Request for Comment: Data Economy Index (DATA) Updates

iip: TBD
title: Data Economy Index (DATA)
status: In Development
authors: Thomas Hepner (@TenaciousTerrier), Kiba Gateaux (@Kiba)
created: 2021-06-18

Background

A little over two weeks ago, @Kiba and I posted a request for discussion in the governance forum around the potential for the Index Coop to launch a Data Economy Index (DATA).

The two biggest takeaways we received from the community were the following:

  1. Expand the Number of Tokens

  2. Simplify the Methodology

We researched how we could improve the proposal by addressing the community’s feedback without sacrificing the mission and purpose of the index:

The Data Economy Index (DATA) is a digital asset index designed to capture the growth of on-chain data economies. The Data Economy Index tracks projects with significant economic activity that connect decentralized blockchains to off-chain data.

We believe that our improvements to the initial proposal will satisfy the community’s concerns.

Below is a summary of our modifications.

Summary of Improvements

Item Initial Proposal Updated Proposal
Mission and Purpose The Data Economy Index (DATA) is a digital asset index designed to capture the growth of on-chain data economies. The Data Economy Index tracks projects with significant economic activity that connect decentralized blockchains to off-chain data. The Data Economy Index (DATA) is a digital asset index capturing the growth of on-chain data economies. The Data Economy Index tracks projects with significant economic activity providing data-based services or products.
Draft Portfolio (Initial) 4 tokens: LINK (46%), GRT (25%), NMR (24%), OCEAN (4%). 9 tokens: LINK (25%), , RENFIL (25%), BAT (15.5%), GRT (13%), LPT (9.4%), OCEAN (3.8%), NMR (3.6%), OXT (2.9%), REPv2 (1.8%).
Combined AUM of Components ~$14.2B ~$18.5B
Market Opportunity (current) ~$80m AUM ~$105m AUM
Token Inclusion Criteria - 1 The primary function of the protocol provides on-chain data-based services. The protocol provides data-based services or products.
Token Inclusion Criteria - 2 Protocol must have organic network activity and usage as measured by Total Value Locked (TVL) in the protocol’s native token(s) and/or Revenue paid to data providers. Protocol must have organic network activity or usage. On-chain transaction volume, Total Value Locked (TVL), and/or revenue paid to service providers are all examples of metrics that could be used to demonstrate organic network activity.
Token Inclusion Criteria - New N/A Protocol token must have sufficient DEX liquidity to support inclusion. If a token has insufficient liquidity, it will be removed from the index during the determination phase.
Token Weight (%) Uses a Matrix Scoring System with a 40% weight to the square roof of the circulating market cap, 20% liquidity weight, and 40% economic activity weight. Circulating market capitalization weight with a 25% allocation cap on any individual token. This closely mirrors the index calculation for DPI.
Rebalancing Period Monthly Quarterly

Additional Commentary

  • Market Opportunity (current): Currently, DPI is $129m in AUM, approximately ~0.54% of the circulating market capitalization of its constituent tokens. DATA will have $100m in AUM if it captures the same share of the Data Economy that DPI has captured of DeFi.

  • Noteworthy Additions: Filecoin was added to the token list by using Ren Filecoin (RENFIL) to meet the inclusion criteria of being an ERC-20 token. Augur (REPv2) was added because it is an on-chain prediction market (i.e. data service) with material TVL. Basic Attention Token (BAT) was included because the Brave Ecosystem creates an Attention Economy, using privacy-preserving machine learning techniques to deliver relevant ads to users and reward them for their attention; BAT has significant on-chain transaction volumes and revenues paid to service providers (source).

  • Liquidity Requirements: In our view, the greatest challenge to scaling AUM will be the liquidity required to support the current 25% allocation to RENFIL. According to CoinGecko, there are currently only 103,525 RENFIL tokens in circulation (~$7m in market capitalization). This will become an urgent issue once AUM for DATA exceeds $5m in AUM. Kiba and I plan on reaching out to the folks at the Filecoin DeFi Bridge to explore ways to increase RENFIL liquidity. If we are unsuccessful, we may need to consider either adding a supply cap to the product or reincorporating a liquidity weight into the index weight calculation.

Work Team Analysis

The Work Team conducted a product prioritization analysis for the initial Data Economy Index proposal, providing a preliminary score. Please note that the score shown below is NOT the final prioritization score for DATA.

Initial Prioritization Score: 1.45

Commentary from the Work Team:

This is a theme worth pursuing. The methodologist team has demonstrated strong competence in putting this index together, has a thoughtful methodology, and the costs are minimal, as the index would benefit from prior IC product constructions and an assumption that UNI V3 makes any LM incentives unnecessary. The product currently gets a relatively low prioritization score because the market for a 4-token index (and we score based on the current state of the product and the market) is likely not large and doesn’t solve burning pain points (or even moderate pain points). Thematic indices become more attractive with several components, as each addition reduces the user’s gas costs and research needs from pursuing the same strategy outside the product. We understand that the current focus and methodology outputted only four tokens, so you’re sticking faithfully to the rules, which is good. Therefore, would it be possible to expand the theme so that the number of tokens increases?

After receiving the community’s feedback on the improvements outlined in this post, we will be reaching out to the Work Team to get an updated prioritization score.

Next Steps

  • Collect Feedback: Receive additional feedback from the community.

  • Conduct Product Market Fit Analysis: Collect data/evidence on likelihood of customers to buy DATA through customer interviews, surveys, or market data. Find initial investors and get AUM and/or portfolio allocation commitments, if possible.

  • Work Team: Receive an updated Prioritization Score from the Work Team. @jdcook @catjam @puniaviision @Metfanmike @overanalyser

  • Launch Partners: Reach out to potential launch partners and project teams.

  • Increase RENFIL Liquidity: Reach out to Filecoin DeFi Bridge to explore ways to increase RENFIL circulating supply and DEX liquidity.

  • Eliminate Engineering Constraints: As @puniaviision noted, new product launches are being pushed back due to Engineering and Product Constraints. We are working with @dylan , @DefiJesus, and rest of the Engineering Working Group to transfer rebalancing and trade execution responsibilities for indices from Set engineers to Index Coop contributors to unblock launching DATA.

Edits

  • 6.21.2021: Rebalancing period was changed from monthly to quarterly.
15 Likes

Requesting comment from @jdcook , @verto0912 , @DarkForestCapital, @DevOnDeFi , @fallow8, @trx314 , @overanalyser, @BigSky7 , @Don-ETH , and @patb

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Also requesting comment from @Matthew_Graham , @prairiefi , @mel.eth and @Pepperoni_Joe , @MrMadila, @oneski22 .

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This is a strong improvement for me @TenaciousTerrier , so congratulations to you and @Kiba. I’m pretty sold and would want to buy this index product. Wen?

My only concern beyond the ones you detail is the name:

  • Doesn’t fit in the the XXI convention of our products so far: DPI, MVI, FLI
  • Data Economy Index might be be better as DEI
  • And, the index product captures more than just data in my mind. Would it not be more logical to call it Decentralized Cloud/Infrastructure/Technology Index (DCI/DII/DTI)?

These are not reasons to stop moving forwards, I just think messaging and communication fit is important and if there’s wider feeling that we can optimize here we should. I’m also aware this naming piece is hard, as many other options might not perfectly encapsulate the investment theme either. E.g. DTI - technology covers everything, including BTC, ETH. Maybe a crowd sourcing project and we put it to a poll?

Separately, were there other tokens which nearly made it into the newly constructed index product but you don’t include?

Big respect to you both for your feedback process and then coming back with this.

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@DevOnDeFi Glad to have your enthusiasm and support for the Data Economy Index!

@Kiba and I have discussed various ticker symbols. $DATA is definitely a “premium ticker”, but we’ve also considered $DATAI and $DEI. We could definitely do a forum poll to see which ticker is favored by the community!

Great question - overall 46 projects/tokens there were considered of which only 9 remained. The most common reasons for exclusion were the following:

  • Not an ERC-20 token
  • Circulating Market Capitalization <$100m
  • Lack of organic network activity or usage.
  • Insufficient liquidity.

@Kiba and I are planning to make a public-facing token inclusion criteria scoreboard so that additions/deletions are transparent to the community and potential investors.

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This update is great - it’s awesome to see this pushing forward! This addressed all of my concerns from the last round and hasn’t introduced any new ones.

Regarding naming - I like ‘DATA’ - it’s clean, easy to remember and communicate, and honestly not grabbing an available premium ticker seems like a miss. I never considered the XXI convention, and hopefully no owl feathers get ruffled by my saying this, but it’s going to be hard to keep that up once we have hundreds of indices under management. Besides, how could we not play off of this . . . ?

I also like the nod to engineering constraints - I’m confident that challenge will be met in a thoughtful way given the team’s approach so far.

6 Likes

Thanks for working on this. I don’t understand the theory behind the max 25% cap? I know DeFI Pulse capped UNI at 25%, but was that a good idea? Won’t it hurt their tracking an uncapped market? It is clear that LINK is going to be bigger than the others in the list…why cap it at 25%? Just a question…

Great! no additional comment
I like $DATA, too

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Hello @TJB2K - capping indices is a common practice in the traditional finance world. It is not uncommon to see caps as low as 10%! One of the reasons for this practice is that you lose the benefit of diversification that an index provides if the percentage allocation of a single asset is too high.

Without a cap, LINK would represent ~53% and RENFIL ~30% of the index, for a combined ~83%, based on circulating market capitalization alone. With that level of concentration, it becomes much more attractive for potential investors just to buy LINK and FIL instead of the DATA index.

We picked 25% as the maximum percentage allocation for an individual component of DATA simply because that’s what DPI was already doing so its easier for potential investors to understand. However, we could definitely explore lowering or raising the cap if we thought there was a compelling reason to do so.

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Hello - trying to get a little more involved in the forums - love the idea of a Data Index

Questions regarding RenFIL:

  • The methodology for DPI states “The token must be a bearer instrument. None of the following will be included in the index: Wrapped tokens. Tokenized derivatives. Synthetic assets. Tokens that are tied to physical assets. Tokens that represent claims on other tokens.”
  • Would we not maintain a similar inclusion criteria for other indices (save BED)? Are we exposing this index to additional risks related to the RenVM?
  • Would love to have exposure to FIL in this index, but it just seems complicated without it being an ERC-20 token.

A question regarding Numeraire

  • This feels more like a protocol that could be included in the DPI sometime in the future. When looking at how Messari Crypto (Messari.io) classifies Numeraire, its under “Asset Management” and “Finance”. However, Coin Gecko classifies Numeraire as “Business Services” and “Decentralized Finance (DeFi)”. So I guess the “Business Services” classification allow for inclusion in a Web 3/Data Economy Index.
  • Just wondering, what is the justification for the Numeraire inclusion

Token Expansion and Market Cap…Cap:

  • It would be interesting to consider expanding this to a more general Web 3 type of index and a SQRT MC calculation (similar to MVI), but with a 20% cap.
  • If we did do this, to address one of @overanalyser’s comments about the XXI format, it could be something along the lines of W3I or WTI.
  • Example with 10 tokens (using Messari’s Web 3 categorization)
Name Ticker Market Cap % SQRT MC
20% Max
Units Per
Token
$ Per
Allocation
Chainlink LINK $9,302,233,132 20.00% 0.9331 $20.00
Basic Attention Token BAT $923,847,329 14.62% 23.7000 $14.62
The Graph GRT $768,843,562 13.34% 21.6085 $13.34
Livepeer LPT $513,293,355 10.90% 0.4493 $10.90
Golem GLM $263,795,159 7.81% 29.6148 $7.81
Ocean Protocol OCEAN $249,609,973 7.60% 15.3684 $7.60
Band Protocol BAND $222,537,542 7.18% 1.1347 $7.18
Orchid OXT $201,055,429 6.82% 23.1349 $6.82
Civic CVC $153,668,928 5.96% 25.9970 $5.96
Streamr DATA $144,202,248 5.78% 35.4186 $5.78
  • Example with 15 tokens (using Messari’s Web 3 categorization)
Name Ticker Market Cap % SQRT MC
20% Max
Units Per
Token
$ Per
Allocation
Chainlink LINK $9,302,233,132 20.00% 0.9331 $20.00
Basic Attention Token BAT $923,847,329 12.48% 20.2256 $12.48
The Graph GRT $768,843,562 11.38% 18.4407 $11.38
Livepeer LPT $513,293,355 9.30% 0.3835 $9.30
Golem GLM $263,795,159 6.67% 25.2733 $6.67
Ocean Protocol OCEAN $249,609,973 6.49% 13.1154 $6.49
Band Protocol BAND $222,537,542 6.12% 0.9684 $6.12
Orchid OXT $201,055,429 5.82% 19.7434 $5.82
Civic CVC $153,668,928 5.09% 22.1859 $5.09
Streamr DATA $144,202,248 4.93% 30.2263 $4.93
District0x DNT $77,687,139 3.62% 27.9429 $3.62
Tellor TRB $75,070,413 3.56% 0.0811 $3.56
Radicle RAD $24,358,756 2.03% 0.4078 $2.03
FOAM FOAM $11,541,553 1.39% 38.2493 $1.39
Aragon Court ANJ $7,634,683 1.13% 18.2201 $1.13

Regardless, love the idea. There are a lot of projects in this category for which I would like to have more exposure. (LINK, OXT, LPT, ect).

3 Likes

The allocation and caps work well for me.

And, they align with DPI, which is helpful for alignment and marketing.

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So basically you picked 25% max because so does DeFI Pulse, even though
that means they clipped UNI to that level during a time when DPI FAILED to
keep up with the benchmark ETH HODL strategy? Seems a steep price to pay?
Why not 33% or even 40%?

Thank you for the thoughtful comment, @Crypto_Texan ! Glad to hear you like the idea of the DATA index - now, let’s see if we can persuade you that this is the right implementation :grinning:

Kiba and I received feedback in the original Data Economy Index proposal that we should consider wrapped and derivative tokens to include assets like Filecoin, Helium, Arweave, and Akash Network that are not natively ERC-20 tokens.

The Index Coop is clearly already comfortable using wrapped tokens given that we already have two products using Wrapped Bitcoin (WBTC, BED and BTC2x-FLI.

Still, your point is duly noted that we definitely need to further research and understand the trade-offs of using assets like RENFIL backed by RenVM / Ren Protocol before an IIP is submitted.

When I first joined the Index Cooperative, I remember thinking it was very strange that Augur was initially included in DPI and not Numeraire. After careful consideration, I don’t think either belong in that index because they do not fit into either lending (i.e. AAVE, MKR, COMP, KNC, CREAM) or exchange (i.e. UNI, SUSHI, LRC, BAL) categories which currently dominate the DeFi industry and therefore the DeFi Pulse Index.

Numeraire is one the quintessential tokens in the Data Economy category because it’s value comes from incentivizing data scientists to submit models/predictions (i.e. off-chain data providers) based on private, encrypted datasets (off-chain data & data providers) to run the ultimate hedge fund. I do not think Messari or CoinGecko are properly categorizing Numeraire; CoinMarketCap is closer to the mark by categorizing it as AI & Big Data.

For what it’s worth, I was introduced to Crypto through the Numerai competitions in which I competed as a data scientist. NMR was actually the first cryptoasset I ever owned.

I think there is definitely potential for a “Web3” style index at the Index Coop, although that is not what we are trying to achieve with the Data Economy index at this time.

In general, I would be extremely hestitant to rely on categorization from Messari, CoinGecko, CoinMarketCap, etc. for building an index. We used several categories to create an initial group of tokens for consideration in the Data Economy index and then designed a token inclusion criteria that we believe captures the theme we defined.

In my view, a huge part of the value methodologists bring to the Index Coop is category definition. There is massive value in creating and defining a new category, and this is what @Kiba and I have sought to do.

For example, note that DeFi Pulse Index does not rely on CoinGecko or Messari to determine what is a DeFi token/asset/project. The folks at DeFi Pulse had a huge part in defining DeFi as a category (i.e. the TVL metric comes from DeFi Pulse) and they are reaping massive rewards for both themselves and the Index Cooperative as a result.

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@TJB2K I’m not sure I understand the point you are making.

Do you think DPI underperforming ETH in USD-terms over a relatively short time period invalidates DPI’s methodological choice to cap individual assets at 25% after the rebalancing phase? I do not think it does.

Yes, a 25% cap is arbitrary but so is 33% or 40% cap. How are these better alternatives? If anything, they allow the index to become further concentrated in a handful of assets, an undesirable feature for an index product.

Do you think DPI methodology should be changed to have a 33% of 40% cap for individual tokens? I don’t think it should. The point of an index is broad exposure to a theme/industry/category/etc., not to concentrate in an individual asset.

Aside from the max cap for individual tokens, what do you think about the proposed product?

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Hey Thomas, thanks for incorporating comments from everyone into this next iteration of the proposal. I certainly like the distribution of weights between tokens and no significant concentration of positions.

I generally like the simplification of the token weight methodology to a simple market cap weight with a 25% single position cap. One comment around liquidity. I think that now that you’ve increased the number of tokens in the portfolio, you can actually have a liquidity weight component that will not materially advantage LINK but might reduce weight to some of the less liquid tokens.

One of the reasons to consider the liquidity weight component - let’s say DATA goes above $5m in AUM in the first month (it probably will but depends on market conditions and any incentives). Then you have to manually and subjectively decide what to do with RENFIL weight, all while managing a very tricky rebalance. Adding liquidity weight (at 25% but you can model others as well) would help push that point a bit further. Can experiment with square root of liquidity weight as well, if LINK advantage is too much.

Even if you don’t use liquidity weight, it might help to think through and outline a process for dealing with the above situation. So, at the very least, the buyers know what you going to do or which steps you are going to follow to arrive at a decision.

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We’ve already scheduled a call with the renFIL team to discuss improving liquidity. Doesn’t prevent the problem going forward with other tokens so might be worth considering.

3 Likes

Great revision from the initial post, the name $DATA is very clear and catchy.

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I am happy to agree that 25% is arbitrary, and based on a third party
decision. Raising the arbitrary cap to, say 33% would still allow for
diversification, since most of the benefit from diversification comes in
the first 8-10 tokens. The more important issue is how to do
re-balancing/re-weighting when/if new tokens enter the index, and how often
this takes place. If you expect lots of new hot tokens to enter over the
next year, then a higher arbitrary cap allows more exposure to the leader
in the short term, and ability to add new entrants later. A lower
arbitrary cap at the beginning means less exposure to the market leader in
the short term. It depends on how dynamic you expect the index to be.
Given that all of this is outsourced in the case of DPI to Defi pulse, I
guess it is up to them.

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Happy to hear that you like the changes we made for this iteration of the proposal!

This is excellent feedback - will absolutely do this before submitting a formal IIP.

@TJB2K I understand your point now.

I think raising the cap on any individual token is one way to address your concern. Changing the rebalancing period from monthly to quarterly would be another (perhaps better?) way to allow more exposure to tokens that have been performing well in the short-term. For instance, most TradFi index products like the S&P 500 rebalance quarterly, not monthly. I suspect DPI started with monthly rebalancing because of all the new DeFi projects they wanted the index to capture quickly (Uniswap was not even in the index at launch).

What do you think?

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