**IIP**: 126

**Title**: Launch the Total Crypto Market Cap Index (MCAP)

**Status**: Proposed

**Authors**: @JosephKnecht (MoonRock), @MrMadila (Index Coop)

# 1.0 Simple Summary

We propose launching the Total Crypto Market Cap Index (MCAP), an index of the total cryptocurrency market capitalization. MCAP will be the first non-synthetic total crypto market cap token.

# 2.0 Abstract

MCAP is an index token that tracks the total crypto market capitalization. The token uses a sampling approach to represent the total market cap using a subset of large cap tokens. The product can be implemented as a Simple set with no additional engineering effort. The components are among the most liquid on the market so the NAV decay and gas costs will be minimal.

## 2.1 Motivation

Total market cap indices are the bedrock of passive investing. There is approximately $2B total AUM in centralized large cap crypto index funds. However, there are few decentralized total market index tokens and all of them are synthetic. Providing a total market cap index would address the largest segment of the index market and serve as a foundation for future diversified meta-index products.

## 2.2 Rationale

MCAP uses sampling replication to represent the total crypto market cap. In the sampling method, the weights are selected to maximally explain the total market variation. Sampling is a standard method in designing traditional equity index funds but we believe this is the first application to crypto. Advantages of sampling techniques over synthetic methods include full collateralization, no de-pegging risk, transparency, and ease of communication. The main weakness is the inability to capture variability which is outside of and uncorrelated with the sample.

# 3.0 Specification

## 3.1 Overview

The MCAP index is constructed using partial sampling. We take a subset of large cap tokens which best explain the variance of the total market cap. In traditional finance, total market ETFs and mutual funds solve this problem by using partial sampling and derivatives instead of direct replication. For example, VTI, the largest total market ETF, uses 85-95% partial sampling and the remainder in futures, option and swap contracts, as well as securities not in the underlying index. VTIâs target is to replicate the price performance of the underlying index and key characteristics including âindustry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.â Motivated by these sampling approaches, we aim to represent the total crypto market using a sampling approach.

## 3.2 Differentiation

Total crypto market index token on the market include the following:

- Base Protocol (BASE, $1.2M fully-diluted market cap) uses a rebasing algorithm to implement tracking, has very large tracking error, and is not collateralized and so is always at risk of depegging.
- Cryptex Financeâs Total Crypto Market Cap token (TCAP, $6.4M fully-diluted market cap) is an over-collateralized synthetic. As a synthetic, TCAP always has the risk of depegging. Cryptexâs CTX governance token can ââŚbe used to compensate for black swan events that may leave TCAP vaults under-collateralized.â Gemini article
- Alongside Finance is creating The Broad Market Crypto Index (AMKT) which âaims to be the most diversified way to invest in the crypto market for the long term. Alongside is the first to create a cross-chain index allowing a single purchase to buy all the top assets in the space. This index optimizes for capturing broad exposure, without focusing on a specific theme, and instead captures the most adopted projects across all of the crypto ecosystem.â Little information is available about AMKTâs methodology except that it will have 50+ components and quarterly rebalancing.
- Centralized large cap indices include BITW, GDLC, DLCX, SPCBLC, and others.

## 3.3 Example composition

Example composition for the period November 1-30, 2021. This composition has the lowest predicted tracking error for the following December month.

This composition explains 99.3% of the market cap variance for Nov 2021 and so thereâs little benefit in adding additional tokens.

## 3.4 Performance

The price history and tracking error for MCAP and TCAP for the test period 01 September 2021 to 30 November 2021 are shown below.

To benchmark the tracking error we consider that the standard deviation of the total crypto market cap is 2.56% across Chainlink oracles and 2.97% across major portals (i.e., CoinGecko, CoinMarketCap, TradingView, Nomic, and Chainlink Oracle).

# 4.0 Size of Opportunity

We predict total AUMs of $3M, $50M, and $200M at 0, 12, and 24 months respectively post launch. The starting AUM of $3M is benchmarked off of the $6M market cap for the closest competitor TCAP.

# 5.0 Market & Customer Research

## 5.1 Target Customers

- Retail investors from TradFi looking for a product analogous to a total stock market ETF or mutual fund.
- Crypto-native investors looking to track the overall market.
- Treasuries looking to diversify into a broad portfolio and increase their Risk-Free Value.

According to Index Coopâs market survey, 2-3 out of 59 respondents asked for a large cap index product or a variant. For example, customers asked for a âTop 30 Market Cap Indexâ, âS&P500 equivalentâ, and a âMarket-cap-weighted L1 Indexâ. For reference, 7 customers requested an NFT index, 4 for a social token index, and 2 for automated yield.

## 5.2 User stories

Susan: âAs an experienced passive equity investor getting into crypto, Iâm looking for a product similar to a total market ETF like VTI or SPY that will allow me to maximize my risk-adjusted returns. I donât have the time, interest, or risk-appetite to purchase individual tokens. MCAP gives me a âset it and forget itâ approach where I know Iâm tracking the overall market.â

Jo: âAs a crypto-native investor, Iâm looking for a core position that I can then complement with smaller thesis-driven investments. I like the fact that I get indirect exposure to a diverse basket of blue-chip tokens.â

John: âAs the Chair of the Magnificent DAO Treasury Committee, Iâm looking to diversify our treasury in order to increase its Risk-Free Value. I like MCAP due to the diversification, relatively low risk, and lack of overlap with our treasury holdings.â

## 5.3 Product economics

We estimate monthly revenue of $4,750 and rebalancing costs of $2,000 for a gross profit margin of 58%. This is based on a $3M AUM, 100 bps trade size for rebalancing, 10% average monthly turnover, $141k weighted-average trade depth (excluding wBTC and ETH), $250 gas cost, and a 1.9% streaming fee.

# 6.0 Methodology

## 6.1 Initial Composition & Token Inclusion Criteria

Selection criteria for tokens

- Top 50 market cap according to CoinGecko or CoinMarketCap.
- ERC-20 standard
- ERC-20-wrapped versions of the above, e.g., wBTC, renBTC, renDoge, Wrapped Terra, etc.
- No staked tokens, e.g., no STETH, CETH, etc.
- '>$25k trading depth at 100 bps without order aggregation
- The top 15-20 tokens by market-cap are selected from the above list.

## 6.2 Weightings

Full replication of the total crypto market cap is impossible because of the sheer number of tokens required. Instead, we use a sampling approach to find the allocations which best represent the total market cap based on the previous monthâs price history.

The objective function is the total daily root-mean-square error plus a prior for the previous monthâs weights. The weights are solved for using the interior point method and bootstrapping. The interior point method is a linear programming technique for solving least-squares problems with inequality constraints. The prior incorporating the previous monthâs weights serves to reduce turnover and hence reduce NAV decay and transaction costs. The prior will be set to keep the average monthly turnover below 10%.

The total crypto market cap history will be taken from the Total Marketcap Chainlink oracle also used by BASE and TCAP. In the example above, the total marketcap data were taken from TradingView.

The sampling method used here can also be generalized to other indices where either the tokens are unavailable, a certain profile is desired, or the universe of tokens is prohibitively large.

## 6.3 On-Chain liquidity analysis of underlying tokens

See composition above. More detailed liquidity analysis to follow for DG2.

## 6. 4 Maintenance

The index will be rebalanced when the 20-day time-weighted correlation falls below r<0.97. We estimate this will entail rebalancing every 2-4 months.

# 7.0 Costs

## 7.1 Cost to customer

To be determined after DG1.

We anticipate MCAP having a 1.9% management fee.

## 7.2 Cost transparency

The total cost to the customer will be disclosed including the actual and predicted annual NAV decay.

## 7.3 Rebalance frequency

Every few months depending on the tracking error.

## 7.4 Manual Rebalance magnitude

We anticipate turnover of 20% at each rebalance.

## 7.5 Fee split

To be determined after DG1.

# 8.0 Meta / intrinsic productivity

Metagovernance will be enabled.

Intrinsic productivity will be enabled when it becomes available at Index Coop.

# 9.0 Liquidity

To be described in DG2.

# 10.0 Author Background and Commitment

@JosephKnecht is a methodologist at Index Coop and Founder of MoonRock.

MoonRock is developing the next generation of crypto index strategies.

# 11.0 Marketing support / distribution / partnerships

The methodologist will promote the token/s through the MoonRock brand. The methodologist will also be available for AMAs and interviews.

# Revision history

22 Dec 2021 - Original version

## Copyright

Copyright and related rights waived via CC0.