The New Path Forward for Index Coop's External Relationships

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Authors: @BigSky7 @setoshi @scott_lew_is

Background

Over the past few weeks, Simon and Felix have had a number of conversations with Scott at DeFi Pulse where empathy / safety was established, common understanding was built, real organizational issues were unearthed and discussed in a respectful / objective manner, and we were able to brainstorm / collaborate on generating potential solutions for these ideas.

These conversations unearthed a number of complex organizational issues such as 3rd party representatives, IP, definition of fairness, and exclusivity that require further time to fully explore to be able to generate long-term solutions.

Next Steps

To unblock the product teams and to serve as a bridge, we propose immediately moving ahead with launching more FLI products with a provisional 60/40 post-gas fee split which seems to have broad consensus.

All parties recognize the work required and are committed to working jointly to find a long-term solution that all parties recognize as fair. We are committed to working closely with DFP to solve these highly complex problems and find win-win solutions for all parties.

We will follow up with a post by early next week to elaborate on these broader issues and describe a process to achieve longer-term alignment.

Are you supportive of this way forward?
  • Yes
  • No

0 voters

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Great leadership @BigSky7 and I’m pumped to see things moving in a positive direction.

We can now stop spending on developing competing products and move to fast track DeFi Pulse’s FLI products.

It would be great to see a bunch of FLI products hit DG1 and DG2 next week.

It is fantastic to see all three parties coming together, collaborating, building trust and we will build the Index Coop moat together.

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I voted against because I don’t know what the vote is for. 60/40 post-gas sounds like an ok compromise but there’s no way to evaluate without further detail or the input of our product team.

I think it’s great that the parties are talking and encourage and support that continuing, but think the community should see the below fleshed out before passing judgment. Commitments are nice but timelines and substance are necessary.

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Hi @BigSky7 @scott_lew_is and @setoshi

I must say it’s fantastic to see dialogue happening and everyone being aligned in wanting to generate solutions to the challenges we face (and hopefully build stronger relationships with our partners).

However, I look at the proposed way forward described above, I just see more of the delays and frustrations I described here.

One of the biggest challenges we have faced (and continue to face) is trying to agree on fee splits etc before we see how a product performs on the market. It’s only then, after we have seen the true costs/income / and work split that we begin to understand our products - and it’s very difficult to reopen the agreements.

While I think there is a shred desire to launch products, I don’t think we have reached consensus on valuing the various parties’ input (from 6 weeks ago and see here, here and here).

By launching further products with the contested 60:40 fee split (albeit with a minor modification re gas costs) we serve to further build the status quo. I should also note that onchain inclusion of gas costs before the fee split is technically challenging given that the fee split is hardcoded and so likely to lead to delays to launch.

I suspect that in 3 months time we will still be having the same debate as to the value-added by the use of the Flexible Leveraged methodology and DeFi Pulses impressive marketing efforts (vs internal methodologies). And we will still be looking at comparing historical data with theoretical models and trying to agree on the split for future products.

We now have the opportunity to do some real-world data gathering and Test in Prod.

Speaking personally, I would like to propose that we:

  • Launch two products using the INDEXcoop methodology.
  • All income goes to INDEXcoop, and ultimately INDEX holders (including DeFi Pulse).

I believe that we can act quickly and launch products.

Then we can look at real data and compare the different products/methodologies:

  • On-chain behaviour
  • Gas costs
  • Performance
  • Management costs

If it is clear that the FLI methodology is superior (i.e generates 66% more income for INDEXcoop), then we can look at licencing it for the two products launched (and agree on a suitable fee spilt based on the comparison).

I’m sure that @Matthew_Graham and the TWG will appreciate having real data to compare and help inform the fee split discussions based on the added benefit of the FLI methodology and DeFi Pulse’s influence on the market capture. Then we can move forward with whichever methodology captures the most value for the treasury and thus for INDEX holders.

So, an alternative sentiment poll:

Edited 26Sept21 to remove reference to problems :slight_smile:

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  • Launch FLI leverage products with 40:60 split (60 to INDEXcoop) after gas
  • Continue discussions on fee split before launching FLI products.
  • Launch INDEXcoop leveraged products with 100% to INDEXcoop and review once we have real data.
  • I don’t know.

0 voters

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Hi @BigSky7,

Thanks for all your hard work on this with @setoshi and @scott_lew_is. It’s great that the three of you are talking, getting deep into stuff and trying to find a way forwards.

A few comments and questions:

  1. Broad consensus from whom? You three?
  1. I voted ‘No’ until more detail arrives via:

  1. 60/40 POST gas seems like a just about acceptable comprise pending more detail next week.

  2. I have a few further concerns, which @overanalyser touches on, but will trust in you and the process and wait until more information arrives next week before deciding if they’re valid or not.

Thanks.

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I think you wanted to say “challenges” since problems sound so negative, lol.

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@BigSky7 @setoshi @scott_lew_is

I have three points to cover.

1)

We believe BTC2x-FLI is the best proxy we have for estimating how the next wave of FLI products will perform. Using the actual cost / revenue data from BTC2x-FLI, here are the actual profit numbers under the current 60/40 agreement, as well as what they would have been if the BTC2x-FLI has always been operating under the proposed 60/40 post-gas agreement:

Current
IC: $3,324
DFP: $41,465

Proposed
IC: $18,068
DFP: $26,722

Basically, the proposed 60/40 post-gas split would have resulted in a swap of $13k from DFP to IC, yet DFP still would have made 50% more profit than the Index Coop on BTC2x-FLI on this product.

Note, “profit” here does not include the cost of contribution, which leans extremely heavily towards the Index Coop as well.

To add to this reference, what would it look like if we actually did a 60/40 rev split + 60/40 gas cost split (meaning DFP pays 40% of the gas cost as well)? I am not necessarily proposing this, but I think it is helpful to look at the numbers to understand the whole picture:

IC: $26,874
DFP: $17,916

Now, my opinion is that an agreement that yielded that sort of return for both sides ^ is starting to feel more like something that both sides should be able to feel great about.

To be honest, the 60/40 post-gas split does very little to persuade me vote in more FLI products when we have the option to put out our own leverage products for 100% revenue. I would love to keep launching FLI products with DFP, and I really don’t want to be so nit-picky about the splits because I agree this isn’t a zero-sum game, but the economics just still feel too far off what a sensible business would agree to, in my opinion.

2)

We got into this whole back-and-forth because there wasn’t clear boundaries set around the initial 60/40 fee split on ETH2x-FLI and BTC2x-FLI. We cannot move forward with ambiguous language like this again. I would maybe be ok launching one FLI product with a 60/40 post-gas split just to see how it performs and what the economics look like, but I am not in favor of multiple FLI products being agreed to with this split.

3)

I have been saying this for a while, but I think the steps forward are actually pretty simple. If DFP is set on this 60/40 post-gas split arrangement and won’t consider anything else, then that is fine - I would encourage them to get another product up go DG1/DG2 so we can determine as a community if we are willing to move forward with that product - I feel like we have gotten almost no where with all these discord channel negotiations.

At the same time, I would like to see one of the Index Coop leverage products go to DG1/DG2 so we can test our ability to launch simple leverage index products and the communities appetite for going down that path.

In short, this can be a much more fluid situation than it is - at the end of the day, the vote is what determines whether we go forward with something - and the vote is a forcing function for us to make decisions. We have wasted too much time here already, so let’s move forward.

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Hi @jdcook

Just on 1), can you share where you get your numbers from ?

Using the FLI Pods data and reading over the original post I draw the following conclusion for BTC2x-FLI.
I haven’t used TWG data as that may just confuse things due to differences in how the accounting is done.

Data is up to 25.08.2021
Revenue: $81,732.00 incl. Streaming, Mint and Redeem
Rebalancing Costs: $41,198.00 (on-chain costs)
Data Source: FLI Pod

60/40 excluding rebalancing costs:

Index Coop: 60% x $81,732.00 = $49,039.20
DeFi Pulse: 40% x $81,732.00 = $32,692.80
Set Labs : Incurs a cost of $41,198.00

Why Set Lab pays this, who knows. Probably cause it was part of the original deal struck is my guess.

Propose Model:

Revenue after rebalancing costs: $81,732.00 - $41,198.00 = $40,534.00

Index Coop: $41,198.00 + 60% x 40,534.00 = $65,518.40
DeFi Pulse: 40% x 40,534.00 = $16,213.60
Set Labs : Incurs a cost of $41,198.00

There is no mention of Set Labs being reimbursed rebalancing costs anywhere in the original forum post. Set Labs pays all rebalancing costs across all the products we offer. Revenue only goes to either Index Coop or DeFi Pulse, nothing goes to Set Labs.

I would like to highlight, rather than getting bogged down in numbers - A cost base approach is the wrong way to determine fee splits. Index Coop’s pays above market rates for people, to attract the best talent and therefore will always incur greater cost than more traditional entities.

60/40 post gas is an interim step is what I read. I see the commitment to a fair conclusion as the main takeaway here. Haggling on terms and conditions detracts from the overall goal of finding a fair outcome. If we trust each other, we should come to same fair conclusion independent of the intermediate step we take. I see the original post as being written in good faith with the right intents.

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Revenue
Costs

I feel pretty confident about this data - it is also up to date. This is what the FLI Pod uses for costs in the BTC2x and ETH2x dashboards, but happy to have anyone check over the queries. I also think we had an old query that was doing some double counting on revenue, and that may be why you have higher revenue # if your data is a month old.

I mean, the main difference is you are not including gas costs as an IC cost, because they are technically not to this date, but they should be and will be - so for the sake of modeling out future products we need to consider that as a cost the IC will take on.

And I am more ok with a 60/40 post gas if it is an interim step for a single product (maybe two), but more than that and we find ourselves in the exact same situation.

I wouldn’t say this is “haggling” - I would say this is more that the community has had a lot of concerns about the economics of FLI products for multiple months and this shows little progress towards alleviating those concerns. I just want it to be clear what 60/40 post-gas split actually is - it is still 50% more profit for DFP than IC - that just doesn’t feel like we are making much progress on the economics broadly.

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I think this is sound logic, if there was a rough timeline it would help the discussion. I hope that is something being worked on away from the forum.

@allan.g any chance you can respond regarding the data. I used an extract from the spreadsheet that was shared. I think it may have been the data used for the original 80/20 discussion proposal…

Can you step this math out please ? I don’t see how a 60/40 split post on-chain costs can lead to the minor party receiving majority of the revenue. Seems counterintuitive.

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This is why I wanted to highlight this - because I don’t think it is easily recognized that even if we just “post-gas split” it still means that there are a lot of days where the Coop takes a loss, while DFP has a bottom bound at 0.

For example, on 5/19, big market downturn, BTC2x-FLI cost ~$11k in gas. Revenues were ~$3k. So the “post-gas” number is -$8k. DFP just takes a 0, and the Coop takes the whole -$8k. We have days like this sprinkled in throughout the product history. So while we do take a larger split on positive days, it doesn’t make up for the losses that we take on over time, while DFP never takes on any loss.

That is how even with a 60/40 post-gas split, DFP would have made 50% more profit than the Coop on BTC2x-FLI.

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Only when the Fee Collect contract is called are the streaming fee tokens minted, thus diluting Nav through increasing unit supply of the product.

I don’t think it is feasible to think of gas spend and revenue on a daily basis. Gas is spent daily but revenue is accrued daily (math) but not realised until the tokens are minted.

Revenue is only distributed when the Fee Collector contract is called, so gas costs could be accrued up to this event just like the revenue.

When revenue is distributed from the vault, all that needs to happen is what was 60/40 before gas is now 60/40 post gas. The accrued gas cost is reimbursed just prior to distributing the remaining revenue to both partners. This may mean all revenue is sent to a multi-sig and then distributed manually - that’s the easy fix here. A better outcome is to build this into the products architecture but that would be a heavier dev lift.

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Yes, if we can determine a process that pays back all previous cost born by the Coop before distributing any fee split, then we are in a better place here. For example, say we haven’t accrued revenue to either party for BTC2x-FLI to this date, and we were to do so today. We could send all revenue to a multi-sig, pay back all the gas, and then distribute 60/40. If all the gas costs aren’t paid paid, then they roll over to the next accrual until they are…

Currently this is not how the product and revenue accrual works though, so we would have to explicitly lay out whatever process or tools need to be built to allow this mechanism to happen.

I will say, there are some potential issues with this even if you extend the accrual cadence - like what if it runs at a positive for a while, then starts running at a negative - the methodologist will have been paid revenue while the Coop is in the negative (as an example).

Anyways, just saying that I think this can work, but the timing of accrual still matters and we have to have a system in place to keep track of all this over time. My sense is that this is something that is easier to talk about and much more difficult to execute.

@ncitron can the accrue fees function be called by anyone currently? Does it make sense (from a technical perspective) for us to be discussing managing the accrued fees in this way?

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The accrual function can be called by anyone. In practice, it is usually only called by myself at the end of each month. I think @jdcook raises a good point about the timing of the distributions affecting the outcomes. Assuming that DFP is not allowed to take a loss, it is possible that long term, the split can become skewed towards DFP when we see a lot of volatility in overall profit and a very short distribution period. This could easily be remedied by calculating the split on a slower cadence, such as quarterly.

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Hi @ncitron

How easy would it be to route the revenue to a Gnosis Safe with say a 3 of 4 signer requirement?

2 Index Coop folks
2 DeFi Pulse folks

Then the accrual function can be called anytime and revenue accumulates in the Gnosis Safe.

Each month, the signers can come together and distribute the funds in line with agreement.

Index Coop’s financial reporting still includes monthly revenue. Gas is reimbursed from the revenue before the split and it eliminates the potential for either party to be out of pocket. This to me feels like a way to remove the concerns raised around when the accrual contract is called.

Longer term, I am still of the opinion that the product holders should be paying the on-chain cost. That to me seems like the ideal design spanning all Index Coop products.

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