Discussion about establishment of a KPI Incentives Council (KPIC)

Governance
1

Goal
Sommelier’s mission is to develop a platform on which Strategy Providers can make DeFi strategies available to all market participants in a decentralized way.

In order to execute on this mission, Sommelier must incentivize Strategy Providers to create high performing Cellars. Adding performance based incentives for Strategy Providers is a crucial component of executing on that goal, and further aligns incentives between Cellar creators and Cellar LPs.

Proposal
This proposal would establish a mechanism and process by which Strategy Providers can request KPI-based incentives be added to an active Cellar.

KPI Incentives Council
This proposal establishes a KPI Incentives Council (KPIC) that will oversee the distribution of incentives to Strategy Providers upon achievement of pre-defined Cellar KPIs. This council will control a multisig that escrows funds, approved by token holders and transferred from the community pool, to be distributed to Strategy Providers on a quarterly basis, contingent upon achievement of KPIs.

A multisig on Ethereum Mainnet, at address 0xdda5b441e486E89D290Bc1bD09ca762ca6ac9E39 and operated by the Council, will have administrative powers to govern the parameters of KPI Incentive programs under an 2-of-3 signing scheme.

The multi-sig is able to perform the following actions:

  • Schedule a certain amount of tokens owned by the contract for distribution (via notifyRewardAmount)

The initial set of signers will be:

  • Lead: Flipside Crypto
  • Polkachu
  • Bidon15

The KPIC will be responsible for:

  • Determining whether or not a Cellar has achieved pre-defined KPIs. A 2-of-3 vote will be required for the Council to confirm that a Cellar has achieved the pre-defined KPIs. Any Cellars that do not meet the Council’s approval threshold will not receive rewards.
  • The Council Lead will publish a forum post within 10 days of the end of the quarter outlining which Cellars will receive rewards and the basis upon which decisions were made. Council members must disclose any conflicts of interest pertaining to a given Cellar in this post.
  • Distributing KPI-based incentives to all Cellars that the Council has determined to be eligible within 15 days of the end of the quarter.
  • If a Strategy Provider believes the Council has made an error in rejecting KPI incentives for their Cellar, they may appeal the decision within 15 days of the end of the quarter (or 5 days after the publication of the KPIC’s quarterly report) using the template provided in [Forum post below.] Appeals posted after the deadline specified above should not be considered valid.
  • The Council may not distribute or spend funds in the KPIC multisig for any other purpose than distributing KPI-based incentives to qualifying Cellars and distributing governance approved rewards to signers.
  • Apart from the above responsibilities, the Council Lead will be responsible for managing the Council’s operations (such as scheduling regular meetings, assigning responsibilities among Council members, ensuring the deadlines outlined above are met, and publishing forum posts/proposals).
  • The Council must establish a line of communication so that community members and Strategy Providers can easily get in touch with Council members.

For fulfilling these responsibilities, each multi-sig signer will receive initial compensation of 20,000 SOMM per quarter (March 31, June 30, September 30, and December 31). The Council Lead will receive initial compensation of 40,000 SOMM per quarter. Quarterly stipends are to be distributed to Council members upon completion of all responsibilities for the quarter. The Council should notify the community when these distributions have been made.

Upon formation, the KPIC will register as an LLC within the state of Delaware. LLC registration ensures that the KPIC is legal and tax compliant. A one-time budget of 1,000 SOMM is necessary for state registration as well as an annual budget of 9,000 SOMM is required for LLC renewal and tax compliance services.

This proposal, if accepted, will transfer the six month compensation budget (80,000 SOMM) and the LLC budget (10,000 SOMM) from the community pool to the KPIC multisig identified above according to the parameters of this proposal. Additional funds will be transferred to the KPIC multisig each time a Strategy Provider successfully passes a proposal to add KPI-incentives to an active Cellar. The multisig shall be responsible for enacting KPI Incentive programs according to the parameters of this proposal once the corresponding SOMM is transferred.

The Council budget will need to be renewed at the end of six months, which gives tokenholders an opportunity to assess the Council’s fulfillment of the above responsibilities. The Council Lead is responsible for creating a renewal proposal, if appropriate. In the event that the Council has not fulfilled its responsibilities, token holders have the option of rejecting the Council’s budget and/or putting forward a counterproposal with different Council members. Council renewals may request an expanded budget to accommodate additional signers or sub-councils, as necessary.

All Council proposals (including any counter proposals) should follow the basic format of this proposal and must be posted to the Forum within 20 days of the end of the Council’s current term, to move to a vote 3 days thereafter. If there are multiple Council proposals, all valid proposals will go to a vote 23 days after the end of the Council’s current term and the proposal with the highest number of “Yes” votes will be implemented. Although the Council may not be renewed at the beginning of the quarter, rewards will always be calculated from the beginning of the quarter.

Conclusion
In this post we outlined the need to establish a KPI Incentives Council (KPIC)

We would appreciate any feedback on how to ensure the proposal best reflects the interests of the Sommelier Protocol and Community.

1 Like
2

Thanks for posting this Polkachu! I wanted to pop in here with a little more color about the proposal process and include the KPI Incentives and KPI Council Appeal Templates.

KPI Incentives Proposal Process:

Strategy Providers may submit a community spend proposal to add KPI incentives to any active Cellar (using the template below). All proposals will include linear and discrete incentives. Strategy Providers may submit KPI-incentive proposals at any time, but rewards will always be distributed at the end of the quarter.
If approved by governance, the amount of the highest possible payout will be transferred to the KPI Council multisig. These funds will be held in escrow until proven achievement of pre-defined KPIs at the end of each quarter.
A thorough analysis of the accomplishment of pre-defined KPIs must be posted by Strategy Providers in the forum within 24 hours of the last day of the quarter at 0:00 GMT. If the Strategy Provider does not post an analysis by this time (intentionally or unintentionally), the Cellar will not be considered for reward distribution in that quarter.
To determine APY at the end of the reward period, the Strategy Provider must measure token price at midnight UTC for each day in the most recent 3 months. Those token prices will be used to compute daily APY, which is then averaged using the geometric mean.
To determine TVL at the end of the reward period, the Strategy Provider must measure TVL at midnight UTC for each day in the most recent 3 months. Those TVLs are then averaged using the geometric mean.
To determine fees to the protocol (for linear incentives) the Strategy Provider must include the list of transactions which resulted in fees being sent to the protocol over the most recent 3 months. In addition, the Strategy Provider must sum the dollar value for assets sent to the protocol using price at the time the assets were sent.
The first time a Cellar receives KPI incentives, performance should be assessed to date, from the time of Cellar launch through the most recent quarter.
The KPIC will validate the submitted analytics, publish a brief forum post on their decisions, and distribute rewards accordingly. An analysis of the impact of rewards may be tracked and displayed publicly post-distribution.
If not all of the reserved incentives are distributed by the end of the reward period specified in the Strategy Provider’s KPI Incentives proposal, the KPIC will return any unearned incentives to the community pool.

KPI Incentives Proposal Template

SIPS Name: SIPS-XXX [KPI Incentives]

Status:

Author: Strategy Provider name

Strategy: Name of Celler

Posted: [to be posted within 24 hours of the end of the quarter at 00:00 GMT]

Description
Please include details about your strategy, performance to date, and why you want to add KPI incentives.

Linear Incentives
Each Cellar that receives KPI rewards will receive a linear incentive according to the below formula:

[Sum of fees accruing to Somm stakers from Cellar, generated over 6 months, minus the sum of liquidity mining rewards distributed to Cellar, generated over 6 months, divided by 2*]

*In the event that KPI incentives are renewed on the same Cellar, the incentive factor will double with each subsequent renewal.

Please specify the expected amount of linear incentives to be added to your Cellar based on the above formula.

Discrete Incentives Table
Please define any additional, discrete incentives using the template below, according to the following guidelines:

  • The APY value should remove fees that go back to the Cellar creator but include fees that are sent to SOMM stakers
  • It’s expected that as TVLs grow, APYs will decrease. It is recommended to request higher rewards at - lower APY returns caused by higher TVLs.
  • APY should be calculated as the geometric mean over the past 3 months
  • TVL should also be calculated as the geometric mean over the past 3 months
  • Rewards are cumulative, so if a Strategy Provider achieves a geometric mean TVL of 20M over the quarter, they will receive the cumulative amount of KPI rewards for each category between 0 and 20M

Screenshot 2023-03-16 080850

Conclusion
In this post we outlined the process and template for Strategy Providers to apply to add KPI Incentives to their Cellars.

We would appreciate any feedback on how to ensure the proposal best reflects the interests of the Sommelier Protocol and Community.

KPI Council Appeal Template (Signaling Proposal)

SIPS Name: SIPS-XXX [KPIC Appeal]

Status:

Author: Strategy Provider name

Strategy: Name of Celler

Posted: [must be posted within 15 days of the end of the quarter]

KPI Incentive Proposal:
Please link to the proposal authorizing KPI incentives for your Cellar.

Analysis submitted to the KPIC:
Please link to the analysis you submitted to the KPIC prior to the deadline.

Reason given by KPIC for Rejecting Analysis:
Please link to the reasoning for rejecting your analysis published by the KPIC.

Appeal:
Please explain why you believe the Council has made an error and your Cellar should receive KPI incentives this quarter.

The results of this vote are to be honored by the KPI Council. If this proposal is approved by governance, the corresponding rewards shall be distributed by the Council to the Strategy Provider within 48 hours of the passing of this proposal. If this proposal is not approved, no rewards shall be distributed to the Strategy Provider for the quarter.

3

I’m curious what the thought process is to why KPI’s are better than the current model of a percentage of a cellar going back to the strategist who developed it? In my mind it would seem strategists are already incentivized to create performant strategies as they earn more the better a strategy performs.

1 Like
4

Are these KPI incentives in addition, or as an alternative to, the existing management and performance fees for new cellars?

If they are additional, what research backs up the need for yet more incentives? Are strategy providers not joining Sommelier because of lack of incentive with the existing fees? If so, why can’t the existing fee framework be adjusted to address this?

The KPIC seems like a lot of additional overhead and expense for the protocol without a clearly stated reason why it is needed in the first place, backed by empirical evidence. Existing fees are already performance based because they are percentages of TVL and profit if I’m not mistaken.

The goal of the proposal is stated to incentive providers but makes no acknowledgement that they are already incentivised with fees nor makes any attempt to explain why existing fee structures or amounts are inadequate. Is there more context I’m missing perhaps?

5

EffortCapital here from Blockworks Research.

While I think this is an interesting idea, Im not sure if a KPI council is needed at this time. Each strategist’s motivation to outperform the market should be inherently baked into the strategist fee. The community should focus on strategist outreach/relations instead - spending some % of the treasury to market the product and getting the word out.

Additionally, I think the community should pay for a master dashboard that updates in near real time the performance of each cellar on either Dune Analytics or Flipside. The dashboard should show traditional financial metrics like (avg return, beta, sharpe ratio, sortino, etc). From there, the community can be better informed on the path forward for strategic incentivization.

We should also entertain dynamic strategist fees, whereby the fee is tiered based on the performance of a cellar over a period of time (i.e if a strategy is returning x% higher than the original advertised performance over a 30 day period, the cellar auto adjusts the take rate to reward the outperformance).

Step 1 should be market awareness and a dashboard for the community imo.

6

While true that strategists are incentivized to operate strategies through the fees they earn, I believe that the KPI committee is beneficial for bootstrapping the Sommelier ecosystem.

At a basic level, token incentives serve as a driving force for strategists to develop on the Sommelier platform, making it a more attractive choice over competing alternatives.

At a more fundamental level, Sommelier is not just a platform of strategists competing against each other on their own. Rather, the process of strategy development (developing adaptors to integrate new protocols, attracting new users, increasing protocol TVL, etc.) results in positive externalities that benefit the Sommelier ecosystem more broadly:

  • Adaptors built by one strategist can be utilized by any other strategist in any other strategy. The addition of new protocol integrations to Somm expands the range of possibilities for creating innovative strategies.
  • The process of identifying and attracting users from new communities not only expands the user base of Somm but also enhances the brand’s reach and visibility.
  • Increasing protocol TVL raises awareness of Somm’s platform and strengthens the platform’s appeal to potential strategists who seek to develop Sommelier strategies. This, in turn creates a positive feedback loop, where the increased demand for Somm’s services leads to the development of more innovative and effective strategies.

The KPI committee is a means of squaring that value accrual by permissionlessly giving a piece to strategists that generate desirable outcomes for the DAO.

2 Likes
7

Would be interested in seeing some portion of the awards to be structured for consistent performance. For example, more rewards available for 3 quarters hitting goals.

This will encourage designs which are less luck based and also encourage designs which retain users who benefit from a design that deliver consistently.

8

This explanation adds a lot to the argument for KPI’s. If the Council lead with KPI’s for infrastructure build out, I would be all for that.

1 Like
9

Wanted to add that the council is going to be adding a fourth member. James Parillo from Figment Capital will be joining the team above.

In response, the multi-sig signing scheme will be changing to 3 out of 4.

10

Hi Effort,

Thanks for the response. I will let Zaki’s comment below speak to the need for the KPI council and address the bit about the Flipside dashboard.

The KPI council intends to operate in a transparent manner, which includes the creation of a master dashboard where the community can track both the past performance of cellars as well as performance of cellars that have received incentives. If this gains enough traction, we could even consider integrating this into the Somm website.

1 Like
11

To make the multi-sig to be more robust, we propose to update the multi-sig from 2/3 to 3/4 by adding James Parillo from Figment Capital. James is an active participant in the Cosmos ecosystem. We are glad that he is willing to be a multi-sig signer for this program!

Here is the updated proposal:

Proposal

This proposal would establish a mechanism and process by which Strategy Providers can request KPI-based incentives be added to an active Cellar.

KPI Incentives Council

This proposal establishes a KPI Incentives Council (KPIC) that will oversee the distribution of incentives to Strategy Providers upon achievement of pre-defined Cellar KPIs. This council will control a multisig that escrows funds, approved by token holders and transferred from the community pool, to be distributed to Strategy Providers on a quarterly basis, contingent upon achievement of KPIs.

A multisig on Ethereum Mainnet, at address 0xdda5b441e486E89D290Bc1bD09ca762ca6ac9E39 and operated by the Council, will have administrative powers to govern the parameters of KPI Incentive programs under an 3-of-4 signing scheme.

The multi-sig is able to perform the following actions:

  • Schedule a certain amount of tokens owned by the contract for distribution (via notifyRewardAmount)

The initial set of signers will be:

  • Lead: Jessica | Flipside Crypto
  • Polkachu
  • Bidon15
  • James Parillo | Figment Capital

The KPIC will be responsible for:

  • Determining whether or not a Cellar has achieved pre-defined KPIs. A 3-of-4 vote will be required for the Council to confirm that a Cellar has achieved the pre-defined KPIs. Any Cellars that do not meet the Council’s approval threshold will not receive rewards.
  • The Council Lead will publish a forum post within 10 days of the end of the quarter outlining which Cellars will receive rewards and the basis upon which decisions were made. Council members must disclose any conflicts of interest pertaining to a given Cellar in this post.
  • Distributing KPI-based incentives to all Cellars that the Council has determined to be eligible within 15 days of the end of the quarter.
  • If a Strategy Provider believes the Council has made an error in rejecting KPI incentives for their Cellar, they may appeal the decision within 15 days of the end of the quarter (or 5 days after the publication of the KPIC’s quarterly report) using the template provided in the forum discussion linked below. Appeals posted after the deadline specified above should not be considered valid.
  • The Council may not distribute or spend funds in the KPIC multisig for any other purpose than distributing KPI-based incentives to qualifying Cellars and distributing governance approved rewards to signers.
  • Apart from the above responsibilities, the Council Lead will be responsible for managing the Council’s operations (such as scheduling regular meetings, assigning responsibilities among Council members, ensuring the deadlines outlined above are met, and publishing forum posts/proposals).
  • The Council must establish a line of communication so that community members and Strategy Providers can easily get in touch with Council members.

For fulfilling these responsibilities, each multi-sig signer will receive initial compensation of 20,000 SOMM per quarter (March 31, June 30, September 30, and December 31). The Council Lead will receive initial compensation of 40,000 SOMM per quarter. Quarterly stipends are to be distributed to Council members upon completion of all responsibilities for the quarter. The Council should notify the community when these distributions have been made.

Upon formation, the KPIC will register as an LLC within the state of Delaware. LLC registration ensures that the KPIC is legal and tax compliant. A one-time budget of 1,000 SOMM is necessary for state registration as well as an annual budget of 9,000 SOMM is required for LLC renewal and tax compliance services.

This proposal, if accepted, will transfer the six month compensation budget (100,000 SOMM) and the LLC budget (10,000 SOMM) from the community pool to the KPIC multisig identified above according to the parameters of this proposal. Additional funds will be transferred to the KPIC multisig each time a Strategy Provider successfully passes a proposal to add KPI-incentives to an active Cellar. The multisig shall be responsible for enacting KPI Incentive programs according to the parameters of this proposal once the corresponding SOMM is transferred.

The Council budget will need to be renewed at the end of six months, which gives tokenholders an opportunity to assess the Council’s fulfillment of the above responsibilities. The Council Lead is responsible for creating a renewal proposal, if appropriate. In the event that the Council has not fulfilled its responsibilities, token holders have the option of rejecting the Council’s budget and/or putting forward a counterproposal with different Council members. Council renewals may request an expanded budget to accommodate additional signers or sub-councils, as necessary.

All Council proposals (including any counter proposals) should follow the basic format of this proposal and must be posted to the Forum within 20 days of the end of the Council’s current term, to move to a vote 3 days thereafter. If there are multiple Council proposals, all valid proposals will go to a vote 23 days after the end of the Council’s current term and the proposal with the highest number of “Yes” votes will be implemented. Although the Council may not be renewed at the beginning of the quarter, rewards will always be calculated from the beginning of the quarter.