This really resonates and I absolutely love this method of open communication with the DAO on what’s working/not working for others in our cooperative. We’re all Index Coop and we need to keep this conversation going. I’ll drop in with some specific comments but I love this open and well-considered feedback; thank you.
To the authors: Thank you for this letter and for highlighting the importance of relationships in direct correlation to immediate and future success. Gentlemen, you are clearly our #1 enabling and functional stakeholders and supporting partners, and your guidance is of immense value to our next six months. Thank you for your patience. I do not doubt our Council and community will find the path to best implement these recommendations.
Though many of these objectives/corrections will be contentious, I believe they are worth pursuing for the greater good of the cooperative. I would like to comment on a few things and raise a few questions as well.
This comparison is particularly shocking. This alone could warrant a full retrospective, but at the most fundamental level, I think there is a question around organizational identify - are we a lean startup that empowers a smaller number of high impact people to move the organization forward, or are we an ultra-flat web3 org with a highly flexible workforce that requires community consensus for progress to be made? I don’t mean to present a false dichotomy here - our collective success can contain elements of both - but I do want to point out that metrics as bad as ours can only be addressed by making some difficult decisions and empowering leaders within the community to make those decisions.
Though I personally disagree with disbanding the investment account, I am curious to know what Set / 1kx would consider to be “safe” destinations for idle stablecoin capital. A few alternatives could be…
- providing Protocol Owned Liquidity (POL) for stablecoin yield products like PINT, FIXED, MNY, etc. This would support product growth and capture yield for the treasury at the same time. Exploit risks are then largely limited to Set infrastructure.
- selecting protocols/products that are entirely removed from the Set ecosystem. The argument could be made that we ought to diversify outside of Set / Aave / Compound / other integrations because we don’t want to put all of our eggs in one basket.
I would like to understand your collective risk preferences because, in my opinion, the opportunity cost of doing nothing with our capital is too high.
I completely agree with this sentiment, and there are already several efforts underway to better manage external relationships (whether they be with methodologies, protocol partners, or others). I must confess that I have expressed skepticism in the past about the true utility of external methodologists, but there are absolutely ways for everyone to win with the right partnerships in place. Moving forward, we must treat external methodologists and other product partners as customers, with the same level of engagement and intentionality as we do the customers of our products.
Authors: @setoshi (Set), @heychristopher (1kx), @anon10525910 (Set), @nic (Set), @AcceleratedCapital (1kx)
Index Coop is at a turning point in its evolution. A lack of clear direction has led to a culture of zero-sum games, and our operational runway is not keeping pace with our spending. This is an open call to action to the Index Coop community, which we are all a part of, to address these issues within six months.
This post reflects our viewpoint based on the data accessible to us - we welcome questions and additional information to sharpen these views.
Our current situation
According to the February financial report, in the past six months revenue has fallen 52% while contributor expenses have increased by 19%. Since the start of the year, we have spent $1.2mm on contributors but have only generated $600k in streaming fees.
Comparatively, our spending is far in excess of most leading protocol DAOs relative to TVL and on-chain revenue flows (note in particular the monthly revenue over total compensation expenses ratio is 6x worse than the nearest comparable) :
Source: Reference spreadsheet
In addition to the above expenses, Set currently bears the gas cost for our products and software costs for our operations, but this is something Index Coop will likely be taking over in the future. This will bring an additional large monthly outflow into the equation on top of any liquidity mining incentives we intend to provide, potentially contributing another $110k/month or more to the costs of the Coop.
Contrary to this spending, the pace of our innovation has been slow (although we recognize some great products are being launched/built like icETH, BASIS, and FIXED) due primarily to long and convoluted process, and our collective focus has shifted to complex side projects and issues unrelated to our core strategy (e.g. DSM, investment initiatives, Governance House, etc.). Contributor ownership is a noble goal that seeks to address some core issues as laid out by the Index 2.0 initiatives, but this can’t come about by putting Index Coop’s future at stake.
Recommendations
In order to move forward as an organization, we collectively encourage the following actions are taken within the next six months to improve the Coop:
1: Define who we are as Index Coop
We need to find a way to properly align incentives for both in-house product development and external methodologists. We succeed as an organization when we provide the most innovative products from both types of providers and can distribute those products in an expansive and cost-effective manner.
By clearly defining a strategy for in-house and external product distribution, we will have a guide to our strategic decision-making (e.g. talent curation, customer procurement, internal processes, etc) going forward.
Specific Actions:
We recognize that some version of this conversation is happening today via Do we want to become a Product DAO, partnership platform or both?.
2: Double-down on financial sustainability
As noted above, the rate of our spending is not in line with our growth. While we often defer to start-up culture financials which tend to operate at a loss, we have seemingly divorced ourselves from a lean approach that performs many experiments with small and highly specialized teams.
We recognize that the Finance Nest states that part of their mandate is “safeguarding the sustainability of the DAO.” To us, there seems to be a disconnect between that statement and some actions. For example, our Finance Nest has moved into investment related activities, which could significantly reduce our operational runway if a single misstep or exploit were to occur. This would inevitably result in selling pressure on the INDEX token to fund expenses at a time when it is already significantly depressed. We worry that risk is not appropriately accounted for here: $6.7mm of our stablecoin position (which is the entire stablecoin balance after Season 1 budgeting expenses) is earmarked for yield generation across 3 primary protocols - a single exploit could reduce our runway by months. The Coop does not have this margin for error.
While income generation does tend to make sense, this is detracting focus, time, and resources away from our core goals and may not be properly accounting for expenses: the February investment account report has an annualized yield of 5.19% (~$350k a year assuming all ~$6.7mm was invested and there were no additional outflows) yet we pay the Finance Nest $626k annualized from the Season 1 budget. This is only 2.21% of relative outperformance vs the Aave/Compound benchmark. Some of this compensation of course goes to financial report preparation and Operations Account management, but we may not be receiving much of a net benefit relative to risk at the end of the day.
The Finance Nest has spent a considerable amount of time on financial reporting and likely understands our sustainability situation the best - many in the Finance Nest have even highlighted these issues in the past. Here, we are relying on the information available to us, so if there is a mistake or missing context, please do let us know.
Specific Actions:
3: Incentivize our top leaders and talent
Effective strategic decision-making ultimately starts with curating and hiring top talent. A tightening of our financial spending should not preclude properly incentivizing our community leaders. Both proper incentivization and empowerment of those leaders in the community is how we will be able to grow sustainably as an organization.
We worry that compensation today is too focused on the short-term. Contributors are compensated on their monthly or quarterly workstreams which conflicts with long-term goal and strategy setting. In addition, mismatches in performance and pay have led to turnover at the Coop. This was sought to be remediated by the core hire program, but we think there are better options than just token vesting incentives available to us today. Most notably, we believe KPI options that directly reflect core Index Coop strategy goals could incentivize the kind of collective effort we need to achieve our goals. We are aware that a version of this idea was previously floated in the community but did not take hold.
In addition to incentives around compensation, we recognize the need for key contributors to receive larger amounts of influence in the DAO’s decision-making, something noted throughout the Index 2.0 process. 1kx and Set intend to delegate significant amounts of INDEX to community members we feel best imbue the DAO with leadership and reflect the values necessary to collectively thrive.
Specific Actions:
4: Improve our relationships
Not having a clear mandate has led us to creating antagonistic relationships with our external methodologists and other partners. We have developed a win-lose mentality on certain issues that doesn’t need to exist at all. This space has so many win-win opportunities, but we tend to focus on playing zero-sum games that push potential partners away from the Index Coop. This harms the Coop both short-term (not launching products) and long-term (bad reputation/brand will repel potential partners).
Paraphrasing an anonymous potential partner:
And from a second anonymous potential partner:
We need a cohesive plan to tackle this head on. In our opinion, our ecosystem will flourish if we work with our stakeholders instead of against them.
Specific Actions:
5: Bring building back
Looking at the forum, less than 30% of all recent posts are actually product-related. This shifts a significant amount of attention away from our core functionality: building the best products. How do we expect our product leaders to operate at their best when so much time and energy is placed in non-product related queries and proposals?
When we do create products, we rely too heavily on others to engineer solutions in order to launch them. When we create or decide to onboard a product, we should be in charge of building the necessary infrastructure to ensure it can be executed. By relying on Set for adaptors, contract maintenance, and rebalancing, we create a bottleneck for both of our organizations.
Specific Actions:
If Index Coop is unable to successfully incorporate these actions within six months, we plan to begin drafting and proposing changes to more quickly shift the organization to meet these needs. This would likely require a reorganization to effect substantial change. In addition, we hope to see the financial sustainability goals implemented by the time we vote on the Season 2 budget if that proposal is to receive our support.
As a note, the burden should not fully rest with the newly-elected Wise Owl council, but they can help guide these issues. Ultimately, the burden rests on all of us to engineer solutions as a fully functional DAO. We prefer bottom-up innovation philosophically, so we would like to see the DAO accomplish this together.
The future is bright
The Coop is considered by many in our industry to be a model DAO, operating as one of the flattest hierarchical organizational structures to ever exist. We are frequently used as an example to showcase how to successfully structure and operate one of these new organizational forms. In a way, we collectively represent the entire DAO ecosystem.
Unsustainability, a return to tribalism and politics, and a reduction of our efficiencies into bureaucracy and bloat could be used by critics to highlight how DAOs are unable to succeed in the long-run. Let’s silence these critics and show that DAOs improve upon all other forms of human coordination. We bear a responsibility to this industry to become a shining example of success.