IIP-145: DG - Launch the Layer 2 Index (LAYER2)

IIP: 145
Title: Launch the Layer 2 Index (LAYER2)
Status: Proposed
Authors: @JosephKnecht (Index Coop, MoonRock), Advisor: Piotr Szlachciak (L2BEAT)
Reviewed by: @DocHabanero
Gov Review: @asira
Created: 29th March 2022
Notification: @GovNest

1.0 Abstract

We propose launching LAYER2, an index token of the Layer 2 ecosystem. The product is advised by and will receive data from L2BEAT, the leading analytics and research platform for Ethereum layer two (L2) scaling solutions.

Layer 2 (L2) blockchains are a ground-breaking innovation in cryptocurrency. L2 chains provide transactions which are orders of magnitude faster, less expensive, and higher throughput than their L1 counterparts. The high performance of L2 chains will be instrumental in onboarding the next generation of mainstream users to crypto. Additionally, the dramatically faster speed and lower transaction costs enable a wide range of applications not currently possible on decentralized L1 chains such as real-time gaming, high-frequency trading, micro-trading, perpetuals, and central limit order books. It is anticipated that most applications will eventually move to L2 with L1 serving as a settlement layer.

The LAYER2 index token will capture the leading protocols in the L2 revolution. The protocols include infrastructure, scaling, and application tokens. The index is being developed while being advised by L2BEAT, the leading L2 analytics dashboard and educational resource.

L2 protocols represent one of the most dynamic and promising segments of the cryptocurrency market. In the Index Coop’s most recent market research surveys, an L2 index token featured as one of the most requested products. The LAYER2 token can address that market demand. Strategically, an L2 index would also help the Coop build partnerships and visibility with L2 protocols and users ahead of the industry-wide migration to L2.

LAYER2 will be deployed on Ethereum L1 due to the low underlying liquidity and fragmentation of the native L2 platforms. L1 side-chain tokens are included sparingly. The allocation will include scaling protocols as well as L2 application tokens.

2.0 Market information

2.1 Target customer segments & user stories

  • Layer-1 investors looking for exposure to the L2 market but have not yet migrated to L2.
  • Layer 2-native investors looking to track the overall L2 ecosystem.
  • Treasuries of Layer 2 protocols looking to diversify into a broad portfolio, increase their Risk-Free Value, and support the Layer 2 ecosystem.

‘As an experienced L2 investor, I’m looking for an index product like LAYER 2 that gives me broad exposure to the protocols I know and use regularly.’

‘As an L1-native investor, I’m looking for exposure to the L2 space even though I still do most of my trading on L1. LAYER2 lets me benefit from the growth of the L2 ecosystem even if I haven’t taken the leap yet myself. The token vetting by L2BEAT gives me added confidence in the methodology.’

‘As the Chair of the Magnificent L2 DAO Treasury Committee, LAYER2 helps us diversify our treasury and increase its Risk-Free Value, as well as strategically support fellow protocols in the L2 ecosystem.’

2.2 Market research

According to Index Coop’s market survey of 20 Dec 2021, 7% of respondents asked for an L2 index, making it the second-most requested product of the ones Index Coop does not currently offer or have under development. Only a gaming index and an alt L1 index ranked higher.

2.3 Size of opportunity

We predict total AUMs of $3M, $9M, and $100M at 6, 12, and 24 months respectively post launch. The growth in months 6 to 12 is approximately 1.5x growth in share price and 2x in supply.

2.4 Differentiation

There are no L2 or scaling index tokens currently on the market. PieDAO has a proposal for a scaling index token SCALE which includes a number of roll-up and side-chain tokens. See the SCALE Risk Analysis and Monitor. The project was first proposed in Feb 2021 but has not gone to governance vote yet.

2.5 Marketing support / distribution / partnerships

L2BEAT will serve as advisors to the project. They will provide technology consultancy, data delivery, branding and marketing.

2.6 Marketing risks and weaknesses

  • The composition has few tokens and a very heavy allocation towards ETH and MATIC. This could reduce the product’s attractiveness. One mitigation is to explain that the ETH and MATIC reserves will be used to acquire future index components. LAYER2 token holders will vote on which tokens to include which could create war demand for the product.

  • Many top L2 protocols are missing due to the lack of a token, in particular Arbitrum and Optimism. The reserves described above can be used to purchase these tokens if/when they come to market. One mitigation is to position the index as a passive way to acquire new L2 tokens without having to constantly monitor the market.

  • The underlying liquidity is low, which will increase the price-NAV deviation. The index will not rebalance and so there’s no effect of the low liquidity on gas costs or asset decay.

3.0 Financials

3.1 Revenue

The streaming fee will be 2.95% and the mint/redeem fees 0.5%. The streaming fee is justified by the novelty of the product and the effort to manage the Governance Council.

3.2 Fee splits

Post-gas, fee income and protocol rewards will go 20% to L2BEAT, 70% to Index Coop and 10% to the Index Coop Product Pod according to the framework for internally-produced products.

3.3 Product economics

We estimate monthly revenue of $7,375 and no rebalancing costs for a gross profit margin of 100%. This is based on a $3M AUM, a 2.95% streaming fee, and no rebalancing.

3.4 Financial forecast

LAYER2 financial forecast

4.0 Specification

4.1 Product design


LAYER2 will be a simple set built on TokenSets. The tokens will include the top L2 projects by Total Value Locked (TVL) according to L2BEAT.

Engineering lift

No additional adaptors or customizations are required.

Deployments and bridges

LAYER2 will be deployed to mainnet. Based on the success of the product we will consider deployments on Polygon, Optimism, and Arbitrum.

Token inclusion/exclusion criteria [if applicable]

Selection criteria for tokens

  • Tokens in the L2 ecosystem incl L1 sidechains sparingly
  • TVL > $50M
  • Trading depth > $10 ETH aggregated @ 100 bps including LP fees
  • ERC-20 standard

Tokens with <10 ETH trading depth will be included with a 2% allocation cap.

ETH is included as a proxy for Optimism and Arbitrum. MATIC is technically not an L2 protocol but rather an L1 sidechain due to its dependence on external validators. However, MATIC is still included due to its proximity to L2 and heavy investment in L2s. Including ETH and MATIC serves to improve the overall liquidity of the product and provides a reserve for adding additional L2 tokens as they launch.

Index weight calculation

The weighting is 90% square-root market cap and 10% liquidity. Liquidity is defined as the aggregated trading depth at 100 bps including LP fees. We note that certain pools can be used for issuance which are not available on 0x Matcha as required by TokenSets. We use these issuance pools to measure the underlying liquidity since the index will not be rebalancing and hence the post launch liquidity is less relevant.

ETH and MATIC will each be initially capped at a 15% allocation.

Rebalancing approach

The index will be rebalanced only to maintain a 30% allocation cap. Otherwise the index will not be rebalanced.

Recomposition approach

Tokens will be added or removed from the index based on a vote of LAYER2 token holder. The voting options will be delineated by the LAYER2 governance council.

Intrinsic productivity

Intrinsic productivity will be enabled if and where available.


Management of the protocol will be governed by the LAYER2 Governance Council (L2GC). The Council will consist of 5 members: 3 appointed by Index Coop and 2 members voted in by LAYER2 token holders. The L2GC will serve to direct votes to LAYER2 or Index Coop token holders depending on the topic and to delineate the votes for LAYER2 token holders.

4.2 Example composition

The trading depth is defined as the aggregated trade size that would induce 100 bps slippage including LP fees. For issuance, we use the dex’s with the deepest liquidity (eg, PMMs on 1inch) and 0x Matcha-supported dex’s for maintenance post-launch. The overallocation (OA) factor is the ratio between the component allocation for a hypothetical $1M AUM and the aggregated trading depth at 100 bps. OA factors > 1 for allocations >5% suggest a heavy allocation relative to the underlying liquidity. BOBA was subject to a 2% allocation cap due to its low liquidity.

4.3 On-Chain liquidity analysis of underlying tokens

See the underlying liquidity above under Composition.

4.4 Backtest results

The tokens are too recent to provide meaningful backtest results.

5.0 Product liquidity

LAYER2 is expected to require $430,000 in seed liquidity which would currently support a 2% Target Access Cost. The trading pair will be LAYER2:ETH and will be seeded in a Uniswap V3 30bps pool with a range of -29% : +40%.

This pool is not likely to be immediately self-sustaining for a long-period of time and we should expect Protocol Owned Liquidity to be required for at least 3 months. There will be no liquidity mining incentives.

The Liquidity Pod will explore the possibility of launching this product directly to zkSync on the ZigZag exchange using a Chainlink Price Feed. This would eliminate the need for an L1 liquidity pool which exposes Index Coop to impermanent loss risk as well as price risk. An L2-only launch would require $200K which is exposed only to the price risk of $100K in LAYER2. This pool would be a LAYER2:USDC Pool. Large buyers such as DAOs would still be able to mint and redeem on Mainnet. This option is highly unlikely however due to METIS, DVF, and BOBA not having Chainlink price feeds.

Target Access Cost % 2.00%
ETH/USD Price $3,300
Gas Price 55 gwei
Exchange Issuance Gas Required 1410000 wei
Swap Cost $22
Exchange Issuance Gas Cost $256
Exchange Equilibrium $12,796
Total Baseline Liquidity $2,776,041
Concentration - Lower Bound -29%
Concentration - Upper Bound 40%
ETH Required 65.13
Tokens Required 2,149.29
Total USD Required $429,858

6.0 ‌Author Background

JosephKnecht is a product designer and quantitative analyst at IndexCoop and Founder of MoonRock.

Piotr Szlachciak is a Co-Founder of L2BEAT, the leading analytics and research portal about Ethereum layer two (L2) scaling.


‌Copyright and related rights waived via CC0.


Super bullish on this and L2 beat is the perfect methodologist to partner with, we’ll all be on L2 in the near future and I love that this index will (hopefully) be deployed to capture the growth in this space.

will a 15% ETH allocation be enough to adequately capture the assumed upside of OE, arbitrum, ZKsync, starkeware etc? Does it make sense to have a larger allocation of ETH ready to deploy if/when the L2 airdrops start?

Personally I think MATIC should be maintained at 15% and not used as dry powder to trade for new tokens. Polygon has 3 ZK projects (that I know of) that haven’t been released yet and a great team with a proven track record of success. I still think there is big upside in holding MATIC

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Gm @skaha Thx for the nice feedback. The trade-off on the reserve size is that a larger reserve creates more governance value and war demand, gives more dry powder to deploy, and improves the underlying liquidity. Also, in the case of an ETH reserve it reduces our seed liquidity requirements since we can use more concentrated liquidity. On the downside, the reserve dilutes the index thesis and accordingly reduces the attractiveness of the product. We felt reducing the total reserve to 2x15% was a good balance in particular because the reserves are no longer the headline allocations.

Regarding MATIC there’s no strong consensus on whether or not it’s L2 due to its dependence on external validators. As described in the proposal the index recomposition will be determined by LAYER2 token holders.

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@sixtykeys Can you please assign an IIP number to this proposal and schedule a snapshot vote for this upcoming Monday?


Makes sense, I’m really forward to this product

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I’m not exactly sure how things work, but seems it is a updated copy of this proposal IIP-127: Launch the Layer 2 Index (LAYER2)

Is such duplication an accident, or must each update to a proposal be a new IIP?

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Hi @balupton

This is a legacy issue. We used to have 2 Snapshot decision gates DG1 and DG2 for our new products. For simplification we moved to having a single decision gate called DG. At the time of rolling out the new process, LAYER2 had passed DG1 but not yet DG2. Hence we are putting LAYER2 through DG to reflect the new process instead of grandfathering it in based on only having passed DG1.


What does this mean?

‘War demand’ refers to demand for the token based on the governance value of influencing the reserve allocation. For example, one could purchase LAYER2 and vote to direct the reserves to rebalance into a protocol where one had an interest. The voting options will be circumscribed by L2GC and the token holders to limit the influence of bad actors. The analogy is to the Curve wars for emissions and the FLOOR wars for NFT bonding. ‘Dry powder’ refers to the reserve allocation


Are the allocations meant to add up to 100.1 instead of 100?

The allocations add up to 100%. They add up to 100.1% in the table because of a rounding error from using only 1 decimal place in the table.

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This proposal has been reviewed and queued for voting to start on snapshot on April 4, 2022 at 6:00PM UTC. Voting will run for 72-hours and is subject to the elevated quorum (10%) and passing-threshold (60% FOR) requirements for product launches.


If the vote passes, what’s the roadmap and timeframes to get it to purchaseable?

If the outcome is positive we build the product and launch it. We have a very heavy product launch schedule so I would estimate Q3. Let me invite you to our Discord where we can answer any questions at more length. Index Coop

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IIP-145 has been approved by the community meeting the elevated 10% quorum with a total INDEX of 446,000 and a passing threshold of 60% FOR.