Index 2.0 | Our Future of Finance

Authors: @Pepperoni_Joe, @Matthew_Graham, @anon10525910, @prairiefi, @Hammad1412, @Ahuja, @ElliottWatts , @AcceleratedCapital

Contents

1. Background
2. Our Vision, Principles and Impact
3. Existing Financial Processes
4. Challenges & Issues
5. Our Future of Finance
6. Introducing Concept of “Nest”
   6.1. People Organization Community (POC) WG
   6.2. Funding Council
   6.3. Finance Nest
   6.4. Innovation Lab
   6.5. Monthly Contributor Compensation
7. Benefits of Our Future of Finance
8. Open questions for future discussion beyond FoF
   8.1. Leadership & Governance
   8.2. Compensation and Community Allocation
   8.3. Risk & Legal
9. Request for questions & feedback

Summary

As part of Index 2.0, a series of workshops were conducted to generate feedback and recommendations to inform a new “Future of Finance” for Index Cooperative.

A team of Domain Experts from across Treasury WG, the Funding Council and POC have consolidated these outputs into this comprehensive proposal to reimagine Index Coop’s financial and administrative capabilities.

Key changes include:

• Dissolving of the Funding Council as a body which determines and funds ad-hoc rewards and WG proposals.
• The consolidation of all of Index Coops financial capabilities, including payroll, into a new “Finance Nest”
• The transition of operational funding from the Funding Council multi-wallet (primarily Set signers) into the Operations Account (all Index Coop signers)
• The creation of a new “Innovation Hub” design to support the launch of new initiatives/Working Groups. This group will also seek external grant funding through bodies such as Gitcoin and Uniswap grants

As Domain Experts, we feel the recommendations offered here will enable Index Coop to level up and will support Index Coops long term financial sustainability and growth.

1. Background

• Index 2.0 - On August 25, 2021, the forum post Index 2.0: Autonomy Next Steps 5kicked off the ongoing workshop process. “Future of Finance” has been one of the workshop themes. It has covered “Financial and Administrative capabilities” in the Coop.
• Future of Finance Workshops - Two workshops have been run
  • Workshop #1 set the stage for the community to come together and brainstorm on an overhauled structure (Session Recording, Deck 1, Forum Post 1)
  • Workshop #2 was a forum for participants to dive deeper into some of the outputs of the first workshop and begin thinking about the big picture, values/principles, and what an ideal structure might look like (Session Recording 1, Deck 1 1). Workshop #2 provided clarity on a number of topics like key financial goals for Index coop, exploring the remit of the Funding Council, the structural overhaul of the finance organization, and decision making. This resulted in the above authors gaining a sense of alignment within the community.
• Next Steps
  • On October 1, this same group of authors posted Future of Finance - Next Steps [Poll] 2in order to share our ideas for how to go from discussion to action.
  • This post is delivering on our promises made therein.

2. Our Vision, Principles and Impact

The purpose of this section is to, as best as possible, articulate the vision we are pursuing.

We believe it is important to try to make this clear as, while this forum posts puts forward some immediate proposed changes, we also believe that there is more work to be done.

We hope the vision and principles displayed below provide guidance as the Coop continues to evolve its financial abilities.

Our vision…

We have a vision of the financial arm of the Index Coop as a unified collection of teams that continues to be the go-to resource for innovative, efficient, and trusted financial operations in crypto.

Our principles…

To pursue our vision we believe our approach should be guided by the following principles.

• Financial (Sustain, Preserve, Grow 1)
  • Grow: We should make decisions with a long-term view. We seek to act within a predetermined framework and make strategic decisions that accelerate growth and build the Index Coop moat. We are laying the foundation for becoming the Blackrock of crypto.
  • Sustain: In time, we will need to fund our expenses from revenue. We will need to fund recurring expenses like full time salaries, community rewards, various incentive schemes in effort to attain our North Star 1 objectives from the revenue we generate. We need to consider the long term viability of our operating model and ensure that future generations of owls can flourish. We are building a community that will be funded in perpetuity from internal token flow.
  • Preserve: We should seek to build a strong treasury which can withstand any future “crypto winter”. Investment yields and product revenue should fund a proportion of our spend.
  • We want to be conscientious ecosystem participants and avoid investing in products or areas which harm the ecosystem or have negative connotations. To stand up for this will require courage.
• Transparency & Accountability
  • Transparency: By operating on ethereum, everything we do is visible to everyone. As stewards of the community’s financial assets, we are obligated to be the best stewards we can be. Providing visibility and context is key to building community trust and confidence - not just within the community at large, but also with current and prospective investors. Credibility and trust are built through transparency.
  • Transparency: Processes should be shared and discussed in an open and transparent manner. An example: The recurring distribution of funds like contributor rewards shall have clear guide rails, transparent process and an open feedback mechanism in place. Index Coop shall provide open transparent processes, with a data-led feedback mechanism that is always meritocratic.
  • Accountability: Everyone at Index Coop needs to be accountable to the community, the Finance Nest provides the data, insight and context by which community members can make an informed decision regarding funding and requests going forward. Great ideas will rise above and good ideas may fade.
• Solid Foundation
  • Stable building blocks for a successful future of the DAO we will look to build with a Community driven approach. Ensuring that the correct financial foundations are laid early in the DAO’s lifecycle to enable a platform for future financial stability and success.
  • Prudent risk management: Through conservative and well thought out iterative steps that reflect our culture of continuous improvement and preserving the community’s assets, the Finance Nest will deliver prudent risk management. From here, we increase our upside potential through adopting a more managed approach to risk, knowing that safety/security are paramount, “Security is an important unforkable source of competitive advantage that attracts capital to a protocol” (DeFi Citadels).
• Continues Improvement
  • Iterations: In balance with being “safety first,” we will not make decisions out of fear and are willing to test out new hypotheses and look to get better every day.
  • Evolution: by balancing opportunity with a safety first mentality, we expect our financial institutions to evolve over time through innovation
  • Unified Finance: We need to be proactive in ensuring our financial activities work in unison and to serve the Coop as a whole.

Our impact…

Ultimately, through pursuing this vision, guided by our core principles we hope to make the following impact

1. Thriving Community - Individual Coop contributors feel enabled and supported to deliver impact through a well-functioning financial arm of the Coop.
2. Wealth Creation - The Coop as an organization is set up financially to support growth, sustainability, and preservation 1 of our assets.
3. Owlphaneers - We continue to be seen as pioneers, pushing the boundaries of DAO finance.

3. Existing Financial process

Our existing Financial processes are somewhat muddled, with activity and responsibility sitting across a number of entities, including Funding Council, Treasury WG and People, Organization and Community.

Additionally, the community is expected to play a significant role in reviewing WG proposals, providing challenge, pushback and ultimately allocating funding.

Key responsibilities for these different entities currently break down as follows:

Funding Council
(formerly, the Treasury Committee)

• Planning, executing, verifying monthly rewards
• Reviewing and settling reward disputes
• Improving the WG structure & process
• Supporting WG leaders
• Reviewing WG proposals
• Reviewing other proposals that come before the FC
• Improving the FC budgeting process
• Drafting subsequent Funding Council Grants

Treasury WG

• Preparing monthly financial statements in a short-form digest and long-form report
• Drafting proposals for deployment of community funds in Operations and Investment Accounts
• Goal setting and defining the visions for Index Coop’s finances.
• Creating secure and agile wallets to hold community funds
• Transition community funds into the control of the community
• Provide holistic financial management insight
• Developing budget templates for improved budget vs actual reports
• Diversified asset portfolio construction
• Prudent short term money management|

People, Org Community WG

• Management of the monthly contributor rewards and payroll process
• For a significant part of Q3, POC stewarded the IIP process|
  Community
• Provide review, feedback and in-depth challenge on every WG proposal
• Community Contributors
  • Propose, discuss, amend, and call for vote on certain (though not all) decisions
• Token holders
  • Ultimately approve or deny those decisions.
  • Virtually all major financial decisions are run through the IIP process.

4. Challenges and Issues

Autonomy & Legitimacy

• Funding Council Composition - Funding Council signers are currently Dylan, Puniavision, Gregdocter and DarkForestCapital (3/4 Set Community Managers). The composition of the signers understates the communities representation within the protocol (copy/pasted from major issues and potential solutions). Furthermore, some Set Community Managers are stepping away from Index Coop for more Set Labs orientated roles.
• Funding Council Accountability - With respect to WG proposals, the Funding Council feels it lacks legitimacy to continuously challenge WGs and/or decline funding requests (seen as “picking on” WGs). Thus, the Funding Council has provided one batch of feedback to WGs. In this quarter this feedback led to no meaningful change for ANY Working Group proposals.
• Reward outcomes - In some instances, reward outcomes are determined by members of Set (who are on the Funding Council). This was flagged as a major issue in need of a potential solution).

Transparency & Fairness

• Rewards and Contribution - Contributors do not feel they clearly understand what the reward process is - and feel that the reward outcomes are often unfair. Greater transparency is needed from a contributor perspective and from a WGL perspective.
• Rewards Equality - Feeling that the reward outcomes are not equitable between themselves and other contributors. There has also been a lack of standardisation in the rewards approach between WGs.
• No framework for funding initiatives outside of WGs - The Funding Council has lacked the remit or muscle to appropriately support and fund new initiatives and WGs.

Clear Roles and Responsibilities

• Overlapping Financial Responsibilities - People Organization and Community, Funding Council and Treasury WG significantly overlap in regards to managing, funding and reporting on contributor rewards. The various process handovers create inefficiencies and a bad experience for contributors within the rewards process.
• Wallet Structure - Presently there are two multi-sigs coordinating operational expenditure, the Funding Council wallet and the Operations Account. This represents duplication and inefficiencies.

Financial Sustainability

• Budget - To date the Coop has no robust mechanism for budgeting or other financial restraint. We indeed want healthy spending to drive aggressive growth but this needs to be moderated by overarching strategic objectives.
• Equity v Expenses - Misalignment of equity and expenses. It makes sense for Index Coop to revisit the Equity for rebalancing product cost arrangement with Set Labs. Similar can be said when framing Index Coop as a start up and the founding party normally reduces equity into growth. Currently, equity is linked to a known fully diluted supply figure that would otherwise not exist in a traditional start up model. As Index Coop expands - community ownership v major founding party relative ownership per contribution diverge. Creating a more autonomous Index Coop accelerates the cost transfer from Set to Index Coop but not the equity, unless action is taken within INDEX 2.0. Whilst not directly addressed here, this will be explored through the Compensation and Community Ownership theme.
• Gas Costs - All Index Coop wallets spanning WG level to Treasury are not fund funded with ETH to support transaction costs. This leads to market selling INDEX for ETH and can be managed in a more holistic manner streamlining how transactions are funded.

Community Funds

• Control: Currently, the Treasury wallet has zero native Index Coop signers. As a result processing transactions is limited to a select few and at times a single transfer can take weeks. Index Coop lags behind the majority of DeFi Protocols in this area. The reliance on employees from a founding party is a security risk, a governance attack vector risk and a source of general frustration within the community at large.
• Autonomous: Lack of control of the communities main wallet, impact autonomy there is little autonomy. Every large expense is vetted by Set Labs employees and soft control is understated. Further to this, a lot of smart contract permissions are now linked to the communities treasuries. It is not best practice to have permissioned wallet addresses within product infrastructure models containing the community life savings.
• Contributors: All of the communities INDEX is consolidated into a single wallet and it is not clear what the intended purpose of these INDEX tokens are. An ongoing issue is that there is no clear allocation to contributors within the token distribution. Other DAO have community allocations that are known and put aside for future community members. Creating a wallet to hold, or at least a known allocation of INDEX that is put aside for contributors will go a long way to providing future security for contributors.

Many of these challenges have been demonstrated during the Q4 Budget process

• The Funding Council as an institution unsuitable to support the volume of applications and provide enough support, review and rigour to WG proposals.
• The Funding Council does not have the legitimacy to push back on excessive spend. No amendments to any proposals budgets were made in Q4. The most simplest alignment for WG uses the same USD INDEX price when determining stipends did not happen in Q4.
• Anonymous “final poll” also failed. Ostensibly, the Coop should not fund every proposal. Yet, every proposal received nearly 100% support. We have created a culture where we each vote each other’s proposal forward and expect the same in return. Thus bypassing constructive criticism or prudent financial spending. Many proposals are not linked to the North Stars.
• Currently the process actively discourages challenges as there is an expectation of WGLs providing challenge on proposal - but they are directly incentivised not to do this through the current framework (which would increase the risk of their own proposal being pushed back on). More than that, to expand our most high level individuals to review ALL WG proposals and provide feedback is simply unsustainable.
• Lack of clarity on who could decide proposed funding structure (i.e. TWG proposing payment alteration etc) ambiguity around certain funding criteria (INDEX used, timeline etc) led to confusion on what was “fair” pay.
• New initiatives such as the sCoop not clearly falling into any existing framework or funding structure - resulting in disputes.

5. Our Future of Finance

Multi Sigs

In line with the changes highlighted in the “Summary”, under our new “Future of Finance”, Index Coops multi-sigs will be structured as follows:

6. Introducing concept of “Nest”

Before we dig into the structural changes proposed as part of Finance of the Future, we felt it important to introduce a new organizational design concept: the “Nests”.

A major part of Future of Finance has been focused on transitioning core financial activity into one functional group. We call this our “Finance Nest”.

The logic behind this is that the “Finance Nest” can represent all core “Finance” capability within Index Coop. There are many synergies and benefits to this. This “Nest” consists of a series of semi-autonomous verticals, each of which is highly accountable for individual performance.

Through consensus, the Finance Nest selected two leads (in this case Matthew and Elliott) to coordinate cross-functionally. Funding for a Nest is provided at a high level through proposal, with the coordinators then allocating funds to support the activity happening in each different vertical.

This addresses the following issues:

• Coordination - instead of having multiple disconnected WGs, all financial activity is managed within a broad group, with leaders supporting the coordination of core “capabilities” (the verticals). This improves efficiency and the quality of decision making.
• Accountability - by modulating capabilities into verticals and initiatives and assigning performance targets to each vertical, accountability can be increased and poor performance better identified and rectified. See TOC or the Finance Nest proposal for more details.
• Working Group approach - The title “Working Group” is almost entirely meaningless, as is “WGL”. Recently, we have seen new WG forms, or split from existing ones, thus creating new WGLs. By arbitrarily grouping functions into WGs, we create a rigid, lethargic system which creates silos, reduces merotiacry and stifles innovation. Greater accountability of the verticals within a Nest allows fair more fluidity and room for experimentation.

We are experimenting with this model as part of the Future of Finance. Success here could set the “Nest” model up to be extended across the DAO and help address a variety of our coordination and decision making challenges. There is lots much discussion ont come on this model as part of Index 2.0, but a future structure could look like:

• Growth Nest - BD, IB, Growth, CDWG, APAC*, Language Ops
• Community Nest - TOC, sCoop, Women in Index, Community & Culture Guild
• Technology Nest - Product, Engineering, Analytics
• Governance - Governance Operations, MetaGov committee

*noting that APAC is currently operating in a matrix model, with multiple capabilities coordinating via a regional focused block

If brought functional areas were grouped into Nests, outside of the benefits shared about for the Finance Nest, we would see:

• An evolution of the WG model to help address the challenges created by multiple WGs (both old and new) having to request funding each quarter. Potentially instead, each Nest requests/is allocated funding for all activity falling into their area, and then internally works to determine how to best allocate funds to the different semi-autonomous verticals.
• Encourages a culture of experimentation, as different Nest can experiment with different structural or leadership and organization
• Each nest could conduct their own elections for a “coordinator team” to steward the group internally, and coordinate cross functionally with different Nests. The Nest members themselves would be encouraged to experiment and propose their own models for selected individuals to represent them in this “coordinator” role.
• Encourage better cross pollination of ideas and coordination between different groups at Index Coop. Encourages greater integration and collaboration between WGs that fall under the same Nest.
• Nest proposals could be staggered every 3 months (i.e. Community Nest in Q1, Growth Nest in Q2) with proposals that then run for 6 months. Nest would work together to prepare a robust proposal, enabling geater iterations and improvement.
• The emphasis on semi autonomous verticals within each Nest is staying true to our decentralised / autonomous core principles

Given this is a Future of Finance post, a more expansive exploration on Nests is outside the scope of this post. However, for illustrative purposes broader adoption of the Nest model could leave Index Coop coordinating in the following way.

6.1. People Organization Community (POC) WG

*in Q4, renamed to Talent, Ops, Change, with a detailed Q4 WG proposal found here

People, Organization and Community WG has been managing the contributor payroll process. This process has been hands-on and requires close integration with the Funding Council and the Treasury WG in the lead up to, during, and after each contributor reward round.

Going forward, payroll activities will transition to the “Operations and Payroll” vertical within the Finance Nest.

6.1.1 Responsibility Changes

6.2. Funding Council

The Funding Council has been deprecated by the passage of IIP-90.

Once Q4 funding is complete, transfer of responsibility will ensue in earnest. This will include:

• All of the activities noted above in “Existing Financial Process”
• Transferring funds from the FC Wallet to the Ops Wallet
• Ensuring engineering is aligned such that rewards continue to be distributed efficiently

6.2.1 Responsibility Changes

6.3. Finance Nest

With the changes proposed by the Future of Finance, the Funding Council will be dissolved and merged into the Treasury WG - with this new function becoming the Finance Nest.

Reflecting this expanded role, the Treasury Working (TWG) structure was changed to reflect the emergence of clear domain specialists within the Finance Nest. Thus, going forward activities will be split into three distinct verticals which will operate semi-autonomously and be accountable to deliver against their respective objectives and initiatives.

• Accountability
  • Responsible for the overall review of the DAO’s finances through providing meaningful data lead analysis on WG proposals, financial sustainability and forward forecasting initiatives.
• Operational Funding & Payroll (Operations account multi-sig)
  • Responsible for the overall transactional processing of DAO expenses and providing oversight of the contributor rewards process, ensuring maximum efficiency and timely execution.
• Treasury
  • Investment Account - Responsible for the direction and sustainability of the DAO’s finances through diversification of assets and strategic investments with DeFi partners.
  • INDEX Account - This wallet holds INDEX to be managed separate from the Operations and Investments Accounts. Day to day execution will be implemented by the “Index Stewards” with Finance Nest support as required.

A detailed proposal articulating the structure, objectives, key results and initiatives for the Finance Nest can be found [here]. Long term given the logical and structural distinction between these verticals, they can be split up into separate WGs / Funded bodies.

6.3.1 Responsibility Changes

Accountability

• Improving the WG structure & process Moved into the “Accountability” vertical from Funding Council
• Improving the FC budgeting process
• Reviewing WG proposals
• Providing analysis to the community / a team of stewards regarding proposals and suggesting recommendations based upon a data informed review New responsibility for the Accountability vertical
• Publishing of Monthly Financial Statements Existing TWG deliverable specifically allocated to Accountability vertical
• Publishing of Annual and Quarterly Financial Accounts Existing TWG deliverable specifically allocated to Accountability vertical
• Improving the accounting function of the Index Coop ensuring it is scalable and future proof Existing TWG deliverable specifically allocated to Accountability vertical
• Responsible for consistency from a financial perspective across the DAO (interfacing with Analytics and BD for example) New responsibility for the Accountability vertical

Operational Funding and Payroll

• Planning, executing, verifying monthly rewards and exploring ways to improve the process Moved into the “Operations and Payroll” vertical from POC
• Responsible for the management of the Operations account - ensuring efficiency and operational security in executing transactions and multisig construction FC Multi-sig To be dissolved as per IIP-90 and hived into ‘Operations account’
• Processing WG budgets, contributor rewards and other day to day operational expenses through the * Operations account FC Multi-sig To be dissolved as per IIP-90 and hived into ‘Operations account’
• Management of short term funding / working capital / cash flow Existing TWG deliverable specifically allocated to “Operations and Payroll”

noting that the “Treasury” vertical within the Finance nest will not have any significant changes in their activity

6.3.1 Other Handover

• Full handoff FC to Ops – Shadowing, support, FC learnings document to help transition to TWG Ops Wallet AND areas of challenge/improvement

6.3.2 Procedural Changes

• Safety - Operational Funding and Payroll deliverable for clearly defined and transparent procedures for Operations Account to ensure safe management of community funds and timely transaction execution.
• ETH Management - ETH management for TX costs across the Coop.
• Multi-Sig - stress testing, good human firewalls - How we can verify that the signers are following the procedures as opposed to approving any transaction. Thinking of safety drills to ensure signers are on their game and actively checking transactions. We also engaged signers who are actively participating.