Introduction to Index Coop Metagovernance

What is Metagovernance?

Because the Index Cooperative’s products are composed of other products, it holds voting positions on those products. This is what is referred to as “Metagovernance.”

Right now, the Index Coop can only vote on a handful of protocols within the DeFi Pulse Index (DPI) including Compound, Aave, and Uniswap, all of which rely on Compound’s governance module and are held within DPI. The Index Coop can also vote on Balancer and Yearn protocols, which are also part of DPI. What all this about voting?

The Index Coop, like many of the largest decentralized finance projects, functions as a Decentralized Autonomous Organization (DAO). In a DAO, unlike a traditional corporation, projects and priorities are voted on by community members. Initiatives can be put before the community as proposals and token holders can then vote in proportion to the number of tokens they hold. Governance tends to center around token economics but can include hiring new team members, minting more tokens for reinvestment, and any number of other proposals.

Metagovernance is enabled by the type of index products we build.

How does Metagovernance Function in Traditional Finance?

DeFi metagovernance mirrors that of traditional finance. The Coop’s traditional counterparts like BlackRock and Vanguard are often in the top three shareholders at public companies. As shareholders, they vote on board members, executive compensation, accounting matters, and more recently, environmental, social, and corporate governance proposals.

In Traditional Finance, this kind of governance activity is referred to as “investment stewardship”, and it is a complicated business. Blackrock has a team of 50+ people that interacts with portfolio companies on governance matters, and in 2020 alone Vanguard’s stewardship team cast votes on 168,000 proposals.

The primary difference, like much of DeFi, is decentralization. BlackRock’s voting is handled by a team within the company, or a proxy advisor service, while the Index Coop’s voting is owned by its tokenholders.

How does Metagovernance happen?

At the Index Coop, whenever a new governance vote is called for on Balancer, Yearn, Compound, Uniswap, or Aave, it is automatically posted to our Snapshot page for community members to vote on. In order for a vote to be executed a 5% quorum must be reached by the end of the voting period. Here’s how that works:

• A token within DPI puts out a governance proposal

• The proposal is duplicated on the INDEX snapshot page

• Index holders vote on the proposal within the index snapshot page

• Assuming quorum gets met (5%), the index multisig votes according to the majority recorded by the snapshot

Votes don’t get divided up proportionally to the vote, rather, a majority within the snapshot vote delegates all of Index’s voting power towards that outcome. (For example: If 6% of INDEX tokens vote, then quorum is reached. If 55% of those votes were for the “Yes” option, then all of Index’s voting power votes yes.

Since the Index Coop is a DAO, this structure is malleable and could change according to community vote.

Why does Metagovernance matter?

Most protocols have a governance structure that requires their token holders to vote and pass proposals. In order for votes to move forward, they have to reach quorum. Reaching quorum can be hard to do since many tokenholders aren’t interested in voting (Kevin Owocki recently estimated that DAO voting participation typically hovers around 2%.) This can make it difficult for protocols to make the changes necessary to keep up with the ever-shifting DeFi environment.

As of the May DPI rebalance, the Coop held roughly 1/140th of all Compound tokens. While not a chokehold by any means, that’s the 47th largest holder of Compound in the world, and a sizable voting bloc. A holder the size of the Coop can singlehandedly be the difference between a protocol consistently reaching quorum or not.

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