Request for Discussion: Data Economy Index (DATA)

[Thomas_Hepner]

iip: TBD
title: Data Economy Index (DATA)
status: Discussion
authors: Thomas Hepner (@TenaciousTerrier), Kiba Gateaux (@Kiba)
created: 2021-06-02

Summary

• Mission & 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.

• Thesis: Where DeFi is disrupting traditional banking and financial services, we believe that the Data Economy has the potential to disrupt the data monopolies built in Big Tech over the past 20 years.

• Draft Portfolio: The initial four components of DATA are Chainlink (LINK), the Graph (GRT), Numeraire (NMR), and Ocean Protocol (OCEAN).

• AUM Opportunity: The initial 4 components of DATA represent approximately $14.2 billion in market value and have no overlap with our two existing index products. This suggests that DATA would be a highly differentiated product for the Coop with a significant, compelling market opportunity.

• Revenue Opportunity: We believe that DATA will likely be monetizable immediately after launch, with a realistic potential to capture ~$80M AUM in the short-term, while also creating a new revenue stream for the Index Cooperative that taps an exponentially expanding market.

• Product Differentiation: We are aware of efforts by DeFi Pulse to release an Ethereum Infrastructure or Middleware Index. We believe that DATA will be significantly differentiated as it is designed to capture data economies off and across blockchains.

Motivation

“I believe these marketplaces will transition us out of the current era of Web 2.0 data monopolies into a Web 3.0 era of open competition for data and algorithms, where both are directly monetized.” - Fred Ehrsam, blockchain-based machine learning marketplaces (March 2018)

Decentralized finance (DeFi) is the first of many industries that will blossom on-chain. The Ethereum whitepaper outlined numerous data-intensive applications that the network would support including decentralized file storage, decentralized data feeds, cloud computing, prediction markets, and other on-chain data-based applications.

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 on-chain economic activity connecting decentralized blockchains and applications to off-chain data.

The Index Cooperative now has two index products, DeFi Pulse Index (DPI) and Metaverse Index (MVI) that provide exposure to two on-chain industries, decentralized finance (DeFi) and the Metaverse.

As of today’s writing, the top 7 components in DPI, comprising ~92% of the index’s market cap, have a combined market value of ~$29 billion; the top 7 components in MVI comprise ~75% of the index’s market cap and have a combined ~$3.8 billion market value.

The initial 4 components of DATA represent approximately $14.2 billion in market value and have no overlap with our two existing index products. This suggests that DATA would be a highly differentiated product for the Coop with a significant, compelling market opportunity.

Moreover, the data economy is already deeply integrated into the workings of DeFi. For instance, Chainlink is the 800-pound gorilla in the room; it’s decentralized price oracles are used as infrastructure for most DeFi protocols, including the Set Protocol to calculate NAV issuance.

We believe it is time the Index Cooperative had an index for on-chain data economies.

Specification

Size of the Opportunity

We believe that DATA will likely be monetizable immediately after launch, with a realistic potential to capture ~$80M AUM in the short-term, while also creating a new revenue stream for the Index Cooperative that taps an exponentially expanding market.

Current Market Size:

Currently, DPI is $167m in AUM, approximately ~0.5% of the circulating market capitalization of its constituent tokens. DATA will have ~$80m in AUM if it captures the same share of the Data Economy that DPI has captured of DeFi.

At launch, Chainlink and the Graph would be the two assets with the largest allocations in the Data Economy Index. As of today’s writing, they have a combined circulating market capitalization of ~$13.5 billion; for comparison, the two assets with the largest allocations in DPI, Uniswap and Aave, have a combined ~$18.3 billion circulating market capitalization.

Potential Market Size:

“Technology companies are the most valuable companies in the world…You don’t need a middleman to own your data…I think the big tech companies will be disrupted as much, if not even more, than the big banks. And considering those are the most valuable companies in the world, maybe that’s what’s worth paying attention to.” - Fred Ehrsam, Bloomberg (March 2021)

A little over 2 years ago, on February 28th, 2019, DeFi Pulse only had 10 assets listed on their site. Total Valued Locked (TVL) was $317m and Maker’s dominance was ~90%! Bitcoin’s Lightning Network and Augur had the 4th and 5th most TVL respectively. Much has changed in just 2 years!

We believe that the Data Economy is at the same stage of development that DeFi was at the beginning of 2019.

Where DeFi is disrupting traditional banking and financial services, we believe that the Data Economy has the potential to disrupt the data monopolies built in Big Tech over the past 20 years.

Marketing & Brand Awareness:

• Expands Reach: DATA would represent another on-chain industry covered by Index Cooperative. This potentially expands the reach of the Index Cooperative’s brand as the premier on-chain asset manager to projects and communities currently outside of DeFi and NFTs.

• The LINK Army: DATA would be the first product offered by the Index Cooperative that includes Chainlink (LINK). Chainlink’s official Twitter account has 331k followers; other prominent Twitter accounts include @ChainLinkGod (83k followers) and the @Crypto___Oracle (27k followers).

Product Differentiation

As already mentioned in the sections above, the Data Economy represents an entirely different market from DeFi and the Metaverse.

In addition, we are aware of efforts by DeFi Pulse to release an Ethereum Infrastructure or Middleware Index. We believe that DATA will be significantly differentiated from that index as DATA is designed to capture data economies across blockchains. In other words, it is meant to be blockchain agnostic over the long-term. We believe that most of the value of DATA is derived from off-chain data assets. For example, the value of Numeraire (NMR) is tied to the predictive performance of the machine learning models submitted by independent data scientists to Numerai’s hedge fund. Because the value of data economy tokens are derived from off-chain data, we believe that DATA’s value over the long-run will be uncorrelated with Bitcoin, Ether, and the DeFi Pulse Index (DPI).

Proposed Methodology

Draft Portfolio

Below is the initial draft portfolio for DATA

The methodology has three major components.

• Token Inclusion Criteria

• DATA Token List

• Matrix Scoring System

1. Token Inclusion Criteria

Selection of the DATA tokens is based upon the following criteria:

• The token must be available on the Ethereum blockchain. This will be revised when the Set Protocol infrastructure becomes multi-chain.

• The primary function of the protocol provides on-chain data-based services.

• 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.

• Circulating market capitalization must be over $100m.

• Protocol must have at least 3 months history of operation and its token must have at least 3 months of price and liquidity history.

• An independent security audit should have been performed on the protocol and results reviewed by the product methodologist. In the case that no audit has been performed, the methodologist applies subjective judgement of the protocol based on assessment of the criteria above and communications with the team.

• In the event of a security issue the methodologist will work with the project team to understand the issue and any effects to DATA holdings. The team is expected to provide users of the protocol with a reliable solution and adequate documentation to ensure transparency about any incidents.

2. DATA Token List

DATA initializes a Token List with the following four projects and their native tokens:

• Chainlink (LINK)

• The Graph (GRT)

• Numeraire (NMR)

• Ocean Protocol (OCEAN)

34 separate projects were considered for inclusion in the Data Economy Index by sourcing from CoinMarketCap’s AI & Big Data, Oracles, Storage, IoT, Prediction Markets, and Distributed Computing categories.

Here are the primary reasons that projects were excluded from the Token List:

• Not an ERC-20: Filecoin (FIL), Helium (HNT), Akash Network (AKT), Siacoin (SC), and many others. These projects would be re-evaluated if/when Set Protocol becomes capable of supporting non ERC-20 tokens.

• Protocol Functionality: Gnosis (GNO). Primary functionality is not connecting off-chain data to decentralized blockchains.

• Insufficient Network Activity: Augur (REP). REP tokens are not currently being used or staked by off-chain data providers and revenue is not being captured by token holders.

• Less than $100m Market Cap: Robonomics Network (XRT), FOAM (FOAM).

Projects will be reevaluated on a regular basis and will also be able to apply for inclusion in the Data Economy Index (DATA).

3. Matrix Scoring System

Token weights for individual assets within DATA are determined via a Matrix Scoring System:

Market Cap Weight (MW) - 40%: The square root of the circulating market capitalization weighted allocation.

Liquidity Weight (LW) - 20%: The liquidity weighted allocation.

Economic Activity Weight (EW) - 40%: The weight for the size of the on-chain data economy relative to the token’s market value.

For the Draft Portfolio above, the 12 Month Forward revenue for each token was calculated by multiplying the estimated trailing 30 day revenue by twelve. Trailing 30 day revenue for each token was estimated using the following data sources: Chainlink, The Graph, Ocean Protocol, Numeraire.

Index Maintenance

Index maintenance would mirror the Determination and Reconstitution phases established with DeFi Pulse Index and Metaverse Index.

One key difference is that the methodology for DATA proposes a 50% weight cap for any given constituent token instead of the 25% weight cap in DPI.

Fees

The Data Economy Index would have the same 95 bps streaming fee as DPI and MVI.

Author Background

Thomas Hepner

• Won the Index Creative Challenge by publishing Why I Invested in the DeFi Pulse Index and Index Cooperative.
• Gold/Silver Owl (December 2020 - February 2021) ; Helped @jdcook form the Analytics Working Group.
• Creator of the ₿EST Portfolio.
• Numerai Data Scientist (2016) and Numeraire holder since 2017.
• Data Science Manager at PrecisionLender (2017 - 2021); successfully created and launched several data products now in use by some of the largest banks in the world.
• Financial Analyst, Amazon Prime & Kindle teams (2012 - 2015)

You can reach Thomas on the Index Cooperative Governance Forum (@TenaciousTerrier), Twitter, and through his blog.

Kiba Gateaux

• Prev. Full Stack Developer @ Consensys
• Gold/Silver Owl for the first three months of coop and April
• Top degen score
• Link marine since 2017
• Originally proposed DATA Index in October 2020.

Next Steps

If there’s support for this index from the community, we plan to further research and submit a formal Index Improvement Proposal (IIP) to make DATA an official index listed by the Index Cooperative.

[jdcook]

I am a big proponent of this Index - the vision of Web3 relies on decentralized data economies. This sector has massive growth potential, and I believe a substantial short-term AUM to be gained. I have heard rumblings about this type of index at the Coop for a few months, so it is great to see this proposal come through! A few of the highlights of the proposal from my perspective:

Differentiated

@Thomas_Hepner

The initial 4 components of DATA represent approximately $14.2 billion in market value and have no overlap with our two existing index products. This suggests that DATA would be a highly differentiated product for the Coop with a significant, compelling market opportunity.

Both immediate and long-term growth potential

@Thomas_Hepner

Currently, DPI is $167m in AUM, approximately ~0.5% of the circulating market capitalization of its constituent tokens. DATA will have ~$80m in AUM if it captures the same share of the Data Economy that DPI has captured of DeFi.

Strong sector belief, similar to MVI and the Metaverse

@Thomas_Hepner

We believe that the Data Economy is at the same stage of development that DeFi was at the beginning of 2019.

Imo, this is the clear next choice for a sector index

@Thomas_Hepner

Expands Reach: DATA would represent another on-chain industry covered by Index Cooperative. This potentially expands the reach of the Index Cooperative’s brand as the premier on-chain asset manager to projects and communities currently outside of DeFi and NFTs.

---

Now, onto a couple initial questions that I have:

@Thomas_Hepner

Token weights for individual assets within DATA are determined via a Matrix Scoring System:

Could you provide more color behind why these ^ were chosen as the final weights?

What are y’alls thoughts on IP with DATA? GRT tokens have great opportunity to earn via delegation or curation. OCEAN can be staked against data on the Ocean Protocol. NMR can be staked against models if you are a Data Scientist, but also there is a possiblity for lending NMR to data scientists on Aave. Do you envision the Coop taking an active role in these economies using the underlying tokens? What are the possibilities you see there?

---

I really want to see a DATA index. Looking forward to the review and discussion here. Great work @Thomas_Hepner & @Kiba

[verto0912]

Hey @Thomas_Hepner and @Kiba

These are the same comments I shared with you in private and adding here for everyone’s benefit.

• My gut reaction on the economic activity weight is a negative one. Main concern is that I don’t know what it adds to the index. Perhaps it would be helpful to explain why the economic activity component is necessary? Perhaps some performance backtest or something like that. If you think about people investing in broad, thematic indices, they usually want a simple and straightforward methodology. Economic activity would confuse most people. As a side note, all the sources of data for protocol revenue are different and some are rather ad-hoc. This would be hard to keep up-to-date and ensure reliability of the data.

• Same comment as above for liquidity. Are there liquidity issues with any of the tokens? That was the primary reason to include liquidity in the MVI weighting.

• With that, economic activity and liquidity weights feel like an unnecessary overcomplication of the methodology.b Are there any specific issues with simply running square root of mcap index?

• I’m still unclear what justifies inclusion in the index. What exactly are “on-chain data-based services”? Perhaps more clearly spelling out the categories would be helpful.

• 4 tokens is a bit underwhelming. I would love to invest in this product if it had like 6 or 8 tokens. Otherwise, I can just hold LINK, GRT and NMR and use them productively in the ecosystem. I see the potential customers for DATA being crypto native and capable of using assets productively.

[jdcook]

@verto0912

4 tokens is a bit underwhelming. I would love to invest in this product if it had like 6 or 8 tokens. Otherwise, I can just hold LINK, GRT and NMR and use them productively in the ecosystem. I see the potential customers for DATA being crypto native and capable of using assets productively.

This ^ is a good point, and why I asked about IP with DATA. There could be strong incentive to hold these due to the ability to participate in the economy as an individual rather than get exposure through an Index.

I think @verto0912 brings up some good questions around the weights, which I second. My initial question was a little more broad (i.e. why these weights?). So interested to see y’alls answers here!

[Thomas_Hepner]

Glad to hear you believe in the vision and potential for the Data Economy Index!

@jdcook

Could you provide more color behind why these ^ were chosen as the final weights?

@Kiba and I felt that it was most important for a given token’s weight in the index to be based on a combination of market value (the market cap weight) and on-chain economic activity relative to market value (the economic weight).

The biggest challenge in creating a methodology for a DATA index at this time is the extreme power distribution of market capitalization and liquidity for the assets (LINK is 90% of circulating market market cap and 94% of liquidity). DPI has this challenge as well, but not to the same extent.

Liquidity weight was added as DEX liquidity for GRT, NMR, and OCEAN was under $5m per token so liquidity could become an issue if AUM exceeds $20m for DATA.

[Thomas_Hepner]

@verto0912 Thank you for sharing your feedback with us - these are excellent points for consideration!

@verto0912

• My gut reaction on the economic activity weight is a negative one. Main concern is that I don’t know what it adds to the index. Perhaps it would be helpful to explain why the economic activity component is necessary? Perhaps some performance backtest or something like that. If you think about people investing in broad, thematic indices, they usually want a simple and straightforward methodology. Economic activity would confuse most people. As a side note, all the sources of data for protocol revenue are different and some are rather ad-hoc. This would be hard to keep up-to-date and ensure reliability of the data.

@Kiba and I both feel that the Economic Activity Weight (EW) is a valuable part of the Matrix Scoring System because it gives greater weight to tokens with stronger economic fundamentals (i.e. higher on-chain revenues as a percentage of circulating market cap). We do not believe that adding economic activity is confusing as it is fully transparent in the Matrix Scoring System.

In regards to the data sources, the links provided are well established sites where each community tracks data relevant to their markets. We can improve data collection processes for the index over time as the Data Economy matures and develops as an industry.

@verto0912

• Same comment as above for liquidity. Are there liquidity issues with any of the tokens? That was the primary reason to include liquidity in the MVI weighting.

As I mentioned in my comment to @jdcook, the biggest challenge in creating a methodology for a DATA index at this time is the extreme power distribution of market capitalization and liquidity for the assets (LINK is 90% of circulating market market cap and 94% of liquidity). DPI has this challenge as well, but not to the same extent. Liquidity weight was added to the matrix scoring system as DEX liquidity for GRT, NMR, and OCEAN is under $5m per token so liquidity could become an issue if AUM exceeds $20m for DATA.

@verto0912

• With that, economic activity and liquidity weights feel like an unnecessary overcomplication of the methodology.b Are there any specific issues with simply running square root of mcap index?

We could simply calculate the square of circulating market capitalization, but that would skew the index heavily into a single asset, Chainlink (LINK), and also not take into account fundamental economic activity for a given protocol, which we believe should be an important factor for the index.

@verto0912

• I’m still unclear what justifies inclusion in the index. What exactly are “on-chain data-based services”? Perhaps more clearly spelling out the categories would be helpful.

For all of the tokens/projects in the Data Economy Index (DATA), data is the product.

For instance, Chainlink Node operators power decentralized price feeds, Graph Indexers create consumable GraphQL endpoints, data owners publish data assets for consumers on Ocean Protocol, and data scientists submit predictions from machine learning models to power Numerai’s hedge fund.

@verto0912

• 4 tokens is a bit underwhelming. I would love to invest in this product if it had like 6 or 8 tokens. Otherwise, I can just hold LINK, GRT and NMR and use them productively in the ecosystem. I see the potential customers for DATA being crypto native and capable of using assets productively.

Starting with 4 tokens does feel a bit underwhelming, but we have to start somewhere! We’re extremely early in the development of the Data Economy. I believe that the Index Coop should define and own the category before someone else does. As noted in the post, DeFi Pulse started when Maker dominance of DeFi was ~90% and Lightning Network and Augur were still considered DeFi projects:

@Thomas_Hepner

A little over 2 years ago, on February 28th, 2019, DeFi Pulse only had 10 assets listed on their site. Total Valued Locked (TVL) was $317m and Maker’s dominance was ~90%! Bitcoin’s Lightning Network and Augur had the 4th and 5th most TVL respectively. Much has changed in just 2 years!

Crypto evolves rapidly. It is easy to imagine many additional projects meeting the Token Inclusion Criteria outlined above and being included in DATA. For example, if cross-chain interoperability were a solved problem on Ethereum and Set Protocol then projects like Filecoin and Helium would already be eligible for inclusion.

[Thomas_Hepner]

@verto0912 @jdcook In regards to your comments on Intrinsic Productivity (IP):

@Kiba has lots of ideas about Intrinsic Productivity (IP) for DATA, but we did not want to overload initial considerations for the index given that IP is still in development for DPI after much consideration and many spirited debates we have both been a part of.

In the original draft, we had a section for Future Considerations, here is what @Kiba wrote for IP:

Intrinsic Productivity (IP): IP will make DATA completely unforkable if done correctly. There are two types of IP possible - protocol level staking and DeFi farming. We will start with DeFi strategies similar to DPI. Once staking becomes available on a protocol and we start staking on it we can provide superior returns to token holders because 1) higher yields with native staking 2) we can give all returns to DATA holders maxing out APY which no other operator can do. This leads to flywheel effect where higher yield gets more TVL → more staking power → more jobs (superlinear unlike L1/DeFi staking) → higher APY → higher TVL. If we reach capacity on native staking we can switch assets to DeFi farming.

[jdcook]

@verto0912

My gut reaction on the economic activity weight is a negative one. Main concern is that I don’t know what it adds to the index. Perhaps it would be helpful to explain why the economic activity component is necessary? Perhaps some performance backtest or something like that. If you think about people investing in broad, thematic indices, they usually want a simple and straightforward methodology. Economic activity would confuse most people. As a side note, all the sources of data for protocol revenue are different and some are rather ad-hoc. This would be hard to keep up-to-date and ensure reliability of the data.

Just wanted to respond to this @verto0912 . My perspective is that these assets are fundamentally different than the assets in DPI. They perform functions within a specific data economy where data is the overall product. The economic weights can also be seen as a sign of future growth, imo, so you aren’t just giving weight to what is big now, but also to what has strong tokenomics & usage and potential for high growth. I think it is a valuable addition and one that probably only makes sense with the DATA index at the moment.

The point about data collection is very fair. That would have to be transparent at all times.

[0x_Dev]

Great work bringing this to the Forum @Thomas_Hepner and @Kiba - clearly a boatload of work has gone into this.

I strongly desire more index products from the Coop which help capture new investment themes in crypto. DPI and MVI do this well and I think DATA could too - though to be honest I would personally be more excited if the product had more tokens (8+) and a broader scope.

There’s been talk of this decentralized middleware index from DFP for sometime with nothing forthcoming - and given that I’d be open to your ‘data’ theme being opened up to cover all decentralized cloud (data, compute, query, graph, etc). I ultimately think decentralized cloud is a more comparable theme to DPI and MVI - DATA being more comparable to decentralized exchanges or decentralized insurers, a category lower.

I’m sure DATA could be quite successful - and maybe we have subcategories captured by our index products in future - but for now, I think the Coop should prioritize a decentralized cloud index, which I think could be many multiples larger and help us build our brand better (regardless of who is the methodologist!).

[Thomas_Hepner]

Hey @0x_Dev - appreciate the thoughtful comments! Here is my thinking on some of your concerns:

@0x_Dev

though to be honest I would personally be more excited if the product had more tokens (8+) and a broader scope.

@0x_Dev I hear your concern about wanting more tokens in the DATA index - that is definitely the long-term goal! I think it will happen naturally as the Data Economy grows and matures, just like DeFi did, but there are also some current technological limitations preventing this from happening today.

@0x_Dev

I’d be open to your ‘data’ theme being opened up to cover all decentralized cloud (data, compute, query, graph, etc)

DATA’s scope already covers the decentralized cloud and much more.

@Thomas_Hepner

Mission & 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 reason DATA does not include tokens in what you are calling the decentralized cloud (data, compute, query, graph, etc.) has nothing to do with the Token Inclusion Criteria of DATA. Decentralized data storage projects Filecoin ($5.4B ), Siacoin ($0.85B), Arweave ($0.55B), and Akash Network ($0.2B) are all excluded because they are not ERC-20 tokens. This is a technological, not methodological limitation. DATA would already include these projects if Ethereum and Set Protocol supported cross-chain interoperability.

If we wanted to include Filecoin in DATA at launch we would need to use wrapped Filecoin (WFIL) or renFIL (renFIL). Siacoin, Arweave, and Akash Network do not have wrapped or derivative tokens as ERC-20 tokens at the present time.

@0x_Dev Do these points address your concerns or do you still have reservations? My main point is that we plan to include decentralized cloud projects in the DATA index when it is technologically feasible to do so.

[Don-ETH]

@Thomas_Hepner and @Kiba, great work for collating so much information for this proposal.
As an engineer, I can see the big potential and demand for decentralized Web3 services because they make the whole ecosystem anti-fragile.

However, having four tokens to start the DATA index is quite risky for an investor, and deges will just buy them separately.

We are still in the early stage of Web3 and it is very hard to guess who will be the winners. I would also prefer to have 8+ tokens in an index for diversification.

I would recommend that we dig deeper on other Web3 ERC20 tokens which have a huge potential. Lastly, I think having a survey on discord about what Web3 tokens they like will give us an idea of what tokens to dig in. I would also be delighted to help you on this journey.

[verto0912]

Another point on the economic activity component - it limits your potential inclusions. Assume there’s a token that meets all of your criteria (which still looks like you are handpicking tokens) but they don’t have a credible source for revenue. What happens?

@Thomas_Hepner

Starting with 4 tokens does feel a bit underwhelming, but we have to start somewhere!

If there are only 4 tokens that fit your criteria, what it tells me is that either 1) your criteria are too strict or 2) the space is not mature enough for an index. Or potentially both.

I think trying to expand the universe (maybe you’ve done this and there’s just no other tokens) could be a helpful exercise. What happens if you lower market cap to $50m from $100m? It would also reduce the dominance of LINK in a sqr root of market cap index.

Really quickly on liquidity weights, if all tokens but LINK have liquidity constraints, having a liquidity weight gives LINK token a higher allocation at the expense of the other tokens which is something you are trying to avoid.

[patb]

Really impressive analysis. I have not seen the Infrastructure/Middleware proposal by DeFi Pulse - is their proposal limited to Ethereum?

[Thomas_Hepner]

@verto0912

@verto0912

Assume there’s a token that meets all of your criteria (which still looks like you are handpicking tokens) but they don’t have a credible source for revenue.

How do you think we are “handpicking tokens”? We have defined an objective criteria (Token Inclusion List) and instantiated a Token List with 4 tokens that meet all of those criteria.

Revenue and Earnings are both very commonly used for index construction. For example, Tesla was not added to the S&P 500 until December 2020 because it did not meet the S&P 500’s criteria of needing 4 straight quarters of GAAP profits.

Personally, I thought that was pretty stupid (I have been a major TSLA holder since mid 2019), and think Revenue is the right fundamental metric for an industry like the Data Economy experiencing rapid growth.

@verto0912

Another point on the economic activity component - it limits your potential inclusions. Assume there’s a token that meets all of your criteria (which still looks like you are handpicking tokens) but they don’t have a credible source for revenue. What happens?

Yes, the economic activity component in the Token Inclusion criteria absolutely limits inclusions by design. Augur and Gnosis were both excluded from the DATA Token List for either having insufficient on-chain data-based economic activity. We view exclusion of tokens that do not fit the Token Inclusion Criteria as a feature, not a bug.

@verto0912

If there are only 4 tokens that fit your criteria, what it tells me is that either 1) your criteria are too strict or 2) the space is not mature enough for an index. Or potentially both.

I disagree strongly with this point. As I noted in my comment to @DevOnDeFi:

@Thomas_Hepner

Decentralized data storage projects Filecoin ($5.4B ), Siacoin ($0.85B), Arweave ($0.55B), and Akash Network ($0.2B) are all excluded because they are not ERC-20 tokens. This is a technological, not methodological limitation. DATA would already include these projects if Ethereum and Set Protocol supported cross-chain interoperability.

DATA as designed has a higher market capitalization than all components in MVI; Filecoin alone has a higher market cap than all components in MVI and has been live for 6 years. DATA would already meet your goal to have 8+ tokens if Ethereum and Set Protocol supported cross-chain interoperability.

@verto0912

I think trying to expand the universe (maybe you’ve done this and there’s just no other tokens) could be a helpful exercise. What happens if you lower market cap to $50m from $100m? It would also reduce the dominance of LINK in a sqr root of market cap index.

Lowering the market capitalization still excludes interesting data-based projects like FOAM and Robonomics Networks, but these projects would still be excluded due to the economic activity criteria.

@verto0912

Really quickly on liquidity weights, if all tokens but LINK have liquidity constraints, having a liquidity weight gives LINK token a higher allocation at the expense of the other tokens which is something you are trying to avoid.

This is a good point. I don’t think we are trying to avoid LINK having an outsized weight in the index given how much greater it’s market cap is than everything else so much as give relatively more weight to projects with smaller market caps that nonetheless have great data economy fundamentals (NMR’s weight relative to OCEAN’s is the prime example of this phenomenon).

[Kiba]

Thanks for all the responses and feedback everyone.
So far there seem to be 3 main topics: # of tokens, purpose of economic weight, and Intrinsic Productivity

# of Tokens

There are many tokens that qualify for inclusion in DATA but aren’t on the Ethereum chain. We listed at least 4 that we would like to include but can’t for this reason. It’s possible that wrapped tokens like WFIL could be used if they get enough onchain liquidity. We did discuss reducing the mcap requirement to $30m I think but it didn’t make a big difference

@Thomas_Hepner

Not an ERC-20: Filecoin (FIL), Helium (HNT), Akash Network (AKT), Siacoin (SC), and many others. These projects would be re-evaluated if/when Set Protocol becomes capable of supporting non ERC-20 tokens.

and

Request for Discussion: Data Economy Index (DATA)

Hey @DevOnDeFi - appreciate the thoughtful comments! Here is my thinking on some of your concerns: @DevOnDeFi I hear your concern about wanting more tokens in the DATA index - that is definitely the long-term goal! I think it will happen naturally as the Data Economy grows and matures, just like DeFi did, but there are also some current technological limitations preventing this from happening today. DATA’s scope already covers the decentralized cloud and much more. The reason DATA does not…

This is very early stages for this sector with lots of near term potential in these tokens and for new tokens that come up as it develops. @verto0912 mentioned we use different data sources for economic activity of each and thats because something like defipulse.com or nonfungible.com doesn’t exist yet. This obviously a tool we are looking to build and as Thomas said the coop can be a major part in shaping this industry in it’s infancy just like DPI and MVI.

Intrinsic Productivity

short summary on IP here
Even with a few tokens DATA has same value as DPI with easy market coverage, rebalances, lower volatility, etc. so I don’t think we need IP to get PMF. That being said I think the case for IP in DATA is stronger than DPI, MVI and maybe SMI.

First reason being that if we run our own nodes we can provide DATA holders with higher staking returns than any other nodes on the market because we don’t need to charge staking fees, we only take a small 95bps streaming fee. So historically ETFs outperform actively managed accounts and you get higher staking returns than anywhere else. Second unlike DeFi staking pro-rata rewards, most DATA economies can have superlinear rewards stakers. Nodes have access to even more jobs the more they have staked (bc of minimum requirement, bandwidth, etc.) and could theoretically monopolize the market and set prices at will, something not possible in DeFi. Third, with the amount of tokens we’ll ideally have in DATA we can go to nodes/pools and bargain for better reward splits.

This is all on top of the normal DeFi options available for tokens like LINK.

Economic Weight

I’d say jd captured the main reason here:

@jdcook

The economic weights can also be seen as a sign of future growth, imo, so you aren’t just giving weight to what is big now, but also to what has strong tokenomics & usage and potential for high growth.

We are tracking economies and economies are networks so the strongest network will perform better over time, especially if their token price is undervalued to the fundamentals and then price increase leads to higher economic bandwidth for them to operate. We use sources from the protocol itself (market.oceanprotocol.com) or reputable community members (market.link) and verify on-chain, an aggregator would be nice though.

It’s the Data Economy Index, saying it’s weighted by economic activity has made sense to all the normie friends I’ve sent it to (like they buy DOGE an ADA) and cryptonatives.

[Thomas_Hepner]

Thank you @patb! I do not think DeFi Pulse has put forward a proposal yet, but I’ve heard it mentioned on the weekly Index Coop community calls a few times. So, I do not know if their proposal is limited to Ethereum-based projects or not in the long-term.

[fallow8]

@Thomas_Hepner

@verto0912

If there are only 4 tokens that fit your criteria, what it tells me is that either 1) your criteria are too strict or 2) the space is not mature enough for an index. Or potentially both.

I disagree strongly with this point. As I noted in my comment to @DevOnDeFi:

I actually don’t think your response to @0x_Dev covers “the space is not mature enough for an index.” My reaction based on what I’ve seen so far is “a phenomenal idea that’s too early.”

Why would doing this now benefit the space or the Coop? DPI wasn’t the first tokenized DeFi index. It seems that didn’t matter too much. If you answer this question, you win my support.

The other notion would be to broaden the theme. I’m hesitant to go that route because I think you guys are onto something great with DATA. Have you considered a broader scope? If so, what would that be?

[Thomas_Hepner]

@fallow8 and I caught up over Discord about his question:

@fallow8

Why would doing this now benefit the space or the Coop?

Here’s a brief summary of our discussion:

• Establish Index Coop as the Institution that Tracks the Data Economy: The value of launching DATA now is that it establishes the Index Coop as the premier institution tracking the Data Economy. DPI inherited the credibility that DeFi Pulse built over 2 years by tracking DeFi from the beginning of its development. We believe it’s really important that the Index Coop position itself as the category owner of the Data Economy, even with only 4 tokens in the index, before a different index provider does.

• Number of Tokens Will Naturally Expand: As blockchain technology matures and cross-chain interoperability solutions develop, the number of tokens in the index will naturally expand. There would be 8 tokens in the index now if Filecoin, Siacoin, Arweave, and Akash Network were ERC-20s.

• Creation of a Public Scoreboard to Build Brand: People love scoreboards. There would be lots of brand and reputation value in the index methodologists (@kiba and I) maintaining a website with the Data Economy Token List, akin to what DeFi Pulse has done, showing which assets are included in DATA and which are not. For instance, there are many great DeFi assets, like Curve (CRV), which are included on DeFi Pulse, but not in DPI for various reasons.

@fallow8 Do you agree with this summarization of our conversation? Is there anything I missed or you feel I misrepresented?

[Thomas_Hepner]

Hello @Don-ETH - thank you for your thoughtful comment!

Here are some of my thoughts on different points you have made:

@Don-ETH

However, having four tokens to start the DATA index is quite risky for an investor, and deges will just buy them separately.

What do you mean by risk? If you are referring to volatility, serious cryptoasset investors are quite fine with volatility given that even the crypto blue chip assets like BTC and ETH dropped ~50% in the past month in USD-terms. DPI also declined >50% from peak to trough despite having 14 assets in the index.

DATA would not have fared any better on this dimension, regardless of whether it included 4 or 8 tokens. The original 4 tokens described in the post all lost 65%+ of their value from peak to trough; LINK declined almost 70%! Filecoin, Arweave, Siacoin, and Akash Network all declined by 70%+ in the recent drop so including them would not have decreased volatility of the DATA index materially.

If you are referring to idiosyncratic or specific risk, then having 8+ tokens instead of 4 would certainly be better.

We are still in the early stage of Web3 and it is very hard to guess who will be the winners. I would also prefer to have 8+ tokens in an index for diversification.

As I noted in some of my other replies, there would be 8 tokens in the index now if Filecoin, Siacoin, Arweave, and Akash Network were ERC-20s.

[fallow8]

That covers it. For my part, our conversation turned me around on “it’s too early” as an objection. That may still affect the product in the prioritization process, but it’s not a reason not to do it. Especially because DG1 to DG2 can really refine a product. This should be on the list if you believe in the trajectory of the Data Economy as @Kiba and @Thomas_Hepner lay out (which I do). And it gives us the unique opportunities @Thomas_Hepner covers above (entrenching the Coop as a locus for signal effect in burgeoning markets).