IIP-178: Launch the Index Coop CoinDesk ETH Trend Index ($cdETI)
IIP: 178
Status: Proposed
Author(s): @MrMadila
Reviewer(s): @allan.g, @0x_Dev
Created: 2023-08-31
1 Abstract
In a partnership with CoinDesk Indices, the Product team proposes that the Index Coop launch the Index Coop CoinDesk ETH Trend Index ($cdETI), a token designed to take advantage of trends in the price of ETH by utilising CoinDesk’s ETH Trend Indicator. The Index Coop proposes to build a token which automatically engages with the CoinDesk ETH Trend Indicator to productise the indicator.
2 Market information
2.1 Target customer segments & user stories
User stories:
- As a token holder, I want exposure to a strategy that can help me weather the storm during ETH’s most volatile moments.
- As a token holder, I aim to capitalise on Ethereum’s price trends to potentially achieve better performance over medium-to-long term periods.
- As a token holder, I want to leverage the data-driven insights from CoinDesk’s proprietary Ether Trend Indicator to make macro portfolio adjustments, allowing me to better align my holdings with overarching market trends.
- As a token holder, I’m interested in the potential tax benefits offered by tokens that employ automatic, behind-the-scenes rebalancing.*
- As a token holder, I want to rely on CoinDesk’s proprietary Ether Trend Indicator, rather than my own instincts or analysis, to actively allocate between ETH and USDC.
- As a token holder, I aim to minimise the volatility associated with my overall Ethereum holdings.
*Index Coop does not provide tax advice. Nothing contained in this document should be construed as tax advice, and you should consult with your own tax advisor before making any financial decisions.
2.2 Market research
Market research has identified several key customer segments for the Index Coop CoinDesk Ethereum Trend Index (cdETI). cdETI will not be promoted to or made available to Restricted Persons as defined here, which includes US Persons.
Agile Crypto Funds
Input from DeFi fund allocators points to potential enthusiasm for trend-following strategies, such as cdETI. As multi-strategy hedge funds continue to embrace trend-following elements, the market outlook appears promising. Recent conversations with five agile funds, collectively managing over $1bn, underscored this genuine interest, offering a positive indicator of market receptivity.
Small On-Chain Users
This product is designed for small on-chain users who are long ETH but frequently trade between ETH and stablecoins like USDC based on market conditions. Market sentiment analysis and early customer interviews indicate that small market participants often make emotional, rather than data-driven, allocation decisions. cdETI addresses this by offering a quantitative strategy that aligns with common narratives: the potential for outperformance against ETH, primarily via volatility reduction.
Large On-Chain Users (Whales and Treasuries)
The appeal of cdETI to on-chain whales and treasuries remains uncertain. While many treasuries hold considerable stablecoin positions, it’s generally assumed that their primary focus is not on volatility mitigation but rather on making their operational assets productive through stablecoin strategies. In the case of both treasuries and whales, cdETI can offer a passive way to preserve large ETH positions while managing downside.
Crypto Intermediaries
In initial conversations with three prominent non-US CeFi platforms, there was a moderate but optimistic response to cdETI’s unique offerings. It is worth noting that these intermediaries are largely focused on yield generating strategies, and haven’t yet gauged their clients’ interest in momentum-based strategies. Nonetheless, they expressed optimism about the product’s potential value for their user base. We believe that cdETI could offer a “first-mover” advantage, potentially motivating apps and wallets to integrate, with non-US CeFi platforms potentially following suit.
Smaller Off-Chain Users
Targeting this non-US segment is more challenging and requires partnerships with crypto intermediaries. However, given the popularity of momentum investing strategies in traditional markets the potential for market penetration exists. The advent of new centralised exchange (CEX) wallets, such as OKX Wallet, could facilitate this.
In light of these findings, Index Coop is planning a comprehensive pre-launch campaign to generate buzz, particularly amongst potential on-chain users and agile crypto funds.
2.3 Size of opportunity
| TVL (in USD) by Month & Expectation Level | |||
|---|---|---|---|
| Month | 6 | 12 | 24 |
| Failed Expectations | <1m | <3m | <5m |
| Met Expectations | 3m | 5m | 10m |
| Exceeded Expectations | >5m | >10m | >20m |
Table 1: Expectations for future total value locked (TVL) in the $cdETI-based products.
2.4 Differentiation
The following products or services offer similar value propositions as $cdETI to users:
| Product | Constituents | Strategy | TVL & fees | Available On |
|---|---|---|---|---|
| Momentum Ensemble dHEDGE vault | sETH, sBTC and sUSD | Uses ensemble of momentum indicators to determine momentum | $410k TVL - 10% platform fee | Optimism |
| Sommelier ETH-BTC Momentum strategy | BTC, ETH, USDC | Uses internal risk management rules to reduce exposure to BTC & ETH in unfavourable market conditions | $67k TVL - 2% platform fee - 10% performance fee | Multiple Chains |
2.5 Marketing support / distribution / partnerships
At launch, $cdETI will be available to unrestricted persons and not for restricted persons as defined here via:
- The Index Coop App for issuing and redeeming
- Etherscan (requires technical understanding).
- Decentralised Exchanges (DEXs), (Subject to an initial, independent liquidity provider.)
- DEX Aggregators (CoW Swap, Matcha, 1inch). (Subject to independent liquidity provider as per above)
Additional partners may be onboarded before and after launch. Self Issuance support will be enabled through the Index Coop App and also made available through the Self Issuance SDK for external integrations.
2.6 Marketing risks and weaknesses
- Methodology of the Ether Trend Indicator could be less appealing to some users
- Token performance may not mimic historical performance
- The product could launch during a bad market, reducing TVL capture
- Regulatory change is possible, especially in regard to classification of tokens as digital securities or changing tax rules
- An additional layer of smart contract risk may not be desirable for some users
- Momentum strategies are unproven in DeFi
3 Financials
3.1 Revenue
$cdETI will have an annualised fee of 1.50% or 150bps p.a. Additionally a 0.10% or 10bp fee will apply to issuance and redemption. 3rd Party protocol incentives are not envisioned but any that accrue to underlying positions will be claimed by Index Coop.
3.2 Fee splits
CoinDesk Indices will automatically receive an amount equal to 33% of the annualised fee, or 50bps.
3.3 Product economics
Based on the financial forecast below, average monthly revenue for the first 12 months is estimated to be $3,836 (for a cumulative annual revenue of $46,031) with a TVL of $5m at the end of year one. Cost details will be provided as they become available.
3.4 Financial forecasts
Given growth/appreciation of the underlying assets and further buyers coming in, the Index Coop believes the token can achieve $5m TVL or more after one year. Gas costs are shared and fees are split net of gas costs. No liquidity mining rewards are planned for $cdETI.
4 Specification
Please note: Sections 4.1 up to and including 4.2.3 contain abridged extracts from Coin Desk Indices official documentation. PDFs with full details can be found under Systematic Strategies → Ether Trend Indicator → Trend Indicator Methodology here
4.1 Product design
4.1.1 A brief introduction to trend signals
The Trend Indicator family is a set of dynamic signals designed to convey the presence,
direction, and strength of momentum in the price of a digital asset. Each trend indicator
is calculated and published daily derived from historical daily levels of the underlying
reference price.
Trend signals are used in traditional, alternative and digital assets as a way to pursue uncorrelated returns. The simple, but powerful, idea behind trend strategies is that markets respond slowly to news and sea changes. Trend users seek to harvest returns by “riding” an uptrend or a downtrend as the market adapts. Trend, also referred to as time series momentum, is well documented in academic literature and practised in quantitative finance and in the CTA community in long-only and long/short implementations.
4.1.2 How to create a trend signal
Identifying an up- or downtrend entails comparing recent prices to older prices over a
recent historical period (the “lookback window”). If recent prices are higher, an uptrend
might be indicated; if recent prices are lower, a downtrend may be in place. A trend
strategy uses that signal to position long or short in expectation that the up or down
trend will persist. The choice of lookback window (or, better yet, multiple windows) can
impact the predictive qualities of the trend signal. The best choice can vary depending
on the asset class.
4.1.3 How the Ether Trend Indicator works
The Ether Trend Indicator uses four different lookback windows chosen with the 24/7
trading cycle of crypto assets in mind. Each day, a trend value is calculated from each
lookback window by comparing recent prices to older prices within the window. A “1”
indicates rising prices in the lookback and a “-1” indicates falling prices. The Ether Trend
Indicator is the average of these values for the four lookback windows:
Table 2:
4.2 Methodology (from CoinDesk Indices)
4.2.1 Input data
For each Trend Indicator, the historical time series for the Underlying Index is the sole input data for the calculation of each Trend Indicator.
4.2.2 Calculation
Daily reference prices
The historical time series used to calculate each Trend Indicator is the value of each
Underlying Index at 4 p.m. Eastern Time. The 180 most recent observations, up to and
including the current day, are used in the calculation. Each underlying index value is
rounded to 2 decimal places.
Calculation methodology
Overview
The calculation of each Trend Indicator is an average of four component inputs. Each
component input is the result of comparing a shorter-term and a longer-term moving
average of the level of its Underlying Index. When the shorter-term moving average is
greater than or equal to (less than) the corresponding longer-term moving average, the component’s input value is set to +1 (-1), indicating an uptrend (downtrend).
The possible values of each Trend Indicator detailed in Table 2 above represent the
range of possible values of averaging the four component inputs.
Moving average crossover pairs
The four component inputs used in the calculation of each Trend Indicator are derived
by comparing the moving average pairs detailed in Table 3, with each moving average
expressed as a half-life in days.
Exponentially weighted moving averages
Moving averages are exponentially weighted using a fixed window of 180 observations. Moving average windows are calculated using a Decay Factor (λ) that sets the half-life of the exponentially weighted moving average equal to the corresponding half-life shown in Table 3. A Normalisation Factor (NF) is also calculated and included to correct for the residual averaging weight beyond 180 observations . Both are shown in Table 4.
Trend Indicator Calculation
For each day t, the Trend Indicator is calculated as follows:
where h represents each moving average half-life, λ represents the corresponding Decay Factor, and NF represents the corresponding Normalisation Factor, all as shown in Table 4, and UI represents the Reference Price, i.e., the level of the Underlying Index at 4 p.m. Eastern Time on the day indicated.
Calculation time
The calculation will take place each day at approximately 16:10 Eastern Time, or as soon as is practical thereafter.
Data distribution
Following the calculation, the daily trend indicator values will be available through a CoinDesk API.
4.2.3 Adaptation of the methodology
Backtesting conducted by Index Coop discovered an adaptation of the methodology that resulted in higher historical returns and less trading volatility within the token.
This backtesting found that a less frequent, automatically rebalancing strategy generally led to higher returns over time and less volatility of the product. Users should conduct their own performance assessments of the token and potential methodologies. The Index Coop does not offer financial advice or guarantee performance.
CoinDesk’s Ethereum Trend Indicator has five possible values: Significant Uptrend, Uptrend, Neutral, Downtrend and Significant Downtrend. The Index Coop tested several ways to allocate to ETH and USDC respectively according to the ETI and had the results validated by a third party. The strategy with the best historical performance, lowest volatility, and fewest rebalances was when Uptrend and Downtrend were treated as Neutral. In each of those cases, the product would be equally weighted between ETH and USDC. In the case of a Significant Uptrend or Significant Downtrend, the product would be 100% allocated to ETH or USDC respectively.
| Trend | ETH Trend Indicator | ETH Allocation | USDC Allocation |
|---|---|---|---|
| Significant Uptrend | 1 | 100% | 0% |
| Uptrend | 0.5 | 50% | 50% |
| Neutral | 0 | 50% | 50% |
| Downtrend | -0.5 | 50% | 50% |
| Significant Downtrend | -1 | 0% | 100% |
4.2.4 Backtest Results
Please note this section is outdated as of 25th Oct 2023 due to errors found in the backtest, please scroll to the bottom of this post for details of the error and updated backtest results
The Index Coop ran the following backtests and had them validated by an independent, qualified and highly experienced senior tradfi quant analyst.[CoinDesk Momentum Index Backtest Data](CoinDesk ETH Trend Index Backtest - Google Sheets)
Please note that past performance is not indicative of future returns, and that this data is for informational purposes only and should not be construed as financial advice. Interested parties in the data are welcome to approach the Index Coop via: institutions@indexcoop.com.
4.3 Governance
The $cdETI 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 are also subject to an $INDEX token vote.
4.4 On-chain liquidity analysis of underlying tokens
The underlying assets USDC and ETH are extremely liquid.
5 Product liquidity
Third party liquidity providers may provide DEX liquidity as $cdETI is permissionless to mint and redeem for non-restricted users.
6 Methodologist Background
As per CoinDesk Indices’ website:
About CoinDesk Indices
CoinDesk Indices (CDI), a subsidiary of CoinDesk, has been the leading provider of digital asset indices by AUM since 2014. We are driven by precision, rigour, research and a desire to educate the marketplace and empower investors. CoinDesk, a media, events, data, and indices company, is the most influential and trusted platform for the global crypto ecosystem.
CDI has three distinct product lines: single-asset reference indices, broad market and sector indices, and systematic strategy indices. The CoinDesk Bitcoin Price Index (XBX) has the longest index track record and underlies the world’s largest digital asset products. Our broad market and sector indices offer the most comprehensive broad market benchmarks, and our investible sectors are constructed using CDI’s industry-adopted taxonomy. Our systematic strategy indices help investors target specific outcomes.
At Coindesk Indices, we work with our clients to develop, document, and support systematic investment strategies and products. Our experience base includes institutional-class indexing, structuring, research, and go-to-market expertise that can make best use of signals such as the Ether Trend Indicator.
7 Disclaimers
7.1 Index Coop
Disclaimer:
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 unauthorised (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 unauthorised).
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.
*Index Coop does not provide tax advice. Nothing contained in this document should be construed as tax advice, and you should consult with your own tax advisor before making any financial decisions.
7.2 CoinDesk Disclaimer
COINDESK® and the name(s) of the CoinDesk proprietary data referenced herein (“CDI Data”) are trade or service marks of CoinDesk Indices, Inc. (“CDI”), the publisher of CDI Data, and/or its licensors. CDI or CDI’s licensors own all proprietary rights in CDI Data. CDI is not the issuer, sponsor or producer of any financial product, portfolio, separately managed account, or any other exposure that tracks or otherwise utilizes CDI Data as an input (“Products”) and CDI has no responsibilities, obligations, or duties to investors in or holders of Products. CDI Data is licensed for use by the product operator named herein (“Operator”). CDI is not affiliated with Operator and does not approve, endorse, review, or recommend any Product. CDI does not guarantee the timeliness, accurateness, or completeness of any data or information relating to CDI Data and shall not be liable in any way to holders of any Product or other third parties in respect of the use or accuracy, completeness, or timeliness of any CDI Data.
8.1 Copyright
Copyright and related rights waived via CC0.
Interested in this product?
To designate your interest in this product & be notified upon its launch, please fill out this Typeform: cdETI Survey
Updated backtest
Shortly before launch the backtests were refreshed for the latest results. During that process a small error was picked up whereby the prices used were not taken at the exact same time as CoinDesk Indicies use for their ETH trend indicator. This subtle difference meant that the backtest was effectively able to look into the future by a few hours that resulted in a favourable outcome of the simulated trades. On any given day this incremental gain would be negligible however when compounded over time it lead to extreme outperformance. The longer the timeframe the more extreme the inaccuracy.
Whilst the performance is much less extreme than first thought the over-all expected behaviour and intended purpose of the products remains .
A link to the new results can be found here.
Over a 1y period cdETI underperformed ETH due to volatility in a period of mild up upside
Over the 2yr period shown cdETI outperformed ETH, largely due to avoiding the dramtic drawdown in 2022
Over the full period cdETI demonstrates it intended purpose of limiting significant downside exposure that then compounds the upside performance over multiple market cycles where expansions have been greater relative to contractions.