IIP-71-Final : Launching the Robot Index (iRobot)

[Monportefeuille]

Title : The Robot Index (iROBOT)
Status : Proposed
Author : @Monportefeuille
Created : 2021-09-22

Simple Summary :

The Robot Index (iRobot) aims to become the 1st decentralized Robo-Advisor launched by Index Coop, responding to the surging demand from digitally natives for a product that can unlock the potential of crypto diversification and quantitative trading - in a single token.

Abstract :

This IIP is the final proposal to launch iRobot and is the result of the latest iteration of the Product Onboarding Process. Thanks to the entire BD & PWG Teams for their invaluable support along this journey !

This post was slimmed down to comply with the Snapshot character limits, but contains the majority of the details already developed in the original forum discussion and in the IIP for DG1.

For DG2 the following details have been added :

• Initial Product Requirements Document.
• Outcome of the Work Team Analysis.
• Determination of iRobot’s Prioritisation Score.
• Proposed fee structure & initial liquidity strategy .
• Adjustments to the methodology in order to facilitate management of on-chain liquidity.
• Updated draft portfolio reflecting these changes, as well as the effects of the current market dynamics on the Sortino ratio rankings & the liquidity situation.

Motivation :

The core of Index Coop’s mission is to make crypto investing simple, accessible & safe.

Unfortunately, and despite the potential offered by market-capitalization weighted benchmarks, building a diversified portfolio with long-lasting performance while minimizing its downside deviation is not always easy for retail investors.

This is particularly true for those entering the market in periods of high volatility, and hoping to outperform the top market caps without spending too much time or effort.

With generally little trading or portfolio management experience, a natural bias when facing a screen full of numbers and obscure token names is often to place bids on random projects, or based on influencers advice / crowd sentiment (FOMO).

The Robot Index eventually gives a rational alternative to these investors left alone in front of their price screener with 9000 coins to pick up from as potential space rockets !

You can check out the video recording of our pre-DG1 Community Call here to learn more about the Robot Index story and motivation.

Specification :

→ Overview : the Robot Index automatically optimizies the composition of a sector-agnostic basket of crypto assets by selecting and rebalancing its underlying components based on their annualized risk-adjusted returns. It uses the annualized Sortino ratio as key metric to modelize the performance of hundreds of tokens and rank them to obtain the best possible portfolio composition.

→ Product differentiation : there is no equivalent product elsewhere on the market. Thanks to its unique characteristics, the Robot Index fills an interesting gap in the Index Coop’s product palette by supplementing the broad sector exposure thesis currently supported by DPI & MVI.

→ Example composition : Illustrated below is the draft composition of iRobot as of 21st September 2021, following the complete methodology described below and taking into account the latest data available.

Note that this composition is subject to change until launch to follow the market evolution. The MATIC, ANY, STAKE and RUNE tokens considered here are all ERC20 tokens sourced from liquidity pools on the Ethereum blockchain (cc: @dylan).

→ Backtest data : A backtest covering the period from 1st May to 31st July 2021, and based on a sub-optimal montly rebalancing cadence, showed that iRobot would have been the only asset on par with ETH, featuring a positive Sortino ratio and outperforming BTC, BED as well as DPI with more than 70% cumulative gains in the last 2 weeks of July.

→ Size of opportunity : according to a detailed study by Statista, assets under management in the TradFi Robo-Advisors segment are projected to reach $1.4 trillions this year. This market is expected to show an average annual growth rate of ~ 19%, rising to $2.8 trillions AUM and capturing ~ 2% of the world’s top 50 asset management firms AUM by 2025.
Capturing an equivalent portion of DeFi’s global TVL would unlock a multi-billion opportunity for decentralized Robo-Advisors. The Index Coop could seize a significant share of this opportunity thanks to the 1st mover advantage that the Robot Index is offering :

Extract from PRD : “if we apply a similar ratio to INDEXcoops current products, then iROBOT could be expected to capture $3.5 M immediately (based on DPI, MVI and ETH + BTC within BED). With the expected growth of INDEXcoops passive products, then assuming we achieve similar conversion to automated diverse strategies, further growth in AUM is possible.”

→ Initial Product Requirements (including Target Customer / User Stories) : document available here, based on draft composition from 20th August 2021 (cc: @overanalyser).

→ Work Team Analysis : forum post available here.

→ Product Prioritisation Score : the Robot Index achieved a score of 1.74, placing it on par with SYI (now PAY) and improving significantly from the pre-DG1 review (1.38). Final scoring sheet available here.

→ Marketing & Brand Awareness : the positioning of iRobot as Robo-Advisor will enable Index Coop to communicate around this complex strategy in a simple and exciting way. The Robot Index narrative unleashes a lot of marketing potential through memes or embodiments of the product, for example via dedicated (& already active !) Twitter or Discord accounts.

Proposed methodology :

→ Token inclusion / exclusion criteria :

• The token must be available on the Ethereum blockchain. This is subject to change if Index Coop’s engineering infrastructure allows multi-chain indexes in the future.
• The token must have at least 1 month of price and liquidity history : from previous research, this is the minimum amount of time required for the annualized Sortino ratio to stabilize in a plausible range - while allowing to capture the upside potential of the token.
• The token must have sufficient DEX liquidity to support inclusion (currently estimated minimum threshold : $4M liquidity pool). If a token has insufficient liquidity, it will be removed from the index during the determination phase.
• The token must be emitted by a project considered to be building a useful protocol or product : projects with Ponzi characteristics, stablecoins, tokens with no utility or existing primarily for entertainment (meme coins for example) will not be included.
• The token must not be considered a security by the corresponding authorities across different jurisdictions.
• In case the token is emitted by a protocol, an independent security audit should have been performed and results reviewed by the product methodologist. In the eventuality that no audit has been performed, the methodologist applies subjective judgement of the protocol based on assessment of the criteria above and communications with the team.
• In the event of a security issue the methodologist will work with the project team to understand the issue and any effects to iRobot holdings. The team is expected to provide users of the protocol with a reliable solution and adequate documentation to ensure transparency about any incidents.

→ Index weights calculation :

• The Robot Index composition should include minimum 10 / maximum 15 tokens in order to capture uptrend potential and dilute risk.
• The index will be maintained monthly at launch, subject to increase to a bi-weekly cadence as engineering constraints & operational overhead become less limiting factors. This will allow for a greater resolution to manage the underlying components risk-adjusted returns and liquidity.
• During the final week of the month, the eligible tokens will be ranked by descending annualized Sortino ratio and weighted in proportion of their respective scores with respect to the overall ratio : this is the determination phase.
• Tokens sourced from pools concentrating between $4 & $7m liquidity will see their weight in the index capped to 5% in order to limit the number of trades required for rebalancing / addition / removal, and avoid excessive deviations from NAV resulting from the costs incurred.
• Following publication of the determination phase outcome, the index composition will change to the new weights during the 1st week of the following month. The backtest data show that the biggest portfolio rebalances are expected to range between 5 and 10%.

→ On-chain liquidity analysis of underlying tokens : analysis performed based on draft composition from 20th August 2021 available here with spreadsheet available here.

Fee structure & initial liquidity strategy :

• A simple streaming fee of 1.5% is proposed to take into account the complexity of the methodology and the amount of market research / data analysis required for its maintenance. This ideally positions iRobot in an intermediate range between DPI / MVI and the FLI suite.
• A formal request has been published to establish and fund a fully-fledged Working Group dedicated to iRobot. For this entity to become autonomously funded as quickly as possible, it is proposed to redirect 30% of iRobot’s streaming fee towards the iRobot WG budget . The initial funding proposal to boostrap the 1st iteration of this WG will be detailed in the aforementioned post.
• In line with the original community methodologist framework, Index Coop will retain the rest (70%) of the streaming fee as well as the methodologist bounty for all other budget lines falling outisde of iRobot Working Group’s scope.
• Index Coop will provide the initial liquidity for iRobot . A launch on Sushi Onsen is envisaged to further incentivize liquidity provision and bootstrap initial AUM.

Author Background & Commitment :

• Ex-F1 engineer, data analysis specialist.
• Spent the last 2 years developing personal investment strategies based on this same framework used for the Robot Index.
• Joined Index Coop in December 2020 and started contributing on DPI’s performance evaluation against its competitors.
• Have continuously assessed and refined this methodology, its relevance as a product as well as the tools necessary for data processing and backtesting over the last 9 months.
• Committed to working full time on iRobot’s success and growth if it passes DG2 (potentially serving a notice period in parallel with the 1st iteration of the RIWG). My future endeavours may also include the development of bloom.fi as a Coop sub-DAO, specialized in global crypto market research & designed to support projects like iRobot.

DG1 vote : passed

DG2 vote : targeted for CW39

Copyright and related rights waived via CC0.

[afromac]

Good luck @Monportefeuille. I will be voting YES for this.

[Monportefeuille]

Great thanks for your support @afromac !

[DarkForestCapital]

Also happy to see iROBOT reach this stage and will be voting in favour. Decent score on the new prioritisation sheet (although it doesn’t seem to have been updated with the new numbers just yet) which is great to see in action.

I still think this is going to be a bit a hidden gem of a product and am looking forward to holding some to see how it performs. The key will be educating people that it’s on the exciting side as far as indexes go, and probably hammering home that performance data. Imagine being able to hold a product that finds the ‘tokens on the move’ for you! Great stuff Julien

[BigSky7]

Super stoked to see this product moving forward. I’ve been really impressed by the level of thought and analysis that has gone into iRobot.

To echo DFC, the key here is going to be building a compelling narrative around the index. Luckily Index Coop is light-years ahead of where we were even a few months ago when it comes to product marketing and outreach.

I can’t wait to see what our Growth team does with the marketing for iRobot. I will definitely be allocating a chunk of my portfolio.

[moose]

Hey @Monportefeuille, really love the idea. I think there is definitely a gap in the market for a crypto robo-advisor and this fills it perfectly. With how fast the market is moving and changing, it would be nice to rely on an index to keep up with all the new projects and do the research for you. I also think it will be easy to market since it is the first of its kind and will allow exposure to alt-coins that are based on risk-adjusted data (instead of just FOMO like you mentioned). The robot memes will also be fun to make too. However, I think a more fleshed-out framework of how to determine if a potential token has a useful protocol or product for inclusion could be helpful. Great work!

[sidhemraj]

Great work @Monportefeuille! Voting YES for this. Good luck for DG2
Let’s build some good stuff!

[Matthew_Graham]

I think the methodologist incentives should be included here and used to fund the pod/working group. I’m not a fan of Index Coop receiving “methodologist incentives” to then budget and pay the methodologist for performing the methodologist role.

The revenue split and methodologist incentives should be distributed to the methodologist. That’s nice and clean. If then, the methodologist wishes to use those funds to reward contributors for supporting the product, that is 100% the methodologist decision. The pod would be funded from revenue and the existing incentive scheme and Index Coop has no liability for supporting a pod/working group that exists to perform the methodologist role.

An alternative, is to revise the roles and responsibilities of the methodologist and then revise the fee split.

It is No Vote from me until the pod/working group topic is flushed out.

[Monportefeuille]

Thanks for your support @DarkForestCapital ! I agree with the 2 essential factors that you have identified for iRobot’s success, and will focus relentlessly on it

[Monportefeuille]

Thanks very much @BigSky7 ! Looking forward to push the journey that we started further along with the Growth team and all the other owls !

[Monportefeuille]

Thanks a lot for your comments @moose !

The decision whether a token can be included or not in iRobot’s composition based on its utility will be the result of extensive market research and communicated transparently during the determination phase.

The need to apply this restriction to the composition is inherent with the way the methodology is built : the aim is to exclude illiquid tokens going through extremely quick hype cycles, like meme coins for example.

[Monportefeuille]

Yesss, let’s do this @sidhemraj !

[Monportefeuille]

Hey @Matthew_Graham ! Just responded to your post in the RIWG thread. I’m sure we can find a suitable framework for the development of internal products. For clarity, can you please just explain what you mean with the following ? Thanks

@Matthew_Graham

An alternative, is to revise the roles and responsibilities of the methodologist and then revise the fee split.

[Matthew_Graham]

IMHO for all internal products, there is no fee split, it is 100% Index Coop revenue and resources supporting the product are paid via the existing contributor rewards program. The choice is solely the methodologist if they want an internal product or external. Any deviation should from this should be apart of INDEX 2.0 and no product should be voted on prior to knowing what any hybrid program is. How can we vote with undefined relationships/roles at play.

I won’t be supporting a working group or any additional budget to perform the methodologist role. The added complication, continuous dialogue, grey area it creates and the pandora box it creates is not something I support. BED was an internal methodology that is now a product through Bankless. PAY was developed by myself and is now DeFi Pulses product. MVI would have been cheaper and supported better if it was solely an external product. The fact MVI is going 100% external shows the importance of clearly defined role and allowing the methodologist to focus on the methodologist role.

If an incubator program was to emerge, 100% internal revenue and then the methodologist can be paid contributor rewards independent of revenue. I would exclude full timers from this though as they have a different renumeration system to everyone else at the coop.

[catjam]

Thanks for catching that – master sheet is now updated: Revised Product Scoring Chart - Google Sheets

[JosephKnecht]

Thanks very much for the Discord chat yesterday. I appreciate your time. The chat helped me understand what you’re trying to achieve. I’m mindful I’m coming into this discussion late so excuse me if I’m raising questions that have already been answered.

Let’s focus on the first question regarding momentum. iRobot’s strategy is to buy past winners in order to “buy high and sell higher”. However, winners tend to underperform in the future due to “reversion to the mean” also called the “winner-loser” phenomenon. This is consistent with investment advice not to “chase winners” or “buy into a pump”.

iRobot’s strategy therefore depends on there being positive, persistent momentum in the crypto market, i.e., winners continue to win. The literature on momentum in the crypto market is contradictory but the most recent and comprehensive studies show that momentum effects are small and short-lived (i.e., minutes to weeks) followed by large reversals. See Dobrynskaya (2021) …

Is there any evidence of positive momentum in your data set and, if so, that the momentum persists on long-enough time horizons to be relevant to our investors? Alternatively, it would be helpful to show how the “winners” chosen for the iRobot portfolio performed (out-of-sample) against the “losers” and “average” tokens not chosen for the portfolio.

My other question was whether the Sortino ratio can actually predict future performance for equity or crypto portfolios but let’s come to that after we’ve resolved the momentum question.

[Monportefeuille]

Hey @JosephKnecht, thanks a lot for the stimulating conversation over the WE

I agree the immunity to mean reversion (winner-loser effect) is an important point that needs to be clarified based on empirical, out-of-sample data which I have endeavoured to do since Sunday.

Unfortunately, while I was extracting the “average” and “losers” portfolio performance from the backtest covering May to July '21, I discovered an issue with my price feed API whereby random bits of price history would be missing across the 800-ish tokens currently monitored.

The methodology behind iRobot relies on characterizing historical returns against downside volatility to capture early upside potential or exit of accumulation phases : complete datasets are required to be relevant / unbiased.

My priority before going into DG2 is therefore to understand the effect that this issue has got on iRobot’s composition as well as on backtesting performance.

Concretely, this means comparing my actual datasets with the results coming from another API, which is a fair bit of work : I will continue updating you and the community on my findings.

As shared in our chat, progressing iRobot without ensuring 100% transparency and integrity is the last thing I want to do.

On the bright side, testing another API is something I intended to do before launch anyway since my current one is also starting to be a limiting factor in terms of available price feeds.

I’m happy to have caught this issue now, and I’m sure we will look at this step back positively once the 1st decentralized Robo-Advisor is finally out on the market

[JosephKnecht]

Likewise it’s always a pleasure speaking with a fellow math wonk. I’m glad you caught the missing values issue sooner rather than later. In TradingView I sometimes find missing values for thinly traded pairs. As the Coop matures it will probably be useful to have shared data management workflows to ensure best practices and minimize duplication.

Good luck fixing the issue and I’ll look forwad to the updated results.

[Monportefeuille]

Dear owls,

After 10 months growing this idea into a viable project, the last few weeks saw us overcoming the biggest challenge for the Robot Index to date. The time has come for the Index community to decide on iRobot’s future, and this time there will be no turn around !

Assuming positive feedback is received to the updates listed below, I am targeting the DG2 vote to start next week, Monday 8th November (cc @sixtykeys / @mel.eth for the pre-warning and the IIP number attribution ). Note that a POAP has been prepared to reward all participants on Snapshot !

I’m not able to edit the original post above, but here are the most important updates to implement in Snapshot / Gitbook before the vote :

→ Example composition : Illustrated below is the draft composition of iRobot as of 13th October 2021, following the complete methodology described below and taking into account the latest data available.

Note that this composition is subject to change until launch to reflect the market dynamics and liquidity situation.

→ Backtest data :

A backtest covering the period from 1st May to 31st July 2021, and based on a sub-optimal montly rebalancing cadence, showed (link updated) that iRobot would have been the only asset on par with ETH, featuring a positive Sortino ratio and outperforming BTC, BED as well as DPI with more than 70% cumulative gains in the last 2 weeks of July.

→ Fee structure and initial liquidity strategy :

• A simple streaming fee of 1.5% is proposed to take into account the complexity of the methodology and the amount of market research / data analysis required for its maintenance. This ideally positions iRobot in an intermediate range between DPI / MVI and the FLI suite.
• It is proposed that Index Coop retains 100% of the streaming fee as well as the methodologist bounty for this product.
• It is proposed that the community methodologist(s) contributing to iRobot’s maintenance claim rewards from the Product Working Group / Simple Indices Pod (cc @Cavalier_Eth / @DocHabanero).
• Index Coop will provide the initial liquidity for iRobot . A launch on Sushi Onsen is envisaged to further incentivize liquidity provision and bootstrap initial AUM.

→ Author Background & Commitment :

• Ex-F1 engineer, data analysis specialist.
• Spent the last 2 years developing personal investment strategies based on this same framework used for the Robot Index.
• Joined Index Coop in December 2020 and started contributing on DPI’s performance evaluation against its competitors.
• Have continuously assessed and refined this methodology, its relevance as a product as well as the tools necessary for data processing and backtesting over the last 10 months.
• Now able to work full time on iRobot’s success and growth. My future endeavours also include the development of bloom.fi as a Coop sub-DAO, specialized in global crypto market research & designed to support projects like iRobot.

DG2 vote : targeted for CW45

[DocHabanero]

Thank you for the post, @Monportefeuille.

Before we schedule DG2 snapshot we would like to get feedback from the community about the perceived market opportunity for this product. Product-market fit is critical to the success of any product and getting this right ensures the success of our products and IC as a whole.

Keeping in mind that it’s not just time that’s dedicated but significant capital to:

1. Provide seed liquidity
2. Pay out reward incentives (if applicable)
3. Pay gas fees for initial composition and rebalance

As PWG reviews various methodologies we feel that this product, though well thought out, will likely not drive adoption because it does not solve a need in the market.

Before we assign more time and resources, we would like to get feedback from the community. Mainly answering the question, “Would you buy this?”

We would like to keep this post open for one more week and decide next steps based on feedback.