After seeing “Metaverse” everywhere over the last few weeks, @DarkForestCapital and myself have worked on improving the proposal from October and coming up with a methodology that we believe could work in this space.
After the successful launch of DeFi Pulse Index, the follow-through in terms of new products has been fairly sedate with CoinShares the only new partner onboarded and ready to launch. Below is a reworked version of a proposal that was put forward in the early days of Index Coop. The intent here is not to become an individual or even community index provider, but to use the methodology and composition as a catalyst to invite NFT/metaverse specialists to critique and possibly improve upon the idea as presented.
There is also the methodologist bounty to consider, 7.5% of $INDEX token distribution, to be earned over the next 17 months. Recently it’s been discussed that the bounty has not been marketed widely enough and Index Coop should get the word out. Capturing the hype around the NFT space could serve as a great way to make potential methodologists aware of the bounty and bring in new partners for the Coop.
Our society is undergoing several transformative trends at once. Covid-19 has not only accelerated these trends, it also showed us exactly which ones are here to stay.
One such trend, we believe, is the trend towards ownership economy. Modern day platforms like Facebook, Youtube and others have been the beneficiaries of our societal shift to digital. However, what makes these platforms valuable is often user-generated content. Unfortunately, the financial benefits of Youtube’s success, for example, are not accruing to the content creators who made it all possible.
This is where the idea of ownership economies comes in. The entire ethos of crypto is based on fairly rewarding all contributors, not just early investors and founders. Bitcoin and Ethereum are the primary example of community owned and led networks. In the ownership economy, users will be increasingly rewarded for creating value.
Coinciding with the trend towards ownership economies is what’s happening at the intersection of blockchain and virtual reality technologies. While gaming is the primary example, for example what Sandbox are doing with in-game items and their related marketplace, we believe this is just the beginning. Decentraland, for instance, offers so much more than gaming, with the ability to host events, build headquarters and run a business all in the virtual realm. We can see virtual and augmented reality ecosystems creating significant economic value for their patrons.
In essence, NFTs are a liquid shell for our data. This could be art and collectibles, digital resources, social money, platform tokens, reputation scores and the like. In 2020, each one of us generated 1.7 MB of data per second and the World Economic Forum estimates that we will produce more data between 2021-2024 than we did in the previous decade. Most of this data has value and can be repackaged and relicensed via peer-to-peer marketplaces.
While naming this an NFT Index certainly makes sense, we believe that it’s a bit simplistic. This index is not a bet on NFTs, but on the evolution of the economic narrative powered by technology. As such, we thought it makes much more sense to call this product the Metaverse Index.
For a more professional description of this thematic, please read the following article from Wired.
The opportunity here is to create an index that rewards long term investment in a decentralized and virtual future. Holders of the Metaverse Index are taking a view that the future of entertainment, sports and business will shift to a virtual environment and that transactions will take place on the Ethereum blockchain within this metaverse.
Questions and Answers
Size of the opportunity?
Unlike the current craze for yield and the narrative of blockchain replacing traditional financial systems, the gaming/VR sector is flying somewhat under the radar. If we look at the mainstream gaming market, it’s currently valued around $155b (2020) predicted to rise to $200b by 2023. A quick back of the envelope calculation for the top 5 crypto gaming projects (using MANA, ENJ, SAND, UOS and CUBE) gives a market cap of roughly $360m, that’s 430x smaller…
In terms of holding virtual meetings and other remote working opportunities, ZOOM’s market cap rose above $100b in 2020. What happens when we are all meeting in the local Decentraland office? Popular crypto educator Alex Saunders of Nuggets News recently constructed a HQ in Decentraland and established businesses like Rarible and Matic have been there for a while (take a walk over to crypto valley). In the last year there have been a number of forums and conventions held in Decentraland and prominent figures in the crypto space continue to use it as a way to engage with followers.
Aside from gaming and the virtual meetings that can take place inside these projects, there is also the ‘virtual object’ aspect, underpinned by Non Fungible Tokens (NFTs). According to research from Messari, sales volume for NFTs is around $150 million and metaverses make up roughly a third of that.
So what is the actual value of these virtual worlds? Annual subscription revenues for World of Warcraft are in the $200 - $300 million range. At the same time, the North American MMO (massively multiplayer online) industry generated total revenue of $2.5 billion in 2016.
In Somnium space, Decentraland and Sandbox it is possible to use each project’s tokens to purchase objects or land as NFTs. Enjin went as far as creating a technology that allows user created content to move between games, something not seen in the worlds of Sony or Microsoft. This adds some depth to $MVI as the underlying tokens represent more than just face value, they are a substrate for virtual creativity.
How is it different from other products?
$MVI is a straightforward bet on the world moving to a more virtual environment to conduct both business and pleasure.
In terms of differentiating from other products that exist this isn’t a yield farming play, it functions more like a traditional equity ETF in that it simplifies the expression of a particular trade. In this case the belief that virtual environments hold huge growth potential over the coming years. A similar product in the tradFi world is the Van Eck e-sports ETF.
Who is it for?
This is by no means a large cap index. To begin with it will be more suited to smaller investments either from smaller investors or as a portion of a larger portfolio. As discussed above, the index is designed to express the fundamental idea that the space has large growth potential. Anyone investing now is an early adopter. Of course as the space begins to realise its full potential the market cap will grow and MVI with it.
Selection of the $MVI tokens would be based on the following basic criteria:
- The token must be available on the Ethereum blockchain.
- Protocol must be in one of the following token categories on Coingecko: Non Fungible Tokens, Entertainment, Virtual Reality, Augmented Reality and Music. More categories can be added in the future as the market matures.
- Total market cap must be over $5m.
- Protocol must have at least 3 months history of operation.
- Token must have reasonable and consistent DEX liquidity on Ethereum, as quantified by the token tier weightings in the calculation below
- An independent security audit should have been performed on the protocol and results reviewed by Index community and product methodologist. In the case that no audit has been performed, a community vote can take place based on subjective judgement of the protocol, with a weighting reflective of the increased risk.
- In the event of a security issue the set manager should work with the project team to understand the issue and any effects to the $MVI holdings. Upon resolution the index manager and community should review together and vote to keep the token or not.
- Tokens will not be staked at the launch of the index. This is subject to change as liquidity increases and it becomes possible to safely generate yield through staking.
Index Weight Calculation
- The $MVI will use a combination of market cap and liquidity weighting to arrive at the final index weights. We believe that liquidity is an important consideration in this space and should be considered when determining portfolio allocation.
TW = 65%*MCW + 35%*LW
TW – token weight in the $MVI
MCW – market cap weighted allocation
LW – liquidity weighted allocation
- Furthermore, the $MVI will use 4 tiers for projects’ market cap and liquidity. For the purposes of liquidity, the tiers will be based on the size of a trade that can be accommodated with slippage below 3%. The tiers will be as follows:
|0 to 14.99 mil||1||0 to 9.99k||1|
|15 to 29.99 mil||2||10 to 24.99k||2|
|30 to 99.99 mil||3||25k to 50k||3|
|>100 mil||4||> 50k||4|
- The tiers will be used to cap the portfolio weight of projects with both, low market cap and low liquidity. Projects with a Tier Multiplier (Market Cap Tier * Liquidity Tier) of 4 or below will be capped at 3% allocation.
The index is maintained monthly in two phases:
- Additions and deletions: The tokens being added and deleted from the index calculation are determined during the third week of the month and published before monthly reconstitution.
- Following publication of the determination phase outcome, the index composition will change to the new weights on the first working day of the following month. I.e components will be added or removed, and weights adjusted.
Share of the market cap owned by the $MVI index at $5 million and $10 million TVL
This is an initial proposal and is open to feedback from the community. We propose the following as a starting point:
- 0.55% fee on holdings first 6 months, charged per block. This is a subsidized rate initially to incentivize growth of AUV.
- 0.95% after 6 months also charged per block
- 0.3% fee on sale of the index to discourage selling but not arbitrage (should be tuneable so it can be adjusted)
This is in the same ballpark as the Van Eck e-sports ETF which currently has a net expense ratio of 0.55%, with a 0.44% reimbursement until Feb 2021, and will likely rise to 0.99% thereafter.
What’s the downside?
Liquidity in a lot of these tokens remains quite shallow. We are hoping, however, to address this issue through the liquidity weighted adjustment to market cap weights as well as the Tier Multiplier. At the same time, it’s often challenging to get a true sense of token’s liquidity. For example, a lot of MANA liquidity is being provided through the Kyber Fed Price Reserve (FPR), which is an on-chain market making platform for professionals. Unfortunately, we have no visibility into how deep that liquidity is, how it evolves over time and if it’s sticky. For example, over the January 2-3 weekend Kyber liquidity was not available. This meant that a $10,000 trade for MANA would have a 3% slippage. This is compared to $65,000 trade with 3% slippage when Kyber liquidity is available. We are conscious of this issue and will work on ways to address it. For example, MANA’s Treasury is a DAO and we could partner with the project to facilitate deeper MANA liquidity on Uniswap. )
As a nascent space built on a nascent technology the index would likely be quite volatile over short timeframes and holding for 6+ months would be recommended. The volatility also reflects the large upside potential for these projects and as such it is a high risk high reward index. Having said that, as mentioned earlier the volatility of the proposed MVI tokens are in most cases a lot lower than that of the DPI index which has been a runaway success.
As with everything built on Ethereum there is underlying smart contract risk.
Ok, so what’s the benefit?
- Reduced gas fees when compared to buying/selling tokens individually
- Volatility of individual tokens is offset by holding an index
- Simple way to capture a broad market trend based on the idea of the metaverse, without having to constantly research and rebalance a portfolio
- It’s a unique product. To carry out the same trade today you’d have to buy tokens individually or create a Balancer pool and risk impermanent loss.
- Potential to be first community index to market
- Generate excitement around the Index Coop and bring in new users
We believe that the time is right for the Metaverse Index. If there’s broad support for this index in the community we would like to:
- Solicit feedback from industry experts i.e Messari analyst covering NFTs.
- Reach out to projects like Sandbox, Axie and Rarible to explore a potential partnership for the index. Bankless also launched a Metaversal newsletter a few days ago and could be a great partner.
- For: We should actively seek partners to launch this index
- Against: We should let partners approach us with their own ideas