Understanding PowerIndex: the value of Index governance
By reading this article you will understand how the community can govern the index and why it is valuable
PowerIndex is a decentralized ETF-like DeFi index, consisting of 8 different governance tokens (GTs).
Read more about PowerIndex and PIPT:
- Understanding PowerIndex: Introduction & Basics
- Understanding PowerIndex: the PIPT token magic
- Understanding PowerIndex: liquidity provision
- Understanding PowerIndex: pooled tokens usage
As it was described before, PowerIndex contains 8 tokens on the smart-contract (the pool). Composite tokens are stored in this contract.
What does it mean “to govern the index”?
It means to, that the PowerPool community can change principal index parameters:
- Token set. The initial token set of PowerIndex is planned to be: CVP, YFI, SNX, AAVE, wNXM, UNI, COMP, and MKR.
Changing the token set: community can exclude some token(s) from the index and add another one if necessary (max limit — 8 tokens in the index) - Token weights. Initially, each token has 12.5% weights. Changing weights means that the community can increase or decrease the weight of each token. For example, the community can increase the weight of YFI by 7% and decrease the weights of the other seven tokens by 1% each. Note, that the sum of all weights has to remain 100%.
- Fees. The index has an entry fee, exit fee, and swap fee. The first two are set at 0.1%, and the swap fee at 0.3%. The community can change these fees via proposals.
Who can govern the index?
First of all, it is important to note:
The only governance token in PowerPool is CVP (Concentrated Voting Power). It is used for governing all PowerUniverse products.
Accountable votes in the PowerPool governance system are based only on this token. But, to make possible participation in voting by LPs (Uniswap, Balancer, and PowerIndex ones) without pulling out the liquidity we implemented functionality to vote using Uni v2 LP tokens, BPT tokens, and PIPT tokens (we remind — PIPT is the LP token of PowerIndex).
So, it is possible to vote using LP tokens containing CVP in the pool. But it doesn’t mean that you are voting using an LP token. You voting using CVP and LP token is like a key for this CVP staked in the pool.
De-facto, the governance system accounts for your CVP share in the pool and calculates the number of votes based on that.
So, finally — the index is governed by CVP holders, including CVP holders acting as LPs, such as Uni v2 LP tokens, BPT holders, PIPT token holders.
Why is Index governance valuable for CVP token holders?
The value of governing something is based on: (1) what is governed? (2) how valuable is this protocol? (3) what are the consequences of governance decisions?
So, let’s describe it by answering on mentioned questions:
What is governed? PowerIndex, a pool with 8 governance tokens (token set, token weights, fees).
How valuable is it? The answer is based on TVL. The PowerIndex with $100m liquidity inside is more valuable than PowerIndex with only $10m of liquidity.
What are the consequences of governance decisions? It is the most interesting question.
Imagine that PowerIndex has $100m liquidity and each token has a 12.5% share. For example, changing UNI share from 12.5% to 10% and COMP from 12.5% to 15% will result in delivering $2.5m worth of UNI to the market and absorb into the pool $2.5m worth of COMP from the market.
In the case of excluding a token with 12.5%, from the $100m index— $12.5m worth of this token will be released to the market.
So, finally, CVP token holders have an opportunity to change index composition. It can be done for different reasons (for example, hedging the index).
Anyway, it influences the market of composite tokens and with big index capitalization, it will be a huge power.
How the index composition is changed in the case of community decision?
When it comes to pools with high liquidity it is important to make changes safely for the pool capital. We developed a special dynamic weight changing model in collaboration with Anton Bukov, 1inch.exchange co-founder for this purpose.
Links:
PowerPool website: https://app.powerpool.finance/#/mainnet/pools/shared/
PowerIndex main website (coming 25 November): http://powerindex.io/
