Index Coop Financial Report - May 2021

March to May 2021

Summary

The Index Coop maintained its upward growth trajectory with monthly revenues continuing to increase since our last report. The treasury balance currently stands at a total of $44.4m despite the recent market turmoil. As of 1 June 2021, the Treasury holds  $37.6m in INDEX tokens (84.7%), $6.4m in USDC (14.4%), $250k in DPI (<1%), $104k in ETH2x-FLI (<1%) and $11k in BTC2x-FLI (<1%). Index Coop is currently exploring ways to diversify our holdings to better manage market downturns. Index Coop has seen substantial revenue growth since genesis, with average month on month increases of 94%. Revenue has grown to $444k in May, largely as a result of the ETH2x-FLI and BTC2x-FLI series (two new leveraged projects). Combined, the leveraged product suite accrued $290k in income. The flagship DPI product continues to grow with revenues of $144k in May (see below for further analysis). The Index Coop has created a stable foundation since genesis, allowing the DAO to build on its current success, continually developing and improving the product and the community. 

Key takeaways;

The Index Coop remains well funded. The treasury currently receives periodic income from a vested token contract, with 950k INDEX tokens becoming available between now and October 2021, another 1,425k tokens in the following year, and 950k tokens in the final year. The 1 year vesting contract started with a balance of 2.38M INDEX tokens and has been drawn down periodically, as tokens are made available. The table below details the remaining balance within the 1 year vesting contract that will be released to Index Coop treasury. At today's prices* the remaining balance within the vesting contract is $30.2M. The Index Coop will use these funds to further the growth of the DAO by rewarding its contributors, incentivising liquidity, funding impression mining, and expanding/improving existing and future projects. 

One of the main developments since the last financial report is around impression mining - this was initiated at the start of May and has seen impressive growth in its first month. The motivation behind impression mining is to incentivize growth by increasing social media presence. The aim is to determine if volume can scale without diluting cost-efficiency. 

Income Statement

Revenue for the Index Coop is generated through streaming fees. There has been significant growth in this area in recent months with the launch of the leveraged product suite. The streaming fees for each product are detailed below:

  • DPI streaming fee is 0.95%. This is split 70/30 between DeFi Pulse and the Index Coop. Within the income statement, the total streaming fee has been shown within Revenue and the DeFi Pulse share is shown as a cost. 

  • ETH2xFLI and BTC2xFLI, the Flexible Leverage Index series, each have a streaming fee of 1.95% (195 basis points). The revenue generated from the streaming fee is split 40/60 with DeFi Pulse and the Index Coop respectively. Similar to DPI income, revenue has been shown in totality with the DeFi Pulse portion shown as a cost. 

The Income Statement below is presented in USD and records the USD value of each transaction at the time each transaction occurred. For instance, if INDEX tokens are transferred from the treasury to a merkle contract for distribution to contributors, the USD value of the transfer to the merkle contract is recorded. The tokens are priced using CoinGecko USD opening price on the day the transaction occurs.

We will be reviewing the income statement in detail throughout. Of particular note, revenue has grown exponentially totalling $899k YTD for a gross profit of $593k. With significant growth as a result of the FLI series expected, the Index Coop foresees continued success.

Liquidity Mining

Liquidity incentives averaged a cost of $35.8k per day for the month of May. While the growth in this cost is partially explained by the increase in price of the  INDEX token, liquidity mining is by far the largest expense to the Index Coop, with YTD costs in excess of $3.96m. Looking at current gross profit levels and assuming no revenue growth (unlikely!!), it is expected to take over 4 years ($4,335k/$899k) to pay back.

While liquidity is essential for improving user experience and ensuring minimal slippage during trades, the associated costs cannot be ignored. In its early stages, the Index Coop had to prioritise providing liquidity to the DPI-ETH pool, but this is difficult to sustain at current levels. April and May have seen substantial increases in expense, drastically increasing the net loss position. This has been identified as a key issue (further reading within link). A team has been assigned to review the pros and cons of migrating liquidity to Uniswap V3. If the integration of Uniswap V3 proves efficient, we could reduce the total size of the liquidity pool, while maintaining the same level of trading volume depth that is possible using a larger V2 pool. Swap fee APY is also likely to be more attractive, meaning we could reduce liquidity incentives with minimal impact to the end user.

Current LM APR can be seen below.

* Note: APY fluctuates based on the number of deposited tokens in the contract and the price of the INDEX tokens.

Liquidity mining is important when considering a product's life cycle. When launching a new product, liquidity mining is seen as a tool for successfully progressing through the Product Launch phase to the Product Growth Phase, capital should be strategically recycled from liquidity mining into other growth initiatives as the product matures. Our end goal is to build products that address the needs of our customers while remaining profitable and self-sustainable in the long-run. This has resulted in consideration towards liquidity mining cycles that run for a predetermined time frame. This will enable us to bootstrap the product while simultaneously ensuring a tapering of incentives as it reaches maturity. Ultimately this will reduce costs and improve profit margin for the Index Coop community.

Balancer Pool

Given the significant cost of liquidity mining incentives, the Index Coop is exploring an INDEX/ETH Balancer pool that will follow the creation of the Operations account (discussed below). When launched, the pool will consist of $22.5m of INDEX and $2.5m of ETH (90/10) and will rebalance over a 90 day period to $17.5m of INDEX and $7.5m of ETH (70/30). By changing the weights of the pool gradually over time, this acts to convert $5m of INDEX to ETH at a rate of $55.6k per day, representing 5.4% of the average daily trading volume. Index Coop will be utilizing the INDEX tokens within the treasury to provide liquidity to the pool. This will result in diversification of the treasury while minimizing the potential cost of liquidity incentives. 

KuCoin DPI Exchange listing

Fiat-based centralized exchanges remain an important access point to crypto for many token holders.  The Index Coop community is pursuing listings on multiple exchanges. DPI was successfully listed on the KuCoin exchange on May 21st. As part of the listing, a loan to the KuCoin market maker was made for a total of $150k USDT and $150k of DPI. This has not been included within expenses given that this is a balance sheet item given it constitutes a loan - half of the loaned amount is to be returned to the Community Treasury after 6 months with the remainder being returned after 12 months. The initial listing has been a success with additional listings being considered as part of our growth initiatives.

Our community continues to develop partnerships with major DeFi protocols. These partnerships span a broad range of activities including trading competitions, yield farming, and liquidity pooling. As our partnerships continue to develop, we expect an increase in user engagement resulting in a subsequent increase in assets under management.

Contributor rewards

The Index Coop has a number of different ways it rewards its members and contributors. This can be seen by the continued growth of community rewards from $13k in November to over $250k in May, just six months later. Currently, contributor rewards make up 16.4% of total expenditure. This has enabled innovation around new products with exceptional product-market fit (discussed in more detail below). The community is expected to grow over the coming months. Our focus as a DAO will be on retaining top talent to ensure the future longevity and success of the organisation. 

It should be noted that while these costs continue to increase, they are expected to rise significantly as a result of full-time Contributor retention rewards with vested tokens not yet being accounted for within the income statement. The compensation package is $5k per month, plus vested tokens (two year lock up period) at 0.15% of total supply over 2 years for each contributor (total 0.60% of INDEX supply allocated to 4 Index Coop members). The motivation behind this is to ensure that the Index Coop retains high-quality, full-time contributors who deliver meaningful contributions to the benefit of all Index Coop stakeholders. An estimate of this cost is showcased below:

Product performance - DPI, ETH2xFLI, BTC2xFLI and MVI

The Index Coop is continually improving on Key Performance Indicators (KPIs) month on month, with AUM growing to $226.8M. DPI continues to be the main contributor, with a current market value of $157m. ETH2x-FLI has grown to $57m without incentives, and after the launch of BTC2x-FLI on May 12th, we anticipate continued growth with AUM currently standing at $7.7m, impressive given it was only launched 3 weeks ago. The Metaverse Index (MVI) remains steady at $4.1m.

Competitor comparisons

In this section we will look at the performance of our products relative to our competitor’s offerings. We compare each product on various metrics and also take a look at the fees generated to the founding community. Comparison metrics include:

  • Assets Under Management

  • Liquidity within Ethereum ecosystem

  • Daily Trading Volume

  • Annualised Product Fees

Drawing from the below infographic, we can see that DPI and ETH2X-FLI are the market leaders in revenue generation, daily transaction volume, and overall market liquidity, highlighting product market fit and brand reputation. ETH2x-FLI is an outlier when considering the trade off between liquidity and fees - typically those with lower levels of liquidity have less volume.

The common theme between the two charts is that there is a clear distinction between small (PieDAO), medium (PowerPool) and large cap (DPI) products. Typically products with high liquidity generate more trading activity, but the important outliers are the products which outperform in terms of revenue generated relative to trading volume. The leveraged products are an example of this, they have lower levels of liquidity but generate a higher annualized revenue. Both products are in their infancy and expected to increase in liquidity, trading volume, and revenue over time.

Capital Raise

Strategic Raise

The Index Coop has deployed a strategic capital raise which has been a great success - as shown in the summary above, USDC has increased to $6.4m with an additional $3.6m available for sale. The Index Coop expects the majority of this capital to be raised in the coming weeks. This raise will allow Index Coop to diversify the Community Treasury. 

Currently, the treasury is almost entirely in INDEX tokens. This is a result of the automatic vesting of community treasury tokens on a block by block basis from the vesting contracts. In addition to the INDEX tokens, the community treasury also holds small amounts of DPI and ETH-2xFLI tokens accrued from those products’ streaming fees. Diversification will minimize the potential impact of a bear market, ensuring operations remain well-funded in perpetuity. 

Community Raise

In addition to the above capital raise, Index Coop is offering the same terms to contributors through a Community capital raise. This sale is intended to allow Index Coop contributors to increase their ownership of the protocol on similar terms to those offered to strategic partners, but the key difference is the vesting and lock up periods are halved.

Investment and operations account 

The Index Coop has developed its treasury function to split into two accounts, Investment and Operations. This setup allows for transactions to be processed more efficiently. Given the recent growth of the DAO, we need to ensure we are agile and able to quickly cascade responsibility across the wider community. Below is a high-level summary of the two functions:

Since the above items are still being discussed, the function of the Investment and Operations accounts may be subject to change depending on feedback from the community. 

Inflation schedule

As of the end of May 2021, the community treasury has received a total of 1,489,583 tokens from the initial 500,000 seeded at launch, plus the 1,425,196 vested from the year 1 contract. Emissions will continue to be vested at 118,750 INDEX per month until the end of the year.

The below table details the quantity of INDEX tokens withdrawn from vested contracts and the initial treasury deposits from the genesis contract. Details on the initial INDEX token distribution can be found here.

Disclaimer - The information presented in this report has been generated using information from Etherscan, Coingecko and internal Index Coop documents as at 1st June 2021. This article does not constitute investment advice and should not be relied upon. The information within has not had an external audit.

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