The $INDEX Flywheel

In the most recent product/growth call (30th Nov) the community discussed how to improve education around our native token, $INDEX.

We currently have 2 goals outlined for the Index Coop

  1. Increase Assets Under Vault (AUV)
  2. Widely distribute the $INDEX token

And three main stakeholders make up the community:

  1. Set team
  2. Methodologists (currently just DeFi Pulse)
  3. Index Coop including core contributors and token holders

It’s something I’ve been thinking about for a while in the context of governance and aligning incentives, so I created a flowchart to share how I think about the tokenomics currently, and how they can be improved to capture more value as we grow.

Of course the aim is for the 3 stakeholder groups to all blend into one community over time. The reason I break it down like this is because it’s easier to then analyse how the tokenomics can be designed to create a positive feedback loop. The team at Set have already removed themselves from receiving tokens through the treasury committee at this time which leaves us to focus on methodologist and community rewards.

To incentivise positive outcomes for Index Coop, $INDEX needs to have value, without a dollar value there is no incentive to roll out quality products through our community via the methodologist bounty, and members who contribute to areas besides creating/maintaining products will be doing so effectively for free. Beyond these examples, anyone accumulating the tokens through liquidity mining with a view to governing the protocol will also be doing so altruistically if the token has no value.

Clearly though that isn’t the case. As managers and marketers of the index products, the Coop is accruing a portion of streaming fees from DPI. Combine this with the potential of managing an increasing number of products in future and the value case becomes clear. This is one side of the flywheel, where $INDEX value increasing means a larger incentive for teams to launch their products with us, bringing more streaming fees and credibility, thus further raising the token price.

The next part of the flywheel is linked to the goal of widening token distribution to decentralise the community and governance. While this is nice for the community and does achieve the stated goal, it is not a reflexive action like the methodologist bounty.

For this part of the tokenomics to become really powerful, we need to close the loop and introduce an incentive for token holders to want to participate in governance. This is where part 3 ‘Governance Mining’ comes in. I propose we have a third stated goal to engage and align voters with the other community stakeholders (contributors and methodologists).

There is precedent for something similar over at Balancer, and I plan to go into more detail in a separate post about what $INDEX gov mining might look like. For example at the moment we use snapshot to vote but the plan is to move on-chain so there is opportunity for a staking contract, another consideration would be can streaming fees be diverted to gov stakers in future? The more ways we can align the community with financial incentives the greater the flywheel effect.

One final point is that the chart ended up looking like an owl so I think that gives it extra credibility, well done if you spotted it!


Great work. Currently, we are considering the following $INDEX staking mechanisms:

  • $INDEX as a risk backstop: $INDEX gains a reward for taking risk, but serves as the backstop in case things to wrong.
  • $INDEX as a voting reward: $INDEX is the voting that engages and aligns community

That said, I’m open to these mechanisms being combined into a single staking contract or segregated into multiple.


How would $INDEX “take risk?”
Is this the sort of meta-governance decisions like investing INDEX treasury funds into other projects/tokens we were discussing earlier?

Thank you for taking the time to do this.
An outline like this showing INDEXs perpetual flows is something I think that needs to be clarified for people to understand governance, in lamens.

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Felix was referring to this discussion about using $INDEX as a risk backstop in the case of a token within an index product like DPI going to 0. Index stakers will take the hit and tokens will be auctioned off to cover the loss.

This is similar to the AAVE safety module where AAVE stakers are rewarded for staking their tokens, knowing that in a shortfall they will be sold off up to 30% and auctioned to the market. mStable also has a token that serves as a backstop for their meta tokens.


Whats the likely hood of that scenario roughly? Percentage wise?

I’d guess pretty low but not zero. The market will decide to some extent. For example if we went with risk backstop staking and rewards were set at 5% $INDEX per year, but no-one staked their tokens we know that users are pricing the risk at more than 5 percent!


I like it we certainly need to think more about how we can use INDEX to align everyones interests.

@setoshi I’m not yet convinced by rewarding voting, it feels like it penalises the smaller investors. I prefer lockup and risk backstop. Then it should be safe, but makes everyone think about the risks we are creating.

@Rhieve369 and @TheGameTheorist we should take some risks, but they should be vminimised and done with awareness.

I think the main risks are if we decide to proceed with intrinsic productivity (i.e. farming the tokens within the PDI vault). Then we can produce a couple of risks:

  1. Loss of collateral (i.e. we use a Maker vault and get liquidated, or a contract gets exploited (AAVE, Compound, xToken?)
  2. loss of liquidity (i.e. someone goes to redeem DPI, and there is no underlying tokens available because we allocated to many for farming).

Both depend on what choices we make in how aggressive we are, relying on battle tests protocols reduces the 1st risk, using lock in of DPI prevents the second, but after a while (1, 2 years ?) we may decide that $xxM of DPI can be farmed with out lock ups to increase our income and reduce the work required.

So keeping that 1-2year interim in mind, what if we had secondary flywheel for index utilizing implementation, circulation on layer 2?
and Dare I say it, what if INDEX was representative of DPIs AUV also?
Could we direct and generate more liquidity with the index token on layer 2?
essentially being a tool to build equity in DPI on eth MN?

An adaptive powerplay of sorts?

Looking at the players on layer2, could we be a solution in contrast to our AUV?

Don’t get me wrong, at the core we stay strong on the end goal.

Too risky??

Nice work @DarkForestCapital!

Definitely interested in how Governance Mining gets fleshed out as someone stewarding a similar program over at Balancer.

The key takeaway we’ve found so far is that there’s a clear distinction between on-chain and off-chain governance. It seems like Index has done a great job at incentivizing engagement, which is largely more of the off-chain elements. We’re looking into SourceCred for both governance forum and Discord contributions which seems relevant here for the off-chain incentives as well.

More thoughts here but will contribute them on the specific Governance Mining post when it’s live!


Have you considered a variable rate that can track some other indicators or overall market volatility so we can try to optimize the amount of the community willing to stake their tokens in that system. i.e. if the rate is lowered from 6% to 5% and people start unstaking their tokens in troves, the rate can be raised to incentivize stakers to come back.

I really like this Risk backstop utility. Kinda unique and definitely a “higher” risk but it incentivizes holders to be invested in the coop.

I shared this thought on Twitter earlier, so will share here as well.

This is a nice concept, and actually sparked an idea of something that could be done. Many of these other protocols offer “governance mining”, which allow anyone to stake native tokens to receive APR. Farm underlying tokens --> receive profits --> buyback $INDEX --> treasury

Or those profits could be distributed to those who stake $INDEX in case one of the underlying assets goes to the shitter, and becomes the risk backstop (similar to what is mentioned/outlined in the post)

What I mentioned would create a lot of additional risk for $DPI, as well as $INDEX though, but would definitely create more value for the token economy.

One of the biggest issues that we will face moving forward with this concept of any form of token mining (whether it be liquidity), potentially governance mining, among other things, is that protocols like Harvest will just cause INDEX tokens to be auto dumped- not much we can do about that, but there needs to be sufficient forms of “buy pressure”, otherwise we’ll see ourselves in a situation similar to CRV, with a massive amount of accumulation. We want people to work for these tokens, with the idea that they don’t want to “dump”, but to be involved in a growing ecosystem.


As the DPI token index’s goal is to get projects to vote towards getting their assets held in the vault, or within DPI, that needs to be a big focal point.

However with this approach it could backfire, as we are pretty much farming other assets to help INDEX to grow. Can’t win em all! Haha.

I’ve got some backlash last week for suggesting creating a staking / lockup pool with a set timer to distribute % of the treasury, the goal was to distribute to the community of $INDEX holders and strengthen the token at the same time, which I think you nailed it well with this proposal by connecting the staking with voting rights. Kudos!

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Yeah I think we just try to keep every instance of distributing $INDEX as ‘proof of work’ i.e it’s rewarded for taking actions that benefit the Coop. So far that just means contributions big and small from the community and liquidity mining ETH/DPI (so whales can buy with low slippage).

Beyond that it feels like something is missing, and I know a few of the more prominent members are opposed to giving out rewards for staking but I think if it’s combined with voting, then holders are more aligned with the success of Index Coop and that can be classed as useful. This alone may only be worth 1-3% APY, but if we add on the risk backstop like AAVE, then it adds another use case and can justify a much higher APY.


This alone may only be worth 1-3% APY, but if we add on the risk backstop like AAVE, then it adds another use case and can justify a much higher APY.

I think you may be undervaluing the construction and management of an index. 0.95% fee is extremely reasonable.

INDEX holders expecting a portion of that does not make them freeloaders, they have demonstrated proof-of-work or proof-of-investment, taking capital risk to fortify continued operations (INDEX price, and thus, INDEX treasury) is not nothing.

Btw, totally cool with adding a voting or risk requirement, but I think the discourse around INDEX holders here is a little negative, intentional or not, when its insinuated that their risk is only “worth 1-3%”

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I don’t understand how you got anything negative from what I posted. I think 2% APY for staking your tokens and voting occasionally is perfectly reasonable. For example YFI has been fluctuating around 1-8% since the gov contract was split and the vault started rewarding in YFI, the AAVE safety module is currently rewarding 5% and that includes the risk of being slashed up to 30% of your deposit.

I also never said anything about 0.95% fee being unreasonable. For construction and management of the index, that is done by DFP for DPI and they take their 0.3% cut from the streaming fees. As Index Coop our job is to push for integrations, intrinsic productivity and to check their weightings and execute the rebalance as a DAO, for which we get 0.6% streaming fee. I think you may be undervaluing how this whole thing needs to operate for years to come, and giving all the streaming fees to Index holders does nothing to support overhead costs for future development/incentives/content creation.

It is implicitly negative to say that INDEX holders only have a small “worthy” claim on streaming fees.

The entirety of streaming fees that are not returned to DP should be returned to INDEX holders. I don’t see how that is controversial at all.

You didn’t say 0.95% is unreasonable, but you implicitly said it’s unreasonable that INDEX capital risk takers expect more than 3% APY; even if they participating in voting!

I’m saying that INDEX holders should reasonably expect that the entirety of the streaming fee be returned to them. Whether the INDEX wants to add friction like voting or risk to collect on that, so be it, but it doesn’t change how much INDEX holders should expect to receive, which is all of it.

-No risk backstop // No gov backstop - 100% (of 2/3) streaming fee should be returned to INDEX
-Risk backstop - 100% (of 2/3) streaming fee should be returned to INDEX
-Gov backstop - 100% (of 2/3) streaming fee should be returned to INDEX

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My numbers were based on $INDEX distribution APY, nothing to do with streaming fee. E.g staking 100 $index gets you 3/year at 3%, not saying stakers should only get 3% of streaming fees.

If you read my original post, and the post you replied to I only talk about distributing $INDEX. What we do with streaming fees is a separate discussion as they are simply accruing in the treasury atm.

Why would we pay INDEX holders in a self-referential way?

Has any INDEX holder stated they want dividends in INDEX?

This post is about the $INDEX flywheel, if you see my post on INDEX token demand, we are discussing similar things.

I think your graphic is great and you seem to understand the flywheel but the piece that hasn’t been connected is INDEX only has demand if holders are confident they will receive proceeds from the product they are investing in.

I don’t, and I would bet most large INDEX holders don’t want our dividends in INDEX, we want the DPI streaming fee to accrue to the token.