The start of the financial year has been challenging for the Index Coop and the general DeFi and crypto ecosystems more broadly. The overall market has seen a general downtrend with $ETH (a good general market indicator) being down 29.2% over the 30 day period. This has had an impact on the streaming fees generated on our products across the board, and also our overall treasury balance. Given the negative price impact market conditions have had on our $INDEX governance token resulting in a reduction in our overall treasury holding. However, January saw the launch of Season 1 for the Index Coop, a refocus on our core objective and KPI’s as set out by the Index Council (our elected body of leaders) with the aim to grow the protocol and expand throughout the first 6 months of 2022. It has also seen the emergence of debt on our balance sheet, which is widely considered a cheaper alternative to equity, in this instance equity can be considered as the Index governance token. This will enable us to use our Index reserves as collateral whilst not distributing the supply to the open market allowing us to better manage our working capital along with partnering with pioneers in the space in providing DAO to DAO debt issuance.
January revenue totaled $321k which in $ terms is a reduction of $272k or 45.7% from December. The reduction in streaming fees was expected given poor market conditions towards the end of December and throughout January. ETH2xFLI continues to be the product leader for the Index Coop and it should be noted that this has the largest streaming fee as well as a mint and redeem fee attached to the product, something not all our products have. ETH2x-FLI has generated to date 59.4% of total product revenue, which is impressive since it was released in March. We attribute the success of the ETH2x-FLI product to traders seeking leverage. However we have seen the N$F to this product slow down over the last two months, a direct result of bear market conditions, so in order to provide a product offering in both bear and bull market conditions, we are launching on 9th February an inverse FLI offering where you can inverse leverage trade ETH and MATIC. This will in effect provide stability to income streams irrespective of market movements.
Other products have also been impacted by poor market performance, total TVL across all products is down 48.5% compared with the end of 2021. This reinforces the importance of having a well diversified treasury, coupled with strong stablecoin reserves to bootstrap a successful future. Good stewardship of the DAO involves sensible and prudent treasury management, we maintain an 18 month stablecoin runway as a minimum.
The DAO treasury remains strong with good USDC reserves, however, given the total exposure to INDEX being 66.83% of the treasury the recent downward trend of governance token price across the defi ecosystem we have seen a total reduction in INDEX since December of 36.1%. The total treasury balance currently stands at $29.7m. INDEX price closed at $9.83 which has decreased by 32.3% since December.
January saw the launch of $GMI which is an Index that focuses on high growth, early stage DeFi projects which are not yet considered “blue chip”. GMI produces an optimal weighting via the use of a combination of square-root market cap, relative secondary market liquidity, and relative token dilution/emission scoring. $GMI had a successful launch program and we are excited to see how it progresses throughout Q1 of 2022. We are pleased to announce a packed product line up for Q1 with more leverage products expected to go live in the coming days.
Key developments within the month
The Finance nest is also pleased to announce that the Investment account has been funded with $5m USDC which has actively been deployed into various stable coin strategies. Of the total $5m within the investment account, 50% has been deployed by Finance. This will enable the DAO to make its treasury holding productive creating another revenue stream for the DAO, the opportunity cost was estimated to be ~$450k per annum. Creating a treasury that is both diversified and productive. This is one step that finance has taken to ensure it meets its overall aim to preserve, sustain and grow. Creating a DeFi Citadel to enhance our community’s ability to survive any and all market conditions, eg: crypto winter, competitor attack, contract vulnerability, DAO hack, or black swan events.
Our Co-Finance leads are currently exploring the option of working with Debt DAO to provide the Index Coop with a line of credit that can be drawn on to satisfy short-term cash flow constraints, this is an important development for the organization as it allows us to be flexible and to utilize our INDEX reserves as collateral for loans. In the short to mid term this line of credit will be used to provide PCL (Protocol controlled liquidity) to our new product launches across multiple chains.
January has been a positive start to the new financial year for the index coop. We have just finished our first round of priority hires which we see as essential to bootstrapping the long term success of the organization, coupled with the release of the DSM, a model intended to reward contributors who continue to hold INDEX, this is the result of many months of discussion and implementation design and we are pleased to release this to the community.
The treasury receives funding from a periodic vested token contract. The one-year vesting contracts have been fully drawn down and the treasury is now drawing capital from the second-year vesting contract which has a total value of 1,425,000 $INDEX tokens and 950,000 $INDEX in year 3. 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 2nd and 3rd year vesting contract that will be released to Index Coop treasury. At today’s prices ($9.83), the remaining balance within the total vesting contract is $20.05m. The Index Coop uses these funds to create products, fund working groups, and promote the DAO. These funds are used to secure the future success of the organization. Amounts vested can be seen below, note that this is represented in $000;
The treasury after the final vesting contract is called will have no further INDEX flow into the treasury. It is therefore important to maintain a sufficient reserve runway to bootstrap the future of the Index Coop. As part of season 1 finance have been enlisted to provide a sustainability review into the organization’s current spending and ultimately the ability to continue is an ongoing concern. From the budget created for 2022 we are expecting to strive towards a business orientated model with a start up a mindset which is essential to ensure we do not overspend initially and inhibit our ability to grow for years to come.
Key financial statements
We have presented below the GTD (Genesis to date) transaction history of the DAO. To date, the index coop shows a loss of $8.8m. This is largely a result of aggressive liquidity mining incentives since genesis which were initially needed to bootstrap new products to enhance user experience. Liquidity mining to bootstrap a new product is one way of incentivising supply, however we have seen how cost inefficient this can be with large emission schedules and mercenary capital flowing to where provides the most lucrative returns, this did not provide stickiness within certain trading pools. For new product launches such as $GMI, $ETH2x-FLI-P and new polygon products being released we will initially provide seed capital to bootstrap the product adoption and provide a positive user experience.
Initial seed liquidity positions are intended to be short term whilst trading volume is established on new products. Whilst we will be exposed to potential loss when exiting the positions the cost of this is significantly less than that of liquidity mining incentives.
When excluding liquidity mining costs from the P/L, the Index would be generating a loss to date of $3.13m, we have work to do before we become profitable and generate positive net cash flows on a monthly basis, however when performing a review of the last 3 months November through January total revenue exceeds $1.6m, 33.5% of total revenue generated since genesis, this is positive and shows good growth towards the latter part of 2021, with a strong product pipeline we anticipate significantly outperforming this metric for 2022.
When reviewing the P/L on a line by line basis we can see that there are 3 key costs to the DAO in January we will explore these in turn;
- Contributor rewards spend which is the second-largest cost to the DAO behind that of liquidity mining to date for January this totaled $644k, part of this was due to the inclusion of FT hire vested contract costs. We have also seen an increase in the number of contributors over the last 3 months, as can be seen through the increasing cost month on month. The DAO is currently undergoing a restructure as part of Index 2.0, and the adoption of the Nest structure which will enable us to streamline the business and avoid duplication of work. We have on boarded a core team which we ultimately see being the backbone of the organization. Shifting from a high spend organization to a start up for profit focused business.
- Ads and sponsorship constitute the next largest spend for the organization totalling $33.7k, this is a growth nest spend which is used to incentivise and market our products. This month we have seen the launch of $GMI which had a number of marketing campaigns attached to it. This is a cost we expect to increase inline with what products are launched in the respective month.
Due to the nature of DAO accounting the Index Coop currently only records transactions in the P/L when tokens have left the IC wallet i.e cash accounting. In DeFi it is difficult to implement the accruals concept due to a lack of back-end accounting systems available on the market. We are however looking into options to optimize as the accruals concept allows for better accuracy, accountability, and transparency.
The Income Statement above 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 closing price on the day the transaction occurs.
The streaming fees for each product are detailed below:
- DPI streaming fee is 0.95%. This is split 70/30 between the Index Coop and DeFi Pulse. The total streaming fee has been shown within Revenue within the income statement, and the DeFi Pulse share is shown as a cost.
- ETH2xFLI, ETH2x-FLI-P and BTC2xFLI, the Flexible Leverage Index series, each have a streaming fee of 1.95% (195 basis points) and a 0.1% minting/redeeming fee. The revenue generated from the streaming fee is split 60/40 between the Index Coop and DeFi Pulse respectively. Similar to DPI income, revenue has been shown in totality, with the DeFi Pulse portion shown as a cost.
- MVI streaming fee is 0.95%
- BED generates revenue for the DAO through a streaming fee of 0.25% (25 basis points). This is split 50% to Bankless DAO and 50% to Index Coop
- Data Economy Index (DATA) will have a streaming fee of 0.50% (50 basis points), a mint fee of 0.10% (10 basis points), and a redeem fee of 0.20% (20 basis points). Split 60/40 with the index Coop and Titans of Data respectively.
- Bankless DeFi Innovation Index ($GMI) has a streaming fee of 1.95% (195 basis points) and has a post gas fee split 40% to BanklessDAO and 60% to Index Coop
Balance sheet review
When presenting the balance sheet we have adopted best practices, adopting cash accounting in order to create this statement. We have made a number of assumptions that are detailed below;
- Cash and Cash equivalents are stated using the EOD translation at the end of the financial year using the latest coingecko price
- Paid in capital is the initial community allocation at launch of the Index Coop token which traded at a price of $3.55 on 07th October (3,625,000x$3.55014)
- Unrealized price movement on tokens is included within Capital and reserves as a balancing item
Due to the nature of the environment the DAO operates in, the balance sheet is limited to treasury holdings, any further asset holdings such as debtors and liabilities which in the future we will see as the DAO moves to take on debt as a position on its balance sheet. We have seen a reduction in total assets held from the prior month as a result of adverse token price movement in the Index Governance token. However other assets such as our own product holdings have grown in line with positive asset price movement. The one item to note is the Kucoin market maker fee that was issued in May 2021 we are expecting this fee back in due course. In addition to this we have also highlighted the liquidity providers that currently have custody and manage our liquidity positions on our behalf. Due to utilising the cash accounting basis we will record any profit or loss on the positions as they are closed.
Net Dollar Flows (N$F) is the measure of “new money” being spent to purchase index products minus the amount that is leaving or “cashing out”. Daily N$F is the product of the average daily price and the net supply change. N$F provides a more accurate measure of growth than TVL or AUM because it only focuses on the attraction of capital, not index performance.
January saw smaller movements in N$F, there has been a general slowdown in the ecosystem throughout the last quarter of the financial year and in January, which is mostly due to poor market conditions late in 2021. Positive gains in N$F due to new product launches is largely offset by outflows in relation to ETH2x-FLI and the Metaverse index. After strong ROI during September and October it is expected that holders take profit on their investment as product price has underperformed late in 2021. N$F analysis has become a key performance indicator, and it will continue to play an important role as we try to measure our ability to attract capital in all market conditions. As the chart shows, N$F is volatile which is a potential indication that customers are trying to time the market. With the FLI-series, this is an expected outcome, and to a lesser extent sectoral indices may be “timed.” As the number and variation of products increases, it’s likely we will see N$F become less volatile in aggregate and show steady month-over-month growth.
Overall January has been a tough month for the Index Coop and the overall DeFi Ecosystem with negative price action across the board. However, with a strong product pipeline and treasury balance, coupled with the recent recruitment of a core team all contribute to an expected successful season 1 of 2022.