Detailed plan to grow TVL

🗂 Proposals 💡 Ideas & Improvements
1

Summary

  • Idle Finance needs to grow TVL
  • Most efficient way to increase TVL is to target institutions/whales
  • Onboarding customers by making them investors is a well-trodden go-to-market strategy in DeFi
  • Idle Finance could sell short duration revenue-share tokens to institutional DeFi investors as a yield-bearing investment asset
  • Benefits to Idle:
    • Raise Idle Finance awareness via promotable partnership
    • Gain a brand ambassador within the institutional investment community
    • Onboard potential customer(s) with perfect alignment between their strategy and Idle’s product offering
    • ETH/USDC added to treasury
    • No dilution to IDLE or selling of treasury assets

Motivation and scope

Revenue should be used to drive growth

@0xSami_ released a blog post on Sunday in which he explains that for early stage projects, revenue should be used to grow.

I know we had a serious discussion about this as a community last month (will omit proposal link in this instance). Regardless of where we stand on the actual payout proportions, I think we can all agree that growing TVL should be our highest priority.

Idle growth is driven by TVL

Idle is effectively an asset manager. The value proposition of Idle is to do research, create programmatic strategies, and manage said strategies. Customers pay a fee to Idle based on the amount of capital Idle helps them deploy. Growing fee revenue is entirely dependent on growing TVL.

TVL growth is driven by institutional capital

One of the best ways to grow TVL is to introduce institutional customers to Idle products. The benefit of targeting institutions is their size: a few large players can drastically improve TVL (and therefore fees generated). Institutions are also much stickier because they have a mandate to deploy capital and they invest for the long-term.

The problem is that institutional investors are difficult to access.

Partnership opportunity: Cinch

We are putting forward our platform, Cinch, as the intermediary to connect Idle to institutional DeFi investors.

Our goal at Cinch is to enable DAOs reaching their full potential by leveraging short duration revenue-share tokens. Our solution gives projects another way to form partnerships, incentivize the community, and grow TVL. Using revenue-share tokens allows DAOs to leverage the token playbook without diluting existing community members and without putting sell pressure on the native token.

Our long-term vision is to be the marketplace where short duration revenue-share tokens are actively traded. As a result, we are in contact with dozens of institutional funds that are looking to deploy capital into yield-bearing opportunities like revenue-share tokens. Some of the investors we are in contact with currently include LedgerPrime, CMCC, Plutus21, Stablecorp, and StrixLeviathan, to name a few.

How revenue-share tokens work

Revenue-share tokens function the exact same way revenue-share programs function with stakers, except they have (i) a maximum and (ii) they are transferable.

For example, a protocol can create revenue-share tokens that receive [10]% of monthly revenue up to a maximum of $[50,000] (after which they are burned).

How Idle and Cinch can work together

  • Idle mints short duration revenue-share tokens via Cinch
  • Cinch introduces Idle to institutional DeFi investors looking to deploy capital into yield-bearing assets
  • Programmatic revenue-share is implemented via cooperation between Cinch and Idle team
  • Idle sells the revenue-share tokens to the highest bidder for USDC/ETH

Benefits & risks

Benefits to Idle

  1. Raising capital from an institutional investor sends a strong signal that a new institutional partner believes in the protocol

    • This can be actively promoted by Idle

  2. The institutional partner becomes a brand ambassador among institutional investors

    • Investor partner is incentivized to promote Idle because a revenue increase leads to faster repayment
    • Other institutional investors will notice when evaluating Idle

  3. The institutional partner could become a long-term customer

    • Idle’s product offering is extremely well aligned with the needs of institutional investors

  4. Idle receives net new ETH/USDC in treasury

  5. Partnership does not require any assets to be sold from the treasury or IDLE to be issued

Benefits to institutional partner

  1. Sustainable yield bearing opportunity
  2. Incentive to promote Idle product to drive faster repayment via revenue-share
  3. Easier to trust DeFi project when introduced via intermediary (Cinch)

Benefits to Cinch

  1. 3% fee [conditional on there being a transaction]
  2. Connect DAOs to the resources they need to grow
  3. Further demonstrate the usefulness of short duration revenue-share tokens

Risks

  • Unable to find an investor that is willing to acquire Idle’s revenue-share token
  • Capital raised from investors is lower than anticipated
  • Revenue generated by Idle during revenue-share period is lower than anticipated, thus extending the time it takes for repayment to be complete

Issuing tokens to partners is a well-trodden go-to-market path in DeFi and revenue-share tokens can be used the exact same way. As a short duration, low volatility, revenue-generating asset, revenue-share tokens would attract a different kind of investor than the IDLE token, thus broadening Idle’s partner base.

Next steps

Cinch is currently in talks with institutional managers looking to deploy capital into DeFi.

We submit to the community that an initial transaction/partnership can be done with small amounts as a first step to build trust among all parties involved (~10-30 ETH). Note that all TVL growth opportunities resulting from this partnership (positive signaling, brand ambassador in investment community, potential long-term whale customer) will accrue to Idle regardless of the size of the investment.

If this is something the community would consider, we will submit a Temperature Check with amounts, proportions, and timelines.

If you’ve made it this far, please do one of the following to help us gather feedback:

  1. Provide feedback and questions directly on this post; OR

  2. Leave a comment with your preference regarding next steps:

    a) “Makes sense. I would consider it. Please submit a Temp Check”

    b) “I need more information before you draft a Temp Check.”

    c) “Doesn’t make sense to me. I’ll vote against regardless of what is in the Temp Check.”

    d) “Why do we need this? I’ll vote against regardless of what is in Temp Check.”

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Hey @habs4lyfe, thanks for the detailed proposal!

The revenue-share tokens look interesting; sound similar to perpetual bonds or, in general, to revenue-sharing agreements, and could be worth exploring their application with our PYTs as a way to release and even bootstrap new strategies.

I’ll leave it to @Davide to explore more over the institutional partners’ side and how this could be explored for releasing new PYTs, but I have a couple of questions re revenue-tokens.

  • How does the auction for revenue-tokens work? Do you have your own auction platform, or you’re going to leverage other platforms like Gnosis Auction?
  • What’s the pricing model used for revenue-tokens? Is it purely based on the auction, or are you using other metrics (eg projected revenues) to define it? If just based on the auction, are you providing any ancillary borrower analysis to support investors during price formation?
  • Can you share more technical documentation about revenue-tokens? How is the on-chain revenue share managed?
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hey @habs4lyfe, thanks for introducing this new concept!

This is the first time that I see perpetual bonds applied in DeFi as a form of trustless loan backed by DAO’s future revenues, congrats on the innovation that you brought up here.

You’re right, Idle’s main focus is on the B2B sector, targeting both integrators (protocols, wallets) as well as institutional liquidity providers.

Following up on @Teo’s questions, I have a few more points to assess:

  1. I suppose that if a lender provides $50k, they will receive a rev-share token representing the initial deposit + loan fee. What’s the range of loan APY that you can expect?
  2. In your vision, institutional investors become brand ambassadors by attracting third-party capital. Which kind of activities do you expect from rev-share token holders to guarantee the repayment of the loans?
  3. I see that the app section is not available yet on your website and your Twitter account is new. Do you have existing case studies or would Idle be the first DAO to test this model?

I think that, as the next step, it would be great to hop on a call and discuss your proposal in detail. Feel free to write me a DM in Discord!

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Thank you @Teo and @Davide for thoughtfully reading and considering the proposal. Allow me to answer your questions one by one in the same comment:

It depends on the type of transaction. For public auctions we are evaluating existing platforms and frameworks like Gnosis Auction, yes.

The pricing will ultimately be decided by the market. That being said, we will be supporting buyers with robust information on the protocol itself and extensive cash flow analytics on the revenue stream. Longer term, when the secondary market gets built out, our analytics will include the trading prices for royalty tokens that exhibit similar characteristics and are exposed to similar risks. Our goal is to be the preferred buying platform for royalties in web3.

Technical documentation will be made available soon. What specifically would you like to know about the on-chain revenue share?

  • Given the uncollateralized nature of the royalty, we expect them to price in the 1.1-1.15x range for a 12 month period

    • Represents a ~10-15% cost of capital
    • Example: investor purchases royalty tokens for $50k, and the revenue-share ends when the investor receives $57.5k (1.15x)

  • We think TradFi companies Pipe and Capchase provide the most comparable structure which forms the basis for our pricing estimates

Sorry Davide, I’m not sure I fully understand this question. You mean what would be required/expected from the investor?

No public case studies yet. What I can say is that we are currently working with Stablecorp and are in talks with many more projects.

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