IIP: 103
Title: Token Terminal Smart Beta Index (TTI)
Status: Proposed
Author: Token Terminal (@tokenterminal)
Created: 2021-10 -27
1. Summary
A price to sales ratio (P/S) weighted smart beta index by Token Terminal (TTI).
Token Terminal is a leading data analytics provider focused on the fundamentals of crypto protocols. We track metrics such as revenue and earnings to gauge the actual usage and performance of different crypto protocols. Over the past year, we’ve witnessed increasing interest towards our chosen methodology and believe that a broadly available index product based on that same methodology could generate significant interest among the community.
We have launched a dedicated site for the TTI: https://index.tokenterminal.com
If this proposal is moved forward to DG2, we will open source the algorithm used for calculating asset allocations in our backtest for maximal transparency.
2. Motivation
Smart beta. In contrast to traditional market cap-based indexes, smart beta indexes employ alternative index construction rules with the aim of improving a portfolio’s risk-adjusted returns. These indexes seek to combine the benefits of passive investing and the advantages of active investing strategies.
Token Terminal smart beta index (TTI). The TTI uses a fundamentals-based ruleset for its index construction. Assets included in the TTI are chosen primarily based on their price to sales ratio. The price to sales ratio compares a protocol’s market cap to its revenues. A low ratio could imply that the protocol is undervalued and vice versa.
The price to sales ratio is an ideal valuation method especially for early-stage protocols, which often have little or no net income. Given the nascency of the crypto market, we believe that the price to sales ratio offers a highly accurate tool for relative analysis between different crypto protocols.
3. Specification
3.1 Overview
The TTI will contain a cross-sector collection of ERC20 tokens to capture broad exposure to assets with a low P/S-ratio. The assets can be wrapped representations of tokens from other blockchains than Ethereum, subject to available liquidity.
3.2 Differentiation
Market cap-based indexes offer a low-cost and easily accessible alternative for investors looking to diversify their cryptoasset exposure. We believe that the TTI could serve as a great fundamentals-based complement to market cap-based indexes and over time, especially as the crypto market and the asset universe expand, evolve to offer its investors differentiated exposure to revenue-generating and fairly valued crypto protocols.
3.3 Example composition
See https://index.tokenterminal.com for composition.
3.4 Backtest data
See https://index.tokenterminal.com for backtested data.
4. Size of opportunity
Our institutional clients have expressed an interest towards an index product that is easily understandable for investors coming from traditional finance. The value proposition of a P/S based index is that it optimizes for fairly valued and widely used protocols and thus lowers the threshold for institutional investors looking to gain exposure to decentralized finance (DeFi).
We believe that cohorts of investors with increasing levels of sophistication are quickly being onboarded into the crypto space, which will contribute to the next cycle of crypto adoption being driven more by fundamentals than the previous cycles. We believe that the methodology chosen for the TTI will make it an ideal vehicle for anyone who wishes to capitalise on this trend.
5. Market & customer research
5.1 Target customer
The TTI is aimed for investors who are looking for a low-cost and easily accessible alternative for diversified cryptoasset exposure. It serves as an ideal complement to traditional market cap-based index products.
6. Methodology
The TTI uses a forward price to sales ratio that is calculated based on a protocol’s past 30-day average revenue. Formula for the forward price to sales (P/S) ratio: fully diluted market cap / annualised revenue (calculated as a 30 day moving average * 365).
6.1 Token inclusion / exclusion criteria
Eligible tokens are those that meet the following technical, market, and safety requirements:
6.1.1 Technical requirements
- The token must be available on the Ethereum blockchain.
- The token must be listed on Token Terminal.
- The token must not be considered a security by the corresponding authorities across different jurisdictions.
- The token must be the native token of a protocol or a wrapped version thereof.
6.1.2 Market requirements
- The token must have a capped supply or it must be possible to reasonably predict the token’s supply over the next five years.
- The token must have sufficient liquidity for initial inclusion and rebalances. [technical details to be confirmed after DG1 in cooperation with Index Coop].
- The token’s economics must not have locking, minting or other patterns that would significantly disadvantage passive holders.
6.1.3 Safety requirements
- The protocol must have been launched at least 90 days before inclusion.
- The protocol must be recognised as having a high-quality product and team.
- The protocol must have sufficient resources for future development.
- The protocol must be actively developed and must not be insolvent.
- The protocol must have conducted sufficient security audits and/or security professionals must have reviewed the protocol to determine that security best practices have been followed.
6.2 Index weight calculation
The individual weights of each component in the TTI can be viewed at https://index.tokenterminal.com. The target weight of the ith component in the portfolio is given by:
Where N is the total number of tokens in the portfolio and SPi is the inverted price-to-sales ratio of the ith project.
An additional set of constraints influence the weighting of each token on rebalances:
- Maximum target weight for a single asset = 20%
- Maximum allocation change on rebalance for any asset = 5%
Only assets with a minimum circulating market cap above $100M are eligible for the TTI.
Furthermore, as of the date of writing, out of all the projects listed on Token Terminal, the following were excluded due to one or more of the following reasons: a) layer 1 blockchain, b) not an Ethereum-based asset, c) no token available, d) data availability issues: Autofarm, Avalanche, BabySwap, BENQI, Binance Smart Chain, Bitcoin, Cardano, Cosmos, Decred, Dogecoin, Ellipsis Finance, Ethereum, Fantom, Filecoin, Futureswap, Kusama, Litecoin, Maple Finance, MetaMask, OpenSea, Optimism, PancakeSwap, Pangolin, Polkadot, Polygon, Polymarket, QuickSwap, Saddle Finance, Set Protocol, Solana, SpookySwap, Stellar, Terra, Tezos, Trader Joe, Venus, Volmex, xDai, Yield Yak, Zcash.
If this proposal is moved forward to DG2, we will open source the algorithm used for calculating the asset allocations in our backtest for maximal transparency.
7. On-chain liquidity analysis of underlying tokens
Our backtesting framework includes a set of constraints that attempt to mitigate liquidity/slippage issues. These have been described in section 6.2. Following DG1, we will perform on-chain liquidity analyses in collaboration with the Index Coop, and discuss the practical implementation of the TTI and how to address any remaining liquidity concerns.
8. Index maintenance
The TTI is maintained by Index Coop in cooperation with Token Terminal as the methodologist. The TTI would be maintained monthly in two phases:
i) Determination phase
The determination phase takes place during the last week of the month. It is the phase when the changes needed for the next reconstitution are determined.
Price to sales ratio determination: the TTI references Token Terminal’s price to sales ratio. The price to sales ratio is determined during the last week of the month and published before the monthly reconstitution.
Additions and deletions: The tokens being added and deleted from the index calculation are determined during the last week of the month and published before the monthly reconstitution.
ii) Reconstitution phase
The index components are adjusted, added and deleted as per the instructions published after the end of the determination phase. New index weightings, additions and deletions are incorporated into the index during the monthly reconstitution, which will take place on the first business day of the month. As assets tracked by the index grow, the reconstitution window will expand to more than one day to lower its market impact.
9. Costs
9.1 Cost to customer
TBD after DG1.
9.2 Cost to mint / redeem
TBD after DG1.
9.3 Rebalance frequency
Monthly.
9.4 Manual rebalance magnitude
The average % magnitude on rebalances in our backtests was ~2.8% (see rebalance tables on https://index.tokenterminal.com).
9.5 Fee split
TBD after DG1.
10. Meta / intrinsic productivity
Index Coop will control the meta-governance in collaboration with Token Terminal. Details to be discussed after DG1.
11. Liquidity
See section 7.
12. Author background
This proposal has been drafted by the team at Token Terminal. Token Terminal was launched at the end of 2019 with the aim to create institutional-grade analytics tools for cryptoasset investors.
As a methodologist Token Terminal will:
- Provide an initial but complete methodology for the proposed index.
- Propose new assets to be added to the index product in accordance with the inclusion criteria.
- Collaborate with the Index Coop in all aspects related to the proposed index.
- Update Token Terminal’s community (Twitter / Newsletter) on index products offered by the Index Coop.
- Launch a dashboard (on Token Terminal’s new portal) that includes all index products offered by the Index Coop.
Copyright
Copyright and related rights waived via CC0.
