index are worth over $4 billion. How do we capture 20% of those in trustless decentralised indexes?
  • After DeFi / DPI, what other indexes can be create that are complementary and build our brand?

In TradFi, EFT’s suffer because the active funds have larger marketing budgets, so they produce more press releases, and the journalists have more to talk about. How do we become the recommended default for retail investors?

This isn’t about token allocations, burning, vesting periods. It’s about providing a good value (low fee / gas) passive product, that is easy to understand, easy to market and has a good reputation. If we crack that, we will get the AUM and those lovely lovely streaming fees.

I look forward to reading your comments and joining the discussions.


+1 to everything

A big outstanding question is “What is $INDEX actually for?”. Voting in governance obviously but are INDEX holders entitled to Coop revenue? Is it used for paying members for fulltime work or is it a simple coin vote token? Figuring out how we want to use INDEX within the Coop affects our options in how we can incentivize people outside the Coop like getting a yDPI vault.

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Incredible thoughts here. Some comments:

  • Re: incentivizing LPs, equity ETFs are some of the most liquid / voluminous assets, because there are market makers that perform creation/redemption arbitrage (essentially issuing and redeeming ETFs by bringing/taking out the underlying). This typically results in 2-3x additional volume on ETF pairs on exchanges. That said, this natural dynamic may not be enough for LPs and it could be useful to inject fees to incentivize.
  • Huge +1 on distribution / integrations. To increase use cases and broaden reach, I believe it is critical to get DPI integrated into MakerDAO vaults, Aave/Compound money market protocols, get a yVault, get listed on centralized exchanges/wallets.

That said, I believe it is important to be clear about the persona we want to target. Retail users on centralized are 2 degrees off from accessing DeFi. And centralized exchanges are difficult to get listings on (e.g. they may charge $X00k listing fees or have super stringent requirements). Most centralized exchanges will list breakout projects that their users demand. Thus, a sensible initial goal could be to get enough AUV (assets in vault) / traction from the DeFi crowd - so there is enough credibility / traction to get listed on centralized venues.

Another note is that most of DeFi flows is dominated by wealthy folks / whales ($100k+). It is much simpler to get a few large holders vs. tens of thousands of smaller folks. As a result, in terms of growing AUV - it may be a smarter strategy to perform BD / evangelizing that is focused on larger holders. Some of those larger holders are already here, b/c of the liquidity mining - but there are a lot more folks that can be reached.

That said, some potential next steps to grow are:

  • Create a plan / requirements to get added to lending market protocols
  • Find requirements for centralized exchange / wallet listings
  • Create marketing / BD plan to onboard larger participants
  • Create marketing / BD plan to reach wider retail audience