AMKT-IP-4: Drop AMKT Expense Ratio to 0%, Replace Fees With Staking Income

Proposals
1

Summary:

Take the AMKT expense ratio down to zero, making AMKT the first broad based, zero fee index protocol.

With the transition from V1 to V2, we reduced operating expenses for maintaining AMKT dramatically, leaving room to lower fees.

This proposal goes a step beyond that, suggesting the elimination of streamed expense fees in favor of recouping income with a staking implementation that captures a portion of rebased staking rewards.

Motivation:

Fees are bad. They are corrosive to returns and they creep up on you. A few bps here and there don’t seem like they matter, but as we know, “compounding is the eighth wonder of the world” and when compounding works against you, it really works against you.

As the ETF/Index Fund market matured, the competition drove fees down to zero (see: Fidelity ZERO). Securities lending of the underlying assets made it possible for asset managers to offer zero fee products, and we believe there’s a similar opportunity with staking rewards at lower risk to end holders.

Dropping fees to zero will long term bolster AMKT liquidity and volumes, improving execution so holders aren’t paying hidden fees in the form of slippage.

Proposed Implementation:

Alongside has written a smart contract that wraps the Lido stETH contract and captures a fee as the token rebases. In order to ensure AMKT holders receive yield, we propose having half of the Ethereum allocation in AMKT allocated to Alongside Wrapped stETH and the remaining half towards stETH.

This allows holders to inherit the security of the Lido network instead of trusting Alongside to run a full network of validators with slashing risks. astETH is redeemable for stETH just like WETH/ETH wrappers.

The Alongside Staked ETH (astETH) contract has been independently audited by Zach Obront, a lead security researcher that spearheaded AMKT V2 security audits.

Risk Factors:

As with any new smart contract code, there are new risks introduced. The Alongside Staked Ethereum contract was written with the intent to limit complexity as much as possible, adding just 30 lines of code.

Taking the fee to zero and introducing reliance on ETH staking rewards could put the continuity of the development of AMKT at risk if staking rewards are reduced to levels that make it impossible to fund future development of the protocol.

If the ETH weight in the index were to be reduced dramatically, it could also threaten development continuity as the sole fee capture mechanism would be tied to ETH staking.

The implementation introduces a dependency on Lido, which could adversely impact holders if Lido were to be heavily slashed, hacked, or otherwise manipulated.

Conclusion:

We recommend AMKT holders vote FOR our proposal to remove the AMKT expense ratio and instead capture fees based on a portion of staking rewards. Note that this is meant to temparture check the community on this before the proposal is moved to an onchain vote.

2

this is a really good step forward!
a few questions though:

  1. what is going to be the fee on staked eth?
  2. do you plan to also apply the same strategy on future staked assets (sol)?
  3. can you share your revenue model? do you expect those fees to allow you to break even at some point?
3

Thanks @cyp!

  1. The proposed model is for the ETH portion of the index to be allocated to 50% stETH, where AMKT holders get 100% of the rebase (-lido’s fee), and the other 50% of the ETH allocated to Alongside Staked ETH, a contract we wrote that would route the ETH staking rewards to the Alongside Foundation.

  2. Yes, the thought is that this can be expanded to other PoS assets as they comprise more % of the index

  3. Right now, AMKT charges a 95 bps expense ratio, which we propose taking to zero here. On $3.8m in TVL (TVL at time of writing) this annualizes to ~$36,000. Under the proposed model, the expense ratio fee is zero and we’d capture 1/2 of the ETH staking rewards. ETH is ~23% of the index right now ($874k) and with a 3% staking yield that’s ~$26k ($13k would accrue direct to holders, $13k would go to Alongside Foundation) so at present this would cut our take rate by roughly 2/3. Index products tend to be winner take most in nature, so securing being the most liquid broad based index is super important and the goal is to make up for that take rate loss in the form of higher TVL.

Curious what you think! Appreciate the thoughtful questions.

2 Likes
4

Hey @austin,

Thanks for your answers!

  1. Why choose Lido? Any plans to expand to other LST providers? Also important given the current focus on client diversity.

  2. Awesome!

  3. Yes this makes a lot of sense! I think your 50% commission on staked ETH is ok for now, maybe in the future this can be revisited based on the competition?

5

Re: 1. Initial thought was that stETH has the deepest liquidity and best tested safety profile. Definitely open to expanding to other providers (particularly those that expand client diversity and those that charge holders lower fees). Index Coop actually has a diversified staked ETH index we think is a good product from a client diversity standpoint. Would encourage a proposal for this if you have any specific ideas as it’s a great and important point!

Re: 3- yup the 50% means we have an equal split with holders, which we think is fair as it enables the 0% expense ratio. That said, we want to be the leaders in driving fee compression, and encourage the community to propose options that are reasonable here at their discretion.