IIP-177: Launch the Index Coop Large Cap Index ($ic21)
IIP: 177
Title: Launch the Index Coop Large Cap Index
Status: Proposed
Author(s): @allan.g, @jordan.t
Reviewer(s): @mrmadila, @0x_Dev , @afromac, 21.co
Created: 31 Aug 2023
1.0 Abstract
The Product team proposes that the Index Coop launch the Index Coop Large Cap Index, an onchain crypto index token that is built around the largest and most successful crypto projects, ranked by square root market cap weighting. $ic21 contains a number of non-EVM assets, such as ADA and SOL, that will be included via the creation of wrapped tokens that are managed by 21.co. These tokens use a custodial model similar to wBTC, and liquidity will be made available to Index Coop via 0x RFQ orders.
Please note: the underlying wrapped assets that will be included in this product will be sourced from a well-known industry provider, 21.co. The final product name and corresponding ticker symbol may deviate slightly from those presented in this IIP. These final details will be revealed at a subsequent date.
2.0 Market information
2.1 Target customer segments & user stories
User Stories:
- As a token holder, I want seamless exposure to the largest crypto assets in the market.
- As a token holder, I want to diversify my holdings across multiple blockchains in a decentralized way, while enjoying a typical Web3 user experience.
- As a token holder, I seek a crypto index product that offers substantive access to L1 & L2 blockchains and blue-chip crypto projects without significantly overweighting BTC and ETH.
- As a token holder, I seek a crypto index product that offers substantive access to L1 & L2 blockchains and blue-chip crypto projects without bridging assets across multiple blockchains.
- As a token holder, I require an easy-to-access crypto product that comes with the cost and other advantages of automated rebalancing.
2.2 Market research
The initial ten tokens that meet Index Coop’s inclusion criteria represent the most substantial and successful blockchain projects operating today, jointly amassing a market capitalization of over $860B. As highlighted in the 2022 Investment Company Factbook, index products have been integral to the financial market for close to three decades. Within this time frame, the large-cap theme has held a significant share of net assets. At the conclusion of 2021, net assets in large-cap domestic equity index products amounted to $2.2 trillion, constituting 31 percent of the total net assets in index products. While the traditional route of accessing the large-cap theme (and the underlying constituents they represent) doesn’t serve as a flawless gauge for future success in the crypto market, it does provide us with meaningful insights.
The Index Coop also gained significant qualitative insights from an array of partners who support the product. These partners span across different sectors, including tier 1 centralized exchanges, product providers, advisory platforms, and family offices. Intermediaries that cater to more traditional potential users have displayed considerable interest in a product like $ic21, as per anecdotal evidence.
2.3 Size of opportunity
Today, 99.8% of the world’s wealth exists off-chain. $ic21 has the potential to serve as a metaphorical bridge, providing a straightforward and intuitive product for newcomers who want access to the strongest and most impactful projects, as determined by market cap. With its compelling theme and an accessible format, $ic21 is a good option for those allocating to crypto for the first time.
It’s also notable that as of October 2022, only 2.5% of all crypto assets were held in an investment product, with BTC and ETH making up roughly 95% of the assets. As the crypto market matures, we believe more assets are likely to establish their value and longevity, similar to BTC and ETH, continuing to create demand for an evergreen large cap product. Additionally, $ic21 provides an outlet for crypto users currently allocated to the theme to simplify their long-term strategy.
(Source: Morgan Stanley Cryptocurrency Research Oct 6, 2022)
2.4 Differentiation
In the current market, there are few onchain products that mirror $ic21. First, ic21 employs a square root market cap weighting, resulting in less concentration of BTC and ETH and more diversification in the other top assets. Other onchain products that seek to provide similar exposure use a simple market cap weighting, resulting in substantial exposure to BTC and ETH - as high as 90% of the overall index.
| Provider | Product | No of Assets | TVL | Fee | % BTC and ETH |
|---|---|---|---|---|---|
| Alongside | AMKT | 25 | $2.9m | 0.95% | 91% |
| Index Coop | ic21 | 10 | 0 | 0.95% | 58% |
At launch, $ic21 will be accessed by swapping against 0x where a market maker will provide liquidity via an RFQ system; however, $ic21 will eventually offer permissionless issuance and redemption. Token holders will be able to issue and redeem $ic21 tokens on Ethereum mainnet once there is sufficient liquidity for the underlying wrapped assets.
Lastly, the reach of Index Coop will help drive the success of this product. Index Coop, the leading provider of index tokens in DeFi, holds 76% of TVL across all chains.
(Source: The State Of The Onchain Structured Product Market)
2.5 Marketing support / distribution / partnerships
At launch, $ic21 will be accessible through the Index Coop App for non-restricted users; initial liquidity will be provided via the 0x Swap API.
The $ic21 token will be restricted from U.S. persons according to this disclaimer.
2.6 Market risks and weaknesses
- Competitor products are available on- and off-chain already, with few pan-market indexes attracting significant TVL versus BTC, ETH, and other single-asset products.
- Broad exposure to Large Cap tokens, which largely consist of alternative L1 blockchains, may not be appealing to some Ethereum users.
- The custodial nature of the underlying wrapped assets adds counterparty risk that may not be appealing to some Ethereum users.
- The crypto bear market could potentially create a poor launch environment.
3.0 Financials
3.1 Revenue
Annual Fee: 0.95%
Issue / Redeem Fee: 0%
Any protocol incentives that may accrue to underlying positions will be claimed by the Index Coop.
3.3 Product economics
As per the following financial projection, we anticipate an average monthly revenue of $19,000 at the end of the first 24 months, culminating in a Total Value Locked (TVL) of $25 million by the conclusion of the second year. The expenses related to semi-annual rebalancing are projected to be lower than those associated with previously introduced composite products. This is because the rebalancing process will be implemented using the newly launched Auction Module on Index Protocol.
3.4 Financial forecast
Financial forecast of monthly fee revenue assuming $25M max NAV, 24 months to max NAV, 0.95% annual fee, and no underlying appreciation (source). Gas costs associated with initiating auction rebalances will be paid for by the Index Coop, and no liquidity mining rewards are planned for $ic21.
4.0 Specification
4.1 Product design
Methodology
$ic21 will employ a square root market cap methodology and apply a 30d simple moving average to market cap data before determining the ultimate weights for included assets. The averaging helps to reduce the impact of short term price movements that could result in unnecessary churn during rebalancing periods.
Composition:
| Asset | Market Cap (30d SMA) | Weight | Sq Rt Weight |
|---|---|---|---|
| BTC* | $583,482,576,420 | 62.87% | 35.8% |
| wETH | $227,516,944,365 | 24.52% | 22.3% |
| BNB* | $37,642,907,029 | 4.06% | 9.1% |
| XRP* | $33,754,974,878 | 3.64% | 8.6% |
| ADA* | $10,705,398,473 | 1.15% | 4.8% |
| SOL* | $9,511,400,545 | 1.02% | 4.6% |
| LTC* | $7,013,454,493 | 0.76% | 3.9% |
| DOT* | $6,599,052,059 | 0.71% | 3.8% |
| MATIC | $6,797,752,577 | 0.73% | 3.9% |
| BCH* | $5,024,837,611 | 0.54% | 3.3% |
- constitutes a wrapped asset provided by the wrapped asset provider
data as of 8/1/2023
Token Inclusion Criteria
- the digital asset should not be a staked or derivative version of an included asset
- the digital asset must not be a stablecoin
- the digital asset must not be a meme coin
- the digital asset must not be under individual investigation by a securities regulator
- the protocol or project associated with the digital asset must be open source
Engineering lift
At time of writing, Index Protocol’s new Auction Module has been audited and deployed; an interface must also be built for third parties to participate in auctions. The Index Coop App will need to be updated to enable Self-Issuance via 0x RFQ. No further upgrades to Index Coop’s tech stack are required to enable the product.
Deployments and bridges
$ic21 and its wrapped components will be deployed on Ethereum main net. There is no intrinsic dependency on a bridging protocol. Any underlying assets that are not native to the Ethereum blockchain will be made available by the wrapped asset provider via a custodial wrapped solution that is similar to wBTC; addresses on native chains will be publicized so that the collateral backing for wrapped tokens can be verified in real time.
Index weight calculation
Digital assets that meet all of the inclusion criteria will be weighted in the index according to the square root of their 30d SMA market capitalization.
Rebalancing approach
$ic21 will be rebalanced via auctions on a semi-annual basis, or every six months.
Recomposition approach
The total number of assets will be limited to 10 at launch, and any recomposition will take place in line with semi-annual rebalances.
Governance
The $ic21 methodology as detailed above must be voted on and approved by $INDEX token holders before launch. Any material changes to the methodology will be communicated externally and subject to an $INDEX token vote.
4.2 Onchain liquidity analysis of underlying tokens
Because WETH and MATIC are highly liquid on mainnet today, a limited amount of liquidity for the novel wrapped assets will be required for large self-issuance transactions. The amount of liquidity available for the underlying tokens will be determined by Index Coop and will be scaled by relevant partners to meet demand over time.
5.0 Product liquidity
Market Making partners will provide liquidity via the 0x RFQ system, which will be supported within the Index Coop app and anywhere else that RFQ liquidity is enabled as a liquidity source when calling the 0x Swap API.
6.0 ‌Author Background
The Product team is responsible for designing, developing, and deploying products for the Index Coop, as well as managing and maintaining products post-launch.
7.0 Disclaimers
This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice, or otherwise an offer or solicitation to invest. Each purchaser of an Index Coop product should consult with his or her own adviser/s before purchasing. Moreover, nothing contained herein constitutes an offer, solicitation, recommendation, or endorsement to invest or participate in any financial or investment transaction or scheme.
You shall not purchase or otherwise acquire our restricted token products if you are: a citizen, resident (tax or otherwise), and/or green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (defined as a U.S. person), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. persons, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized).
None of our token products have been or will be registered under the U.S. Securities Act of 1933, as amended, or with any securities regulatory authority of any state or other jurisdiction of the U.S. Our restricted tokens may not be offered, sold, or delivered within the U.S. to, or for the account or benefit of, Restricted Persons. Our restricted tokens that may be offered on secondary markets and other platforms are not for distribution to any Restricted Person. No offers, sales, resales, or deliveries of any of our token products may be made in or from any jurisdiction (including the U.S.), except in circumstances that will result in compliance with any applicable laws and regulations and that will not impose any obligations on Index Coop. Persons who obtain our token products are required to inform themselves about and adhere to any such restrictions. Index Coop reserves the right to impose further restrictions at its sole discretion, which will be communicated through its terms of service or on its website. All website users, including U.S. Persons, must read our Terms of Service and List of Restricted Tokens. U.S. person(s) must comply with our Terms of Service and not use restricted Index Coop tokens.
Copyright
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