The Leverage Indices Pod / PWG recently shared with the community that we have the capability to design and launch our own simple leveraged products. These products will be developed in-house, and we intend for 100% of the revenue of these products to accrue to the Index Coop.
Simultaneously, we have reached an impasse with our partners at DeFi Pulse over the existing fee split for future FLI products. Index Coop has presented a data-driven argument that the existing fee split is unfair and economically unsustainable. This is the primary blocker preventing us from launching more leveraged products with DFP.
What has been missing is the wider context about how these two issues are related, so the purpose of this post is to provide that context to the community. Conversations will take place in the coming week that will focus on resolving these issues so that we can begin to launch leveraged products more rapidly. The community ought to be aware of the sequence of events and decisions leading up to these conversations, and what a successful outcome should look like.
From listening to feedback from the community, we are aware of several open questions regarding the current situation with DeFi Pulse that we wish to address:
Why should we risk antagonizing such an important partner?
Are we attempting to strong-arm DeFi Pulse by launching our own products?
While it’s true that existing products launched with DFP make up the majority of our revenue, that does not mean that we forfeit the right to negotiate the fee split on new products proposed. In the case of the FLI suite, we must look to historical evidence and argue our position from first principles. Simply stated, launching more FLI products with the existing fee split is not economically viable or representative of the distribution of work required to make these products successful.
We have presented this concern to DFP and the community on a number of occasions:
- Request for Discussion FLI-Fee Split
- FLI suite streaming fee offer - Request for comment…
- DFP Workshop on 8/23
- Multiple calls and group messages between members of the negotiation team and DFP
These products require far more engineering and active management than any other Index Coop product, and we believe that the fee split should reflect that. In order for these products to be safe and successful, they will continue to require a significant investment of time and resources. To date, that responsibility is entirely borne by Index Coop and will continue to be so in the future.
Similarly, the economic viability of the products provides a number of risks and challenges to the Index Coop. For example, the BTC2x-FLI product has operated at a loss since its launch. During periods of heightened volatility, gas costs to rebalance can soar to over 1,000% of daily revenue.
There is a very real possibility that additional FLI products will perform more like BTC2x-FLI than ETH2x-FLI, so the distribution of revenue from these products should be revised to mitigate that risk. If a more favorable fee split can be enacted for future FLI products, less revenue will be forfeited to the methodologist and the Coop can net out relevant costs, resulting in lesser losses and higher profits on a per product basis.
We believe that ongoing maintenance costs are a valid concern, and being able to identify and overcome issues like these with a partner is a reasonable position to take. Moreso, the 60/40 fee split agreement that the Coop will honor was entered into without the inclusion of the Coop, and we reserve the right to conduct our own negotiations on any future products. Our intent is not to antagonize DeFi Pulse or to rescind existing agreements - it is to arrive at a more equitable outcome for the community in light of what we know about these products.
We are not attempting to strong-arm our partners by launching competing products. After managing the FLI products for several months and communicating with customers, our team saw an opportunity to develop and launch a distinct suite of fixed leverage products that reflected simple, existing indices in DeFi and TradFi. Early in the fee split discussion with DFP, it became clear that launching additional leveraged products using DFP’s methodology would be sufficiently difficult. Given the constraints, our team decided to push forward with the methodology that we developed so the Coop could continue capturing market share in the leverage product sector.
This team’s priority is to launch, grow, and maintain leveraged products. To date, we have focused on growth and maintenance. However, we now have the capability to launch products in-house. It is not viable for us to delay this indefinitely in order to accommodate a disagreement with a business partner. Every day that we do not launch products, we are conceding the market leadership that we have all worked so hard to achieve. Expediency is of primary importance. A prolonged dispute is advantageous to DeFi Pulse, but detrimental to Index Coop. The most desirable outcome is a renewed agreement and a reaffirming of the partnership. If that is not possible, then we must be ready to act independently.
Similarly, a number of questions have arisen about the design of the products and how similar they are to the FLI products. Some open questions include:
- Have we copied DFP’s engineering and IP?
- How are these products different from the FLI products?
Quite simply - no, these products do not reverse engineer any tech that has been created by DeFi Pulse. All of the tech that makes up the infrastructure of our products has been created by Index Coop and Set. This has required an extraordinarily large investment over months by a large team of world class engineers. Please refer to @asoong recent post for more visibility on the amount of energy and resources that have been invested in developing the infrastructure for these products.
The methodologies that have been proposed for LINK2x or MATIC2x do not use a single line of code or equation taken from the ETH2x-FLI or BTC2x-FLI methodologies. Specifically, the FLI methodology pertains to one specific equation that defines the new leverage ratio each time the product rebalances every 24 hours:
CLRt+1 = max(MINLR, min(MAXLR, TLR * (1 — RS) + CLRt * RS))
The proposed in-house methodologies use a standard strategy that is commonly found in countless traditional financial products. It simply rebalances to a 2x leverage ratio at set intervals. Competing products that most clearly resemble the methodology that we are suggesting are FTX’s leveraged tokens (not the FLI suite). We can quickly and effectively adapt this common strategy to work in a decentralized context, and implement all of the safety features that our in-house engineers have designed - such as ripcord and automatic rebalancing when we reach certain leverage thresholds.
It is also important for the community to understand that there was no “copying” of DFP’s roadmap in regards to LINK2x and MATIC2x. Before DFP shared their “roadmap” for the next wave of FLI products, our team had:
- communicated our intent to launch LINK2x and MATIC2x in-house using our own methodology across multiple working group calls
- disclosed to DFP that we were planning to publish our own proposals for LINK2x and MATIC2x, and offered to shared privately before posting to the forum
- published this forum post outlining the two fixed leveraged products that we wanted to launch
The forum post that followed from DFP was an attempt to front-run our individual LINK2x and MATIC2x proposals, which were published one day later with more thorough opportunity breakdown, liquidity analysis, and parameterization.
There is a clear market opportunity to launch more decentralized leveraged tokens and Index Coop is well positioned to stake its claim in the space. It is of paramount importance that we do so in a sustainable way with products that are safe and successful for users and with economics that fuel the growth and the profitability of the Coop, and we believe that this can best be accomplished by launching our own leveraged products in parallel to existing leveraged products.