Title : The Robot Index (iROBOT)
Status : Proposed
Author : @Monportefeuille
Created : 2021-09-22
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.
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 !
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.
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.
→ 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.”
→ 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.
→ 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%.
- 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.
- 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.