NDX Is Now A Productive Asset

Indexed Finance
9 min readSep 25, 2021

We’re happy to announce that the dNDX (dividend-bearing NDX) mechanism is now live. What this means for you is that you can now lock up your NDX tokens in exchange for a token that earns the majority of Indexed Finance protocol revenue.

What follows is a quick FAQ that explains the ins and outs of it all.

I Don’t Care To Read All This, Just Link Me!

We strongly recommend reading this article first, but if it’s not your first time here, here you go!

NDX Staking

I’m New, What’s Going On?

Since the Indexed Finance DAO was created, there has been a desire expressed by its members to distribute the revenue generated by the underlying protocol to holders of its governance token.

As of today, that’s now in place.

Specifically, you can now lock up your NDX tokens for a period ranging from 90 to 360 days to mint dNDX tokens. The ratio of dNDX minted per NDX ranges from 1:1 to 4:1, depending on the duration your NDX is locked for.

Holders of dNDX tokens will accrue proportional dividends from protocol revenue in the form of WETH, which can be claimed as they are distributed, rather than only becoming available at the end of a lock.

When you exit a lock, in order to reclaim your NDX you need to burn dNDX from your wallet in the same ratio as it was issued when the lock was created.

There is a 100 NDX minimum to enter a timelock, and you can create more than one timelock (to stagger your unlock times, should you wish).

So, NDX Isn’t A Pure Governance Token Anymore?

Technically, it still is. Indexed’s Governor Alpha will still be based on NDX votes, and any NDX that you lock in exchange for dNDX will have its voting shares automatically delegated back to the depositor.

It’s important to emphasize this: you are still able to vote on-chain with your NDX even if it is locked up in exchange for dNDX.

There are ideas in the works about using dNDX to express preferences for certain parameters controllable by the DAO (such as liquidity mining rewards), and dNDX is designed to permit this sort of voting, but this is not enabled at launch, and all core governance responsibilities still lay with NDX.

Another potential utility is the usage of bridged dNDX tokens to operate the Governor Alpha modules for sidechain deployments of the Indexed protocol, but this is a decision for the DAO itself to make.

Where Does Indexed’s Revenue Come From?

Indexed currently generates revenue in the form of exit fees within our index products: a small percentage (0.5%) is taken when an index token such as the DEFI5 is ‘burned’ into its constituent pieces, such as AAVE and UNI. The vast majority of this revenue comes from arbitrageurs that are keeping the NAV of our products and their value on the open market in check.

Following our upgrade to Balancer V2, we will also — subject to DAO approval — be depositing the assets within our indices into their respective Nirn yield aggregator vaults, which retains a portion of the yield generated (default 10%) for the DAO as revenue.

We do this in lieu of charging a streaming or management fee on our products themselves, meaning that the average market buyer or seller pays nothing to use our products. This choice to source revenue in ways other than charging holders for owning our products is intended to make Indexed more DeFi-friendly than competing ETF products, as it only takes a portion of profits rather than base value.

How Much Protocol Revenue Are Stakers Receiving?

Following a Snapshot vote, the Indexed DAO decided to split protocol revenue 40/60 in favor of dNDX holders: for every $100 generated in revenue, $40 is kept by the Treasury and $60 is distributed to dNDX holders.

Can I Sell My dNDX Tokens? What Happens If I Do?

dNDX tokens have a varying fair price which is determined by the ratio at which they were minted (so, the length of time associated with the lock that created them). The ‘base’ price for dNDX is ¼ of an NDX token, and any market that appears will likely reflect that pricing.

dNDX tokens are transferable, and as such you are able to sell them should you desire, however, we (the Core team) believe that the DAO should not seed liquidity — or provide any farming rewards — for a dNDX pool.

This belief stems from the fact that even though the option to sell dNDX is available to you, the fact that you need to burn dNDX in order to retrieve your locked NDX means that any dNDX that you ‘dispose’ of (in sense of selling it) by definition reduces the amount of NDX that you can ultimately retrieve without buying more: we do not believe it would be helpful for the DAO to incentivize what effectively amounts to short-squeezing dNDX. However, it’s a free market, so caveat venditor!

Note that if you have — for example — 396 dNDX out of an original 400 that were minted by locking 100 NDX for 360 days (or 99 out of 100 dNDX from a 90 day lock), you are still capable of retrieving 99 NDX from the timelock, but you would need to acquire additional dNDX in order to fully exit.

How Is Existing Protocol Revenue Disbursed?

Roughly two weeks* after the launch of dNDX (i.e. from today), the Indexed Core team will put forward two on-chain proposals to both adjust the fee recipient for the exit fees and all future Nirn revenue from the Treasury to a seller contract, and move all revenue accrued to date to said seller contract. This gap in between phases allows everyone who holds NDX at present to think about whether they wish to enter a lock and determine their ideal timeframe for doing so, rather than immediately distributing months of collected revenue to the first NDX stakers.

This seller contract is capable of selling the index tokens that the DAO receives as exit fees into WETH via on-chain exchanges, as well as unwrapping the Nirn nTokens and selling the underlying assets for WETH.

For example, if triggered at the time of writing, the seller contract would market sell 7,980 DEGEN tokens, 371 DEFI5 tokens, 187 CC10 tokens etc. into their respective X/WETH pairs for a total of approximately 33.4 WETH, modulo slippage on the individual liquidity pools for the indices. LP holders of these tokens don’t need to fret, as the nature of the index tokens means that they will quickly be arbitraged back to their NAV, eliminating temporary IL.

Similarly, any nTokens such as nWBTC would be withdrawn and unwrapped from their respective Nirn vault and thereafter market sold for WETH.

40% of this WETH is then transferred to the Indexed DAO Treasury, and the remaining 60% to the dNDX contract, where it can be claimed by any wallets that hold dNDX at the time of transfer: using the above example, if the total dNDX supply at the time of distribution was 10,000, then each dNDX is eligible to claim —

~(33.4 * 0.6 / 10,000) = ~0.002004 WETH

— in protocol revenue.

Note that the above does not refer to the existence of a lock from the claimant: if you acquire dNDX on the open market without having staked NDX yourself, you are the recipient of the associated dividends: it is the act of holding dNDX that entitles you to protocol revenue, not the existence of lock/s in your wallet.

* Please don’t shout at us on Discord after fifteen days!

Can We Gauge What The APR Will Be On Staking?

Not really. There are a lot of factors that determine the APR of dNDX, none of which are directly controllable by the DAO. To name a few:

  • Token price of NDX at the time it is locked,
  • Total amount of NDX locked for dNDX,
  • The percentages of NDX that are locked for various periods of time,
  • TVL of the index pools (more funds within the pools leads to more exit fee revenue as a result of arbitrage),
  • TVL of the Nirn vaults (more funds vaulted leads to more performance fee revenue),
  • Average yield rate across Nirn vaults, and
  • Market turbulence (more overall volatility leads to more arbitrage, which leads to more exit fees)

There’s a sandbox spreadsheet available here to make a copy of if you want to play around with some figures.

This is not to say that the DAO is entirely helpless in this regard. This has always been the case, but as a dNDX holder with a concrete cashflow (rather than an abstract pool of funds accrued by the DAO) it is now directly in your interest to promote Indexed products (the index pools and vaults), as their uptake (viz. TVL) directly correlates to the revenue the protocol generates.

What If I Want To Reclaim My Locked NDX Early?

You’re welcome to do so, but if you want to exit a lock prior to the time that you initially set elapses, your underlying NDX will be subject to a pretty punitive slashing.

How punitive? If you exit a 360 day lock immediately after you enter it, your underlying stake will have a 90% fee deducted. The formula is:

Max Penalty: 10% + (daysLocked/90 * 20%)

This penalty decreases linearly over the lifetime of the lock, reaching 10% immediately before the lock concludes, after which you can exit the lock penalty-free. You can model a particular lock by making a copy of this spreadsheet.

This hefty penalty is designed to ensure that stakers are not presented with perverse incentives whereby they enter a lock for longer than they intend to (to receive a higher amount of dNDX than they would otherwise), profit disproportionately from protocol revenue and then terminate the lock early.

Any NDX that is slashed from prematurely exited locks is considered protocol revenue, and as such will be market sold and distributed to remaining stakers. Please note that you cannot be exempted from this, so you are encouraged to carefully consider the length of your lock if you have any doubts about your ability to maintain it for the duration.

What If Something Needs To Change?

In the event that this mechanism is discovered to be flawed in some unforeseen way, a proposal is made and implemented that improves the design, or circumstance demand it, the DAO is capable of terminating the dNDX program by rerouting revenue back towards the Treasury and removing the slashing mechanism on early redemptions by way of a Governor Alpha vote. This latter action is a one-way trip, and it cannot be reactivated afterwards.

If this situation arises and the slashing is removed, all staked NDX will be freely available to unlock immediately, assuming you have the appropriate amount of dNDX to burn to do so.

What’s Next For Indexed?

Core will spend the next few months focusing on developing the various components that are needed to evolve Indexed. The specific pieces that we will be working on are:

  • A metaoracle that allows us to price and include a much wider range of assets in our indices (widening our scope from just assets on Uniswap V2 to Uniswap V2/3, Sushiswap, Balancer, Coinbase and Chainlink),
  • A custom Balancer V2 pool implementation (to allow us to integrate with the wider Balancer ecosystem and Smart Order Router), and
  • An asset manager for vaulting pool liquidity using Nirn.

Certora will begin the formal verification of Nirn as of the 4th of October, and we’re hoping to be able to open the gates to vaults for over 100 depositable assets in mid-November: the currently active vaults are simply a teaser!

We’re also looking into deploying on Polygon to create a Polygon-native index using our current infrastructure.

As always, we welcome new contributors to Indexed: be they engineers, marketers, people with ideas for new index products, potential partners, or just people who want to join us to chat!

We hope this answers any of the questions you might have about dNDX; however, if you have anything that needs clarifying, please reach out to us on either Discord or Twitter — we’ll be happy to help!

Thanks for reading, and see you online!