This IIP relates to launching the Metaverse Index with an updated methodology as described below. This will be the first index product to be launched from within the Coop community and not with an external partner as the methodologist. It is designed to capture the potential upside of the new but growing group of projects on Ethereum that relate to virtual ownership through NFTs, gaming, virtual reality and entertainment.
The opportunity here is to create an index that rewards long term investment in a decentralized and virtual future. Holders of the Metaverse Index are taking a view that the future of entertainment, sports and business will shift to a virtual environment and that transactions will take place on the Ethereum blockchain within this metaverse.
It’s clear there is strong demand for an index in this sector, PieDAO recently announced their proposed version of a similar project, advised on the composition by Alex Saunders from Nuggets News. The Index Coop has to ensure we have a well thought out product ready to capture market share as the space continues to grow.
Size of the opportunity?
Unlike the current craze for yield and the narrative of blockchain replacing traditional financial systems, the gaming/VR sector is flying somewhat under the radar. If we look at the mainstream gaming market, it’s currently valued around $155b (2020) predicted to rise to $200b by 2023. A quick back of the envelope calculation for the top 5 crypto gaming projects (using MANA, ENJ, SAND, UOS and CUBE) gives a market cap of roughly $360m, that’s 430x smaller…
In terms of holding virtual meetings and other remote working opportunities, ZOOM’s market cap rose above $100b in 2020. What happens when we are all meeting in the local Decentraland office? Crypto educator Alex Saunders of Nuggets News recently constructed a HQ in Decentraland and established businesses like Rarible and Matic have been there for a while (take a walk over to crypto valley). In the last year there have been a number of forums and conventions held in Decentraland and prominent figures in the crypto space continue to use it as a way to engage with followers.
Aside from gaming and the virtual meetings that can take place inside these projects, there is also the ‘virtual object’ aspect, underpinned by Non Fungible Tokens (NFTs). According to research from Messari, sales volume for NFTs is around $150 million and metaverses make up roughly a third of that.
So what is the actual value of these virtual worlds? Annual subscription revenues for World of Warcraft are in the $200 - $300 million range. At the same time, the North American MMO (massively multiplayer online) industry generated total revenue of $2.5 billion in 2016.
In Somnium space, Decentraland and Sandbox it is possible to use each project’s tokens to purchase objects or land as NFTs. Enjin went as far as creating a technology that allows user created content to move between games, something not seen in the worlds of Sony or Microsoft. This adds some depth to $MVI as the underlying tokens represent more than just face value, they are a substrate for virtual creativity.
How is it different from other products?
$MVI is a straightforward bet on the world moving to a more virtual environment to conduct both business and pleasure.
In terms of differentiating from other products that exist this isn’t a yield farming play, it functions more like a traditional equity ETF in that it simplifies the expression of a particular trade. In this case the belief that virtual environments hold huge growth potential over the coming years. A similar product in the tradFi world is the Van Eck e-sports ETF.
The market liquidity for potential inclusions has been undertaken and used to scale the weighting of each project, but it is not ready to be shared publicly just yet. We are working with the business analysis team within Index Coop to formalise this process and will publish a table here when it is complete. There is also work ongoing to create a Dune Analytics dashboard that can measure the liquidity of the underlying tokens, ready to be used during the determination phase prior to each monthly rebalance.
Selection of the $MVI tokens would be based on the following basic criteria:
- The token must be available on the Ethereum blockchain.
- Protocol must be in one of the following token categories on Coingecko: Non Fungible Tokens, Entertainment, Virtual Reality, Augmented Reality and Music. More categories can be added in the future as the market matures.
- Total market cap must be over $15m.
- Protocol must have at least 3 months history of operation.
- Token must have reasonable and consistent DEX liquidity on Ethereum
- An independent security audit should have been performed on the protocol and results reviewed by Index community and product methodologist. In the case that no audit has been performed, a community vote can take place based on subjective judgement of the protocol, with a weighting reflective of the increased risk.
- In the event of a security issue the set manager should work with the project team to understand the issue and any effects to the $MVI holdings. Upon resolution the index manager and community should review together and vote to keep the token or not.
- Tokens will not be staked at the launch of the index. This is subject to change as liquidity increases and it becomes possible to safely generate yield through staking.
Index Weight Calculation
The $MVI will use a combination of market cap and liquidity weighting to arrive at the final index weights. We believe that liquidity is an important consideration in this space and should be considered when determining portfolio allocation.
TW = 75%*MCW + 25%*LW
TW – token weight in the $MVI
MCW – market cap weighted allocation
LW – liquidity weighted allocation
Maximum weight caps are under consideration for the largest projects at 20-25%, and for those with insufficient liquidity at 3-5%. This will be clarified with the business analysis team prior to DG2 voting based on the market liquidity analysis.
The index is maintained monthly in two phases:
The determination phase takes place during the third week of the month. It is the phase when the changes needed for the next reconstitution are determined.
Additions and deletions: The tokens being added and deleted from the index calculation are determined during the third week of the month and published before monthly reconstitution. This takes place with oversight from a subject matter expert, external to the Index Coop.
Circulating Supply Determination: The Circulating Supply is determined during the third week of the month and published before the monthly reconstitution. To start with we will use Coingecko’s circulating supply figure.
Following publication of the determination phase outcome, the index composition will change to the new weights on the first working day of the following month. I.e components will be added or removed, and weights adjusted.
This is provided as an illustration and inclusions are not final. The index launch composition will be provided prior to DG2 voting.
Fees will be finalised with the Business Analysis team after DG1 voting but will remain in the 0.55-0.95% ballpark as per the initial proposal.
The streaming fee will be split 95% to Index Coop and 5% to the methodologist. Methodologist bounty tokens will accrue 100% to the Coop so that they can be repurposed for liquidity mining incentives.
Author background and commitment
DarkForestCapital has been a member of the Index Coop community since the beginning, initially proposing the Metaverse Index within the first week of the Coop launching. Since then DFC has joined the treasury committee, produced the newsletter and more recently looked to improve Index tokenomics.
Verto arrived on the scene more recently but got straight to work making improvements, firstly launching the Investment Committee to improve our content and analysis while also reaching out to wallets and exchanges for partnership. Verto took the original Metaverse proposal and reworked the weighting calculation to overcome the low liquidity that some of the tokens experience, making the idea into a reality.
Mason Nystrom is a research analyst at Messari specialising in NFTs, social tokens and the metaverse. Mason will provide fundamental analysis as an overlay to the methodology and criteria specified above.
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