Controllers, Pools, Governance and Proposals: An NDX Primer

After writing my previous primer for Indexed Finance (NDX) — which discussed, at a very high level, what an index actually is — I’ve started to whittle down the set of questions that everyone new to the NDX Discord asks. As it goes, it turns out a primer series is probably the best way to get all of these things answered at once as best we can.

So, here’s post number two!

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See also:

• Stock Indices: An NDX Primer

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This one’s a bit more wide-ranging, but to signpost it in advance, I’ll talk at a high level about controller contracts, the pools that represent individual indices, the relationship between these two concepts, the current purpose of the NDX governance token, and the current procedure for manifesting the rights associated with said governance token.

To lampshade the full picture (since there’s a lot more going on than what I’m going to mention here), below is a quick diagram pointing out the major factors of the ecosystem writ large:

For this post, we’re going to ignore the existence of the initialiser and unbound token sellers (since they’re more related to making the whole endeavour work in a smart contract sense, and will ruin the analogy I’m going to run with).

As before, I’m going to keep this sparse on the code/technical detail side of things for the sake of accessibility. If you’ve got any questions that need further detail, there’s a Discord full of people ready to help.

What Constitutes An NDX Index?

With the above disclaimer about overall context in mind, we can turn on our tunnel vision for a bit and look at an index as the sum of two components:

Both pieces are necessary for the index to be fully realized, but most of the heavy lifting is done by the controller.

Controllers 101

To start the analogy I promised, a controller can be viewed as akin to an operator in the financial world — a company that defines and manages indices themselves. Whilst you may be aware of the S&P 500 and Dow Jones as indices, you’re probably less likely to know that they’re both administered by the same company — the aptly named S&P Dow Jones Ventures LLC.

A controller is a contract that defines the way in which token selections are ranked and weighted and determines which tokens are in which universes (if any of these terms are new to you, go and read my stock index primer!).

Operators and controllers alike are capable of administering more than one index simultaneously, although the nature of smart contracts is such that NDX controllers in their current form are constrained to a single method of ranking/weighting each.

What this means in practice is that whilst both the CC10 and DEFI5 indices of NDX — which both utilise a square-root market-capitalisation weighting — were generated by the same controller, if there’s a desire to introduce a DEFI5EQ index pool that uses equal weighting, a new controller would have to be tested and deployed first. However, if the assumption holds that all pools should just continue to use the square-root method, the existing controller can be reused for as many pools as desired.

To the best of my knowledge, there’s ongoing work on developing a library of controllers for various weighting strategies, which can/will lead to a more modular approach to proposing and incorporating indices via governance (which we’ll talk about later).

Pools 101

Pools — as generated by controllers — can be viewed as the team of hapless middle-office employees employed by an operator that perform the workaday tasks associated with maintaining an index.

In practice, they’re Automated Market Makers that aim to keep the balance of tokens they contain as close to the target weights set by their parent controller as possible. For those who are interested in the technical details, they’re a fork of Balancer pools (link goes to whitepaper). There’s a pretty good external article here on their inner workings.

As referenced above — pools are borne from controllers as a way to maintain the balancing act between tokens chosen from a given universe. If a controller has decided that an index should be weighted 40% UNI, 35% AAVE and 25% SNX, it’s the pool that deals with the purchasing/shuffling of assets to make sure that those weights are adhered to. In a more prosaic sense, it’s the pools that deal with the reweighing and reconstitution of indices and setting/accrual of trading fees earned by participants entering/exiting them.

For the most part, despite the controller being the component that describes the underlying specification of an index, for Joe Bloggs the existence of the pool is all that matters, since that’s what they’ll be interfacing with day to day.

What’s The NDX Token, And What Can I Do With It?

As with other DeFi platforms in existence, Indexed has it’s own native governance token NDX (a fork of UNI, itself a fork of COMP). Whilst the topic ‘what do these native tokens do’ has been covered in many other places, here’s a one liner — they entitle you to vote on how Indexed goes forward. To this end, your NDX holdings constitute ownership in a DAO (Decentralized Autonomous Organisation).

Those votes could be in the form of protocol changes (i.e. the swap fees charged on indices), disbursals (i.e. agreeing to release/sell tokens from a treasury to hire a developer or as equity for a potential VC), distributions (i.e. should NDX be farmable for a while, or airdropped to a select group), and so on. If you’re familiar enough to the cryptocurrency world, none of this is new to you. If you’re not, they’re ‘just’ vote-bearing shares that don’t necessarily require you to have exposure to any indices themselves.

The votes that you have (in the form of your tokens) are brought to bear against proposals. Indexed Finance currently has a particular protocol for gathering suggestions and putting them to votes for implementation — we’ll talk about that at the end of this post.

Quickfire Round: NDX FAQs

We get a lot of questions about ‘what benefits the NDX token confers’. Applying the principle of charity here, here are the most common ones. It’s important to note though that these answers might change depending on the proposals that are put forward. I’ll try to keep these answers up to date.

• Can I Earn NDX For Staking NDX?: beyond the fees you can accrue by placing NDX into a Uniswap liquidity pool, no. (Note for the brave or reckless: caveat emptor when it comes to adding liquidity — impermanent loss is real). You won’t be getting airdropped any additional governance tokens simply by virtue of having tokens already.
• Do NDX Rewards Compound?: at the time of writing, there’s a reward scheme being offered to people who hold the DEFI5 and CC10 index tokens and stake them in their respective pools (this scheme ends on March 8th 2021). In short — no. The amount you receive is strictly a linear amount on a per-block basis dependent on your total share of the currently staked tokens.
• What’s The Value Proposition Of NDX?: in short, NDX indirectly gains some of it’s value as metamoney, as a side-effect of the total funds held by a protocol — a token that decides the governance of a pool of US$50,000 isn’t nearly as ‘valuable’ as one that is operating with US$20 million. Beyond this, however, the performance of indices themselves has no bearing on the dollar value of NDX — and that’s how it should be.

As more questions become more prominent, I’ll add them in here. I’m leaving questions like “who created Indexed Finance — are they anonymous?” alone because they don’t fit the category of discussing tokenomics.

I Have A Proposal — How Do I Make It Happen?

I’ll end this post by signaling the way that proposals are currently handled by Indexed Finance. As it stands, despite things being still fairly new, but proposals are being put forward by regular NDX holders (example linked), as opposed to just the developer team themselves.

Nonetheless…

Congratulations, you’ve had an idea for a change to the way that Indexed Finance operates! But… you have no idea how to make it happen.

Here’s how you go about it:

• [OPTIONAL] Make a post on the forums with a title prefaced with [DISCUSSION/PROPOSAL]. Make sure that what you’re suggesting is something that people are likely to vote for!
• Once you get some positive feedback (or if you’re brave and skipped the last step), create a Snapshot proposal. Doing so allows for people to tentatively cast a vote for your idea without committing to it on-chain, and restricts voters (and their vote amounts) to those who held NDX at a time you specify. You’ll have to be holding at least 1 NDX to create a Snapshot proposal (although it’s arguable why you’ve been trying to do all this if you haven’t already got at least one at this point).
• If your proposal meets quorum (50,000 off-chain votes) and the majority vote is in favour of moving forward with your proposal, if you don’t have enough NDX to create an on-chain proposal yourself (currently 100,000, or 1% of the total supply), the developers will create one for you. If you have 100,000 NDX… you could just skip everything up to this point, but it’s incredibly likely you’d already know how this all works by now.
• Everyone votes on-chain (notably, Snapshot votes can be changed — on-chain commitals cannot). The quorum for on-chain votes is significantly higher — 400,000, or 4% of the total supply. This number seems low, but you’d be surprised at how little engagement there can be for DAO governance. To that end, to start with, if your on-chain vote receives a 50,000 ‘sub-quorum’ with a majority within 48 hours of it’s launch, the developers will vote for it to speed early development along.

Note that these on-chain figures (100,000 for proposals and 400,000 for quorum) are derived from the fact that NDX is a UNI fork. These figures might change. They probably won’t.

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So there you have it — another post in the series done. Hope that helped: if not, I’m a message away — ping me @laurence on the Discord server!