Title : The Robot Index (iROBOT)
Status : Proposed
Author : @Monportefeuille (bloom .fi DAO)
Created : 2021-07-16
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.
This IIP is the formalization of the post titled “The Robot Index (iRobot) - Updates & Final Backtest before DG1” as per Index Coop’s official template, to allow for submission to a DG1 Snapshot vote.
This post was slimmed down to comply with the Snapshot character limits : to access full details, graphs and functional links please refer to the post above and the initial “PMI (Post-Modern Portfolio Theory Index)” proposal on Index Coop’s governance forum.
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 !
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.
Market opportunity and potential size :
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. Index Coop could seize a significant share of this opportunity thanks to the 1st mover advantage that the Robot Index is offering.
Product Working Group feedback :
A pre-DG1 product priorization review was conducted by the Product Working Group . Based on the revised scoring framework , the Robot Index achieved an initial score of 1.38. The diversification and research automation have been identified as the potential strongest growth drivers, while the complexity of the methodology justifies a higher revenue potential than a market-cap weighted index.
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.
Backtest results :
A backtest covering the period from 1st May to 31st July 2021, and based on a sub-optimal (see below) 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.
Several integrations with Index Coop’s current or future product suite can be envisaged : FLiRobot, “in BED with iRobot”, LDI …
The automatic calculation of the metrics underlying this methodology is theroretically possible directly on-chain, and could also be an option for the future (pending engineering constraints).
Proposed methodology :
1/ Token inclusion 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.
2/ 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 becomes 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.
- Following publication of the determination phase outcome, the index composition will change to the new weights during the 1st week of the following month.
3/ Draft Portfolio :
Illustrated below is the composition of the Robot Index as of 1st July 2021, identified during the backtest mentioned above :
4/ Fees :
Fees will be determined between the DG1 and DG2 vote and before the subsequent product launch.
Author Background & Commitment :
After 1.5 years of Sortino ratio scanning for hundreds of tokens, I joined Index Coop as soon as December 2020 and started contributing on this framework via a detailed analysis of DPI’s performance against its competitors .
This methodology, its relevance as a potentially successful product as well as the tools for the data processing and backtesting have been continuously assessed and refined over the last 8 months, with the objective to solve a clear problem and secure a significant market edge for Index Coop.
As an aspiring community methodologist, my intention is to build on the Robot Index to cement a strong connection with the Coop and bootstrap bloom .fi DAO’s development in parallel, including the recruitment of new members to support iRobot’s future growth.
Copyright and related rights waived via CC0.