Title: Launch the Alt Layer 1 Index token (LAYER1)
Created: 18 Jan 2022
We propose launching LAYER1, an index token of alternative Layer 1 protocols.
The rise of alternative Layer 1 (L1) protocols has been one of the most exciting recent investment themes. The meteoric rise of alt L1 protocols has been driven by the fact that all blockchains face a fundamental trade-off between decentralization, scalability, and security, the so-called ‘blockchain trilemma’. By providing users different trade-offs, alternative L1 protocols can address different user preferences. For example, some users may be willing to trade-off decentralization for speed or vice versa. The LAYER1 index token will capture the growth of these alternative L1 protocols. LAYER 1 can be implemented as a simple set with no additional engineering effort.
An L1 Index token was one of the most-requested products in the Index Coop’s last two market research surveys. Additionally, we are receiving more requests for deployment on non-Ethereum chains, which reflects the rise of these alternative protocols. The rapid developer growth on alt L1s suggest that these platforms will only gain in importance.
Constructing an alternative L1 protocol is made possible by the increase in alts being bridged to Ethereum mainnet by protocols such as Wrapped, Wormhole, pTokens, Ren, and others. Additionally, the index benefits from the extensive research on bridged L1s completed for the MCAP index token.
LAYER1 consists of a basket of ERC-20 tokens which represent the largest alt L1 protocols by market cap. The tokens are ERC-20-native as well as bridged.
There are no L1 index tokens on the market and there is no thematic overlap with any planned Index Coop products. Strategically, LAYER1 will support MCAP by giving more visibility to the bridged alt L1 components.
Example composition as of Jan 2022.
The OA Factor (=Overallocation Factor or Overanalyser Factor) is the ratio between the allocation for a hypothetical $1M AUM and the trading depth . According to the Liquidity Manifesto, OA Factors greater than 1 for >5% positions suggest a heavy allocation relative to the available underlying liquidity. To remove some liquidity pressure on LUNA we could include 2 tokens, LUNA Wrapped and LUNA wormhole.
Prominent alt L1s not represented include ADA, DOT, ALGO, ZIL, and XTZ. ADA and DOT could have potentially been addressed with the SNX synthetics tokens sADA and sDOT but that would have required substantial IC engineering effort.
Other blockchain tokens excluded due to insufficient liquidity were GLCH, XPR, LGCY, and SAITO.
Back-testing will be performed for DG2.
We predict total AUMs of $3M, $30M, and $100M at 0, 12, and 24 months respectively post launch. The starting AUM is based on typical fundraise sizes of Copper launch auctions. The 10x growth in year 1 is approximately 2x growth in share price and 5x in supply. The 2x share price growth is based on the historical share price growth for similar sized protocols.
- Ethereum-native users looking for exposure to alt L1 protocols
- Alt L1 users looking for exposure to the protocols they know and use
According to Index Coop’s market survey of 20 Dec 2021, 10% of respondents asked for an L1 index product, making it the fourth-most requested product after metaverse, gaming, and NFT indices.
Susan: ‘As an experienced alt L1 investor, I’m looking for an index product like LAYER1 that gives me broad exposure to the protocols I know and use regularly.’
Jo: ‘As an Ethereum mainnet investor, I’m looking for exposure to the alt L1 space even though I still do most of my trading on Ethereum. LAYER1 lets me benefit from the growth of the alt L1 ecosystem even if I haven’t taken the leap yet myself…’
We estimate monthly revenue of $7,375 and rebalancing costs of $500 for a gross profit margin of 95%. This is based on a $3M AUM, 100 bps non-aggregated trade size for rebalancing, 2 trades on average to manage the allocation cap, $250 gas cost, and a 2.95% streaming fee.
Selection criteria for tokens
- Tokens of alternative L1 protocols.
- Market cap > $100M
- Trading depth > $10k non-aggregated @ 100 bps excluding LP fees
- ERC-20 standard including wrapped/bridged tokens
MATIC is considered an L1 protocol and not L2 because it depends on external validators. Adding MATIC also serves to improve the overall underlying liquidity.
The weighting is 75% square-root market cap and 25% liquidity. Liquidity is defined as the non-aggregated trading depth at 100 bps excluding LP fees. Components with very low liquidity are capped at 2%.
See composition above. More detailed liquidity analysis to follow for DG2.
The index will only be rebalanced to maintain the 25% allocation cap. Otherwise the index will not be rebalanced. In order to avoid rebalancing simply to fit volatility we will use the 30-day weighted-average allocation.
To be determined after DG1.
We anticipate LAYER1 having a 2.95% management fee and a 1% mint/redeem fee.
We will experiment with having a large mint/redeem fee of 5% at launch to capture the high mint volume and the greater tolerance for price-NAV deviation during the immediate post-launch period.
The total cost to the customer will be disclosed including the actual and predicted annualized asset decay.
To be determined after DG1.
Metagovernance will be enabled.
Intrinsic productivity will be enabled when it becomes available at Index Coop.
To be described in DG2.
MoonRock is developing the next generation of crypto index strategies.
The index will be provided white-label to Index Coop for marketing and promotion. The Produce Designer will be available as needed for marketing support. Business Development will identify a fit-for-purpose branding/distribution partner.
18 Jan 2022 - First version
Copyright and related rights waived via CC0.