IIP-## Launch the Alt Layer 1 Index (LAYER1)

Governance Proposal
1

IIP: ##

Title: Launch the Alt Layer 1 Index token (LAYER1)

Status: Proposed

Author: @JosephKnecht (Index Coop, MoonRock)

Created: 18 Jan 2022

1.0 Simple Summary

We propose launching LAYER1, an index token of alternative Layer 1 protocols.

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2.0 Abstract

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.

2.1 Motivation

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.

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2.2 Rationale

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.

3.0 Specification

3.1 Overview

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.

3.2 Differentiation

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.

3.3 Example composition

Example composition as of Jan 2022.

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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.

3.4 Performance

Back-testing will be performed for DG2.

4.0 Size of Opportunity

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.

5.0 Market & Customer Research

5.1 Target Customers

  • 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.

5.2 User stories

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…’

5.3 Product economics

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.

6.0 Methodology

6.1 Initial Composition & Token Inclusion Criteria

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.

6.2 Weightings

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%.

6.3 On-Chain liquidity analysis of underlying tokens

See composition above. More detailed liquidity analysis to follow for DG2.

6. 4 Maintenance / Rebalancing frequency

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.

7.0 Costs

7.1 Cost to customer

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.

7.2 Cost transparency

The total cost to the customer will be disclosed including the actual and predicted annualized asset decay.

7.3 Fee split

To be determined after DG1.

8.0 Meta / intrinsic productivity

Metagovernance will be enabled.

Intrinsic productivity will be enabled when it becomes available at Index Coop.

9.0 Liquidity

To be described in DG2.

10.0 Author Background and Commitment

@JosephKnecht is a Product Designer at Index Coop and Founder of MoonRock.

MoonRock is developing the next generation of crypto index strategies.

11.0 Marketing support / distribution / partnerships

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.

Revision history

18 Jan 2022 - First version

Copyright

Copyright and related rights waived via CC0.

5 Likes
2

@JosephKnecht this is an amazing IIP, the untapped AUMs locked within several L1 protocols gives this product the potentials to have an incredible TVL. The research and conversations around $NIT lead to an incredible question by @DocHabanero, the question got me thinking for hours. In his exact words ‘‘It becomes a question of how technically difficult it would be to do this. We have to focus our development efforts on the largest opportunities. NEAR has limited liquidity, so if we spent the time to build functionality to launch an index on the NEAR we can only launch one product. Compared to spending the time to launch an index on Avalanche which has more protocols and liquidity, so we can launch more products.?’’

I see the answer to his line of thoughts outlined in this Alt Layer 1 Index as a backend is to a frontend. Launching this product would kind of create a multiplication effect of the potentials that exists in each L1 protocol, based on

I am excited and looking forward to DG2 of this Product proposal, would love to co-author this with @JosephKnecht :heart_eyes::rocket::rocket:

:point_up_2: @BigSky7 @Mringz @funkmasterflex @Miza … :heart_eyes: BDWG (Growth Nest):rocket: had my curiosity and attention on DAO Treasury Relations initiative. There would likely be a spring of amazing autonomous marketing strategies done by the L1 protocols that meets the inclusion criteria and gets listed on The Alt L1 Index… I see great marketing and partnership potentials here!

AOB
@Mringz :heart_eyes: This was an amazing masterclass initiative with a POAP! Its long term value to the coop is Invaluable.

I strongly recommend this to the entire coop Composition Tutorial For Methodologist. The date is 20th of January, there would be POAP for all participants. :heart_eyes::rocket:

1 Like
3

@JosephKnecht excited to see this proposal, great work. Two quick questions as I start to digest…

  • There are valid reasons for including MATIC in both the $LAYER1 and $LAYER2 product compositions, but it feels weird to have it be the biggest/one of the biggest components of both! How are you thinking about this?

  • IMO, the alt-L1 space is one of the fastest-moving and highest-potential segments of the crypto market, and new blockchains are quickly appearing/growing/falling out of favor. As an investor this product is particularly exciting to me for the opportunity to capture those timely opportunities instead of waiting for quarterly rebalances. Wondering if there’s an alternate approach to including new tokens here that we could consider?

2 Likes
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Hi Catjam,

I’m very glad you like the proposal. Thanks for your questions which are both spot-on.

I agree we’ll have to choose which product to put MATIC in and we shouldn’t have it in both. With the current product backlog, I expect it’ll be at least 4-6 months before either product launches, by which time the landscape will have changed dramatically. I’ll make a decision closer to the time. I expect it’ll stay in LAYER2 and we’ll remove it from LAYER1. I hope that sounds like a sensible approach.

I should have made a distinction between rebalancing and recomposition. We can certainly evaluate new tokens to add/remove more often than quarterly, eg, monthly. The main consideration is that new bridged tokens often have a lot of initial liquidity that dries up rapidly so we’d have to be careful not to allocate a large component only to see the liquidity disappear. It’s a problem specific to using bridged tokens because you can have a very big protocol appear very abruptly, eg, if a wrapped Polkadot suddenly launched. I think we can have a policy of adding new tokens gradually to avoid the problem of over-allocating too quickly. Thanks for catching that. I’ll spell out the approach more clearly in the community call.

1 Like
5

This is a tough one! Seeing that ALGO is part of the world wide ISO2022 integration, I feel that the index could potentially miss out on a good opportunity here.

When mentioning extensive engineering effort, would this mean that there would need to be more time & effort committed to creating a derivative (preferable) or synthetic version on this coin?

6

I agree that ALGO is a major missing component. My reference to ‘substantial IC engineering effort’ referred to adding support for SNX exchange which only would give us access to sADA and sDOT synethtics but not ALGO. We also could have accessed DOT through Mirror protocol but the premiums are prohibitive. Adding mainnet support for ALGO would require bridging it and seeding the liquidity which I don’t think there’s a strong enough business case to do.

1 Like
7

Right, makes sense now! Unfortunately looks like ALGO will have to sit this one out. However, the outline of this Index is very clear! Very much similar to how the SEC handles the production of Indices. Nice work. Excited to see this go to DG2.

1 Like