Financial Report — April 2022

April marked the start of Q2 for the Index Coop; we have a new focus on yield bearing products and have released our first iteration of this in icETH. This has seen strong market fit for its first month post release and at the end of April had $18.8m in AUM. We differentiate from other interest bearing ETH products, we offer the most competitive interest rate in the market, this has resonated with a number of DAOs who are hoping to diversify their treasury into our products.

Coupled with this we have product releases around the corner in this sector of the market, $FIXED and $MNYe will be launched on Optimism early in May, this product aims to provide a market neutral yield token that creases sustainable, USDC-denominated yield  by automating a basis trade or cash-and-carry trading strategy.

General trends throughout the ecosystem posed a challenge for all products with $ETH (a good general market indicator) down 6.6% from the end of March to April 30th. This generally has an impact on the streaming fee’s generated by our products since streaming fees are denoted in the underlying token, accounted for at the day streaming fees are claimed. This month we saw a reduction in streaming fees across the board in dollar terms, however, in total streaming fees increased by 1% a direct result of additional streaming fees generated by icETH. With challenging market conditions comes the need to internally streamline the business, refocus and drive towards a lean startup type organisation in order to start generating a profit. April saw the start of the mid season review process with the aim to highlight area’s over overspend and opportunities to reduce costs non-essential to the business.

April revenue totaled $277.6k which in $ terms is an increase of $2.8k or 1% from March. This month included the launch of icETH, the start of the new product offering of yield bearing products, something we are looking to expand across further asset categories and also across L2 markets in the coming months. DPI and ETH2x-FLI on mainnet continue to be the product leaders for the Index Coop. It should be noted that ETH2x-FLI has the largest streaming fee coupled with a mint and redeem fee attached to the product. This month DPI generated $61k and ETH2xFLI totaled $165.7k, contributing in total to over 81% of revenue for the Index Coop.

In addition to streaming fees the Index Coop also generates income through utilising its unproductive treasury assets through the Investment Account (IA). The funds in the IA are now fully deployed as at the end of April. We utilise the assets to gain strategic advantages where needed, current deployments are earning BAL rewards to support future products launches on balancer v2. Coupled with this we are also providing collateral to support an ETH loan which is providing Index Coop’s first fully hedged Protocol Owned Liquidity (POL) position, icETH. Current deployments within the account Using the weighted average annualized return of 7.01%, we estimate annual earnings will be $472,063 which is ~2 months worth of current streaming fees from products, however these investments have huge potential to open up relationships in the future. One example of this is a proposal on the Balancer forum which will enable us to work closer to build indices products on Balancer v2.Good stewardship of the DAO involves sensible and prudent treasury management, coupled with active strategic investments to place the organisation in a position to work with DAO’s to further the success of Index Coop, we also aim to support a 24 month stablecoin runway as a minimum.

The runway of the DAO treasury is a hot topic with investors and community members, Finance nest ensures our runway remains strong with high levels of stablecoin and stablecoin equivalent assets. The organisation continues to have strong stablecoin or stablecoin derivative holdings totaling ~17% of total treasury balance at month end. Exposure to our native governance token $INDEX remains high at 79% of the total treasury.

Key developments within the month

April saw the finance nest at Index Coop release the Q1 2022 Quarterly report, this included a presentation accompanied by a short youtube video running through the details.

We are also pleased to have acquired a fiat debit card for the DAO,which is linked to a gnosis safe. This wallet has signers from finance nest and one third party being paymagic, it will be a 1 of 3 signer and will not contain more than 1 month's expected expenditure. Paymagic will take a 3% transaction fee and will automatically withdraw from this account once payment has been made on the card. The DAO debit card will enable us to manage all subscriptions at the Coop from one card and minimize the expenses contributors have to front.

IIP-151 to update the operations multi-sig signers passed with a total 181,000 INDEX voting for. This proposal aimed to increase in-house Product coverage on the Operations Accounts which are being increasingly used to support Protocol Owned Liquidity (POL).

The ops account will be used going forward as the primary account to deploy protocol owned liquidity as outlined here.

In addition to this IIP’s 142 & 143 in regards to the investment account passed. IIP 142 aimed to facilitate the transfer of 1,719,897.33 USDC from the Treasury to the Investment Account where it will be deployed to earn yield. IIP 143 modified the signers on the Investment Account Gnosis Safe. During recent efforts to deploy capital from this wallet we experienced difficulties in being able to find times where all signers were available.

Vesting schedule

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 ($8.56), the remaining balance within the total vesting contract is $17.5m. The February, March and April vested tokens have not yet been claimed but they will be drawn out in due course, hence the closing balance is the same from January. 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, this further stresses the need to ensure we develop a sustainable business model going forward, this is the main focus of 2022.  

Key financial statements

Profit/(Loss) analysis

We have presented below the GTD (Genesis to date) transaction history of the DAO. To date, the index coop shows a loss of $10.9m. High initial liquidity mining costs contributed to a significant amount of cost for the organisation at genesis and throughout the first 6 months, coupled with staff costs being in excess of $500k per month towards the latter of 2021 and throughout 2022. For new product launches we will initially provide seed capital to bootstrap the product adoption and provide a positive user experience, instead of providing liquidity mining incentives which generally attract mercenary capital. This option exposes the DAO to asset impairment loss due to impermanent loss experienced within the liquidity pools, this however is expected to be significantly lower than LMI expenses.

When reviewing the P/L on a line by line basis we can see that there are 3 key costs to the DAO in April we will explore these in turn;

• Contributor rewards spend is the largest cost to the DAO. April rewards totaled $578.3k, the general increase in this cost is due to new core hires being onboarded and also renegotiation of certain DAO core hires salary. We are moving towards hiring a core team and reducing spend in areas that are not needed, shifting from a high spend organization to a startup for profit-focused business

• Ads and sponsorship constitute the next largest spend for the organization totalling $356k, this is a growth nest spend which is used to incentivise and market our products. Season 1 has seen large expenditure in relation to paid performance and SEO,  this is a cost we expect to decrease as its an initial outlay to set up the programs

• Impression mining was the third-largest cost for this month totaling $159.7k. The last few months have seen no impression mining costs. The impression mining program is being reduced as it has not quantitatively been proven to be effective and is seen as a cost not necessary within the DAO

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.

N$F statement

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.

April saw positive movements in N$F compared to March, with positive gains in N$F for both the polygon and mainnet products. The weekly average for mainnet products increased to $5.5M from -$1.1M in March, this can be largely attributed to icETH which has seen strong product adoption since launch. The polygon product suite's weekly average increased to $106.9K from -$45.8K in March, driven by the increase in unit supply of MATIC-2x-FLI-P. N$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 April market conditions have provided a challenging period for Index products across the space, Index Coop is no exception. It is however promising to see strong adoption of icETH, we foresee this being a strong revenue stream for the organisation for years to come as it continues to grow and gain more traction. The strong product pipeline expected over the next 6 months, coupled with a new product focus should set the tone for a successful remainder to 2022.

Note: Balance sheet review The Index Coop is currently reviewing the balance sheet presentation. We are aiming to include a balance sheet in next month's financial review once we have accounted for protocol owned liquidity positions.

Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.

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