Request for Comment: Data Economy Index (DATA) Updates

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).

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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.

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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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Great work on this @Thomas_Hepner & @Kiba - love all the thought and effort that has been put into incorporating the community feedback and improving the product. So just want to say out of the gate that I really like this product - would buy for me.

A few points of feedback:

So this is the very core of the theme behind DATA. I love the theme. However, I can see how this can feel like a grey area to a lot of people, and when it comes to indexes, people generally want pretty strict lines drawn that make it easy to trust what would or wouldn’t be included in the index. How do you see this? How do you plan on maintaining the line of “data-based services or products”?

I think something like this ^ would go a long way in solidifying the theme that you are trying to achieve in the communities and investors eyes.

I agree with @verto0912 - it would be great to see the liquidity weight modeled here. I would hate for this product to be hamstrung from the beginning due to liquidity issues!

And I think my broader feedback for the community is that I think we have an opportunity here to be a first-mover on a really large theme!

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Yes…I think 25% max cap is too low for a brand new index in fast moving DeFi…33% allows plenty of space for new entrants without eroding the share of the likely future dominant winner…DPI capping UNI at 25% is not a good move IMHO

I’m in favor of the proposal though the term “data economy” isn’t a term that I hear often and would suggest naming it “Big Data Economy Index”, where Big Data is a more popular/Googled term and likely to improve marketing impact.

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Great work! I think I cannot comment on anything as my concerns were addressed. I just wanted to give a big hand for the hard work and for including a non-native erc20 token on the index.

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Not much to add here other than saying i’m on board with this DATA index big time! the product (or the appeal of it) wasn’t initially clear to me but this post patched those gaps in knowledge up pretty immediately.

thanks!

@Kiba @Thomas_Hepner

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Yes the naming could be much stronger and more memetic. Open to any and all suggestions. Dweb, web3, etc. Are more popular terms in crypto and big data, data economy, etc. is popular in enterprise world.

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This has already been a topic internally when looking to add more tokens to the index. The answer we’ve agreed to so far is “data-based” means the product itself is data vs a product that uses data to improve business/operations.

So for example Chainlink fits “data-based” because the nodes are selling data directly but Uniswap does not even though they used data to guide architecture to v3. Does that make sense?

@Thomas_Hepner is that an accurate paraphrase?

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