Driving Value to $NDX

I think NDX should be designed to capture some of the value created by the indexed.finance protocol.

Rationals for doing so:

  1. Prevent governance attacks: as more NDX tokens hit the market, a malicious actor could buy them for cheap and create malicious proposals. By giving NDX value these attacks will be harder to conduct

  2. Make it more attractive to farm ( by holding DeFi5 & CC10 or LPing): right now there is now liquidity on NDX-ETH so users who farm have no “exit” possibility. By giving NDX cashflows, the farming product becomes intrinsically valuable.

How should it capture value?
By adding an exit fee to the index tokens. Whenever someone burns an index token, x% of the tokens go to the DAO instead of being counted toward their output

My initial proposal would be to make that fee 1% but that’s up for debate. If the exit fee is too high it will discourage people from using the indices though…

Why do people burn index tokens
People burn indexes like DeFi5 when there are arbitrage opportunities. When the value of the DeFi5 or CC10 doesn’t match external markets (underpriced e.g) they can buy the index on Uniswap and burn it in the indexed UI to get the underlying tokens.

This proposal aims to add an exit fee to this process.
Screen Shot 2021-01-14 at 5.55.38 pm

What should be done with the fee revenue?
First it would go to the DAO treasury (controlled by NDX holders) but a second proposal could target a better use/token model.

Looking forward to hear your thoughts.

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On #1 - governance attacks could be a major concern if the circulating market cap of NDX is significantly lower than the TVL of the index pools.

An attacker would need to acquire at least 800k NDX to meet the quorum, assuming other holders were not active, or a larger amount to override the holders if they were active. Liquidity providers would have several days to withdraw due to the voting period and timelock, but not everyone actively monitors their funds, and assuming an NDX circulating mcap far below the tvl of the index tokens, it could potentially be profitable even if you could only attack the LPs who failed to notice the proposal.

On #2 - we do want more people to farm NDX to ensure there is sufficient liquidity for users who wish to use the index tokens as ETFs. I agree that providing a better basis for valuing NDX in the long-term (beyond speculation) could help with this. However, exit fees would not be sufficient to give NDX the kind of value it needs for #1. The primary value is, and almost certainly always will be, control of index deployment, category management and strategy approval.

Here are two other aspects of this to consider:

a) Typical index funds have no fees at all, and the biggest DeFi indices I know of (DPI & PieDAO DEFI pies) have streaming fees of 0.6-1%. Streaming fees are taken linearly from a pool’s market cap over the course of the year, though, rather than from token burns. This is not really an option for index pools at the moment, at least not without significant upgrades.

That being said, our index tokens are very different from index funds in the stock market, as they require some amount of meta-governance which NDX holders must pay gas for, and require regular upkeep calls which NDX holders will pay for in the form of NDX rewards to keepers. So it makes some sense to provide fees to the governance token holders.

b) It will discourage people from arbitraging the price of index tokens on other markets. The ability to do all-asset mints or burns with 0 fees allows people to arbitrage the price of an index token on an external market relative to the actual value of the underlying assets without massive price differences existing between the individual token pairs, as is required for swaps in the AMMs.

With 0 fees, this ensures that users can access liquidity at the correct price, without needing to mint/burn the index tokens, which is the expected behavior from an ETF. On the other hand, adding a small exit fee could help to protect LPs on other markets from some impermanent loss by raising the price differential necessary for profitable arbitrage.


I would normally suggest doing some analysis to determine the value this would provide, but considering that the current tokens are not being burned very much (since most people are just staking) there’s not really any data to base it on. I would suggest that if an exit fee is added, it be ~0.1-0.2%, as this is not so high that it will significantly discourage people from providing liquidity, but should be high enough to give a slight buffer to LPs on Uniswap and other markets, and generate some revenue to NDX governance. I do think we should be cautious though, as having zero fees is generally more attractive than even a small fee.

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@litocoen I’m unsure to understand how this proposal (specifications being add 1% exit fee) has a correlation with driving value to $NDX (the governance token).

Looking at your points:

#1 How does exit fees going to DAO treasury prevent governance attacks? In the current proposal form (or atleast, how I read it) it adds extra incentives for malicious actors to create malicious proposals, as the treasury grows in value. $NDX doesn’t gain addition value (price per token?) by purely having a larger treasury.

#2 While I agree that (larger) farmers (which are mainly farming for $ profits, rather than farming to take part in governance) might have a difficult time exiting their $NDX to ETH/$ at the moment, I’m not sure how an exit fee of 1% will change that (even in the case where that exit fee would be used to buy NDX+ETH & LP with it).

As @d1ll0n noted, there is close to no one burning indices as they are currently farming. Current proposal would lead to a very marginal increase of treasury cash flow, while (potentially) having large impacts on TVL of Indexes by scaring off newcomers with additional exit fees (with minting + swap fees already costing a sizeable amount, rendering out a large majority because they can’t afford to).

Considering above, if the proposals’ end goal is to create deeper liquidity for the NDX/ETH pair (meaning it’s harder to impact $NDX prices + easier to exit for mid/large farmers), I’d propose to discover options to incentivize LPs to provide liquidity there.

This can be done through setting up Pool2 farming (but be aware that if emissions are not thought out correctly, it may lead up to an $NDX death spiral).

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#1 In an efficient market it should, since NDX holders are the ones controlling the treasury. But true, it’s not guaranteed. Hence, why I suggested a different proposal could target what to do with the generated revenue.

#2 My thinking was that an exit fee would give them a reason to farm and not want to dump (since $NDX would have cashflows)

Yes it’s true that an exit fee could scare off index buyers. However, other index projects also charge fees in some ways (streaming fees).

Another idea could be to direct 50% of the swap fees generated by the Balancer AMM to NDX holders. This way Index holders would not have to pay anything directly (no streaming fee nor exit fee).

But Dillon mentioned that this would be harder to implement…

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Agree with all ideas! Another later idea could be a small fee 0,5% for minting an index, and a continuous fee of 0,5-1% per year for the indexes (similar to etfs)…

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An exit, burning fee could be useful to drive the value of NDX token but it should not just go to the DAO Treasure. While it is important to have a cash flow , it will not incentivize NDX holders enough. Perhaps a portion of that x% could be sent to the treasure and another % to the NDX stakers?

Another idea could be the following: several tokens in an index, are part of an ecosystem where these can be staked. e.g. upcoming hegic index. Suppose a variant of the “Voting” delegation of tokens that allow governance could be implemented :

Indexes can be staked on index finance
-> Index finance extracts the tokens and stakes them on the corresponding platforms.

In order to avoid unecessary minting/burning, this could be an option during the buying process of an index via Indexed finance website.

A percentage of the rewards are provided to the stakers , a percentage to NDX Stakers, a percentage to DAO

what if we implement a streaming fee or a withdrawal fee, but also create fee reductions based on certain thresholds of NDX staked or you can pay the withdrawal fee with NDX (similar to how BNB is used at binance)?

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Uniswap charges a fee to purchase CC10 and DEFI5, Index should charge the same fee to mint it.

This would generate revenue for NDX and actually improve the arbitrage equilibrium since it’s now the same cost to mint or swap. With no fee on minting, presumably minting would always run a small premium over trading, this premium being equivalent to the Uniswap fee.

I think charging a fee for minting CC10, DEFI5 or any indice is hugely counterproductive. The only thing this would do (imo) is prevent people from participating. Perhaps charging a very small exit fee would make sense, but charging a fee for minting seems like a bad idea.

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The idea of the fee is that it would be the same as Uni/Sushi charge to buy the token and as we know, people pay that fee 1000s of times a day.

What’s the thought process behind thinking people wouldn’t pay that same fee to mint as they already pay to swap? If the idea is to drive more people to mint than buy on Uniswap, maybe the mint fee could be 1/2 Uniswap’s fee.

Edit:
I would add that I believe it’s better to leave the indices fee-less for now to grow the ecosystem and later start adding fees to support the economic security, rather than suffocate the protocol early with fees. I hadn’t mentioned the timing aspect previously.

The fee you speak of for Uni/Sushi is the swap fee for trades on the platform, something which Indexed already does.

If I understand you correctly you’re talking about adding an additional fee ontop of the swap fee, which is a fee specifically for minting. Gas costs are already very expensive for minting, and adding an extra cost ontop of that raises the barrier to entry, as now users have to determine whether the gas cost + mint fee + swap fee is worth it, as opposed to gas cost + swap fee.

A minting fee also makes DCA (Dollar Cost Averaging) much more expensive, as each time you wish to average in, you must pay an extra fee. This would disincentivize frequent smaller purchases in favour of infrequent larger purchases.

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Why dont we create our NDX based AMM like Uniswap, but exclusively for indices listed on indexed.finance. The swap fee could be given to NDX staker, it will be counted as dividend for NDX staker.

Just wanted to add my thoughts that while I think longer term adding value to NDX would be great, I would rather prioritize a handful more index options and TVL growth prior to this being a priority.

I think the exit fee is not a great solution and think a yearly fee or streaming fee would be better (although Dillon mentioned there are some technical feasibility challenges with that at the moment) Maybe this is something that is acknowledged would be good down the road but not something that is a focus area until we see more growth.

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The single asset swap fee rate 2.5% is a magic number, so can we send the industry standard 0.3% to NDX stakers? In that case, the other 2.2% is sent to the index pool, and I think the magic number 2.5 and 2.2 is not so much difference for the index pool, but the 0.3% for NDX stakers is very sensitive to $NDX value, that is the cash flow for the protocol.

BTW, as NDX rewards approach to 0, index token liquidity (say DEFI5-ETH) will probably decrease, so more ppl will enter and exit through minting & burning, which will lead to a lot swap fee for the pool to cancel the potential IL and even more than that.

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Agree minting fee is hurting adoption. Small exit fee isn’t a bad idea, but these are index products that people buy to hold for on a long time frame. So not much potential revenue anyway?

Just putting this out there, but I see a lot of people on here talking about various ways to game the economics around the NDX token for it to accrue value. I think what we and the team the should on is what will make NDX’s products the best products in this space. The token won’t accrue value over the long-run just because it has the best tokeneconomics. We need to figure out ways to get more AUM in the door. I don’t know if that’s through marketing, offering better products, lower fees so that they are competitive with competitors, etc. Once we have NDX products as the go to index products in this space, as long as we don’t have a terrible token model, the value of the token will sort itself out. Just my 2 cents.

While I agree that focusing on making the best products is paramount, I also feel it’s important to provide NDX holders with some type of monetary compensation related to the success of indexes. I’d argue that the stronger we can link the success of the indexes to NDX, the better off we’ll be.

As it stands, NDX holders are only loosely incentivized to improve indexes through the promise of “success of indexes means NDX goes up long term”, but that feels far from guaranteed.

As for potential solutions: Taking a small percentage of the swap fee, as long as we feel that swap fees scale with index TVL, makes sense to more closely link NDX with index success.

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I like this one… Perhaps swap fees for the indices go to buyback NDX and then burn it?

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Was talking about this actually earlier today in the telegram. I think this is a great idea. Even somewhere between what Sushi is doing with their fee structure and Uni where they have the switch to be able to migrate to a profit sharing model.

That being said I think that it certainly does make sense to prioritize the rewards going into the LP’s however I would like of course see the NDX token scale somewhat tied to the overall platform’s success.

What if we require each index to be minted in the future, include 5% worth of $NDX in it.

I can’t imagine nobody proposed this before.

It’ll be so much fun!

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