Date: 2024-02-28 Stage: RFC Product: Index Coop Layer 2 Index (icL2) Author:@anthonyb.eth Reviewer(s):@allan.g, @MrMadila
Description
The Ethereum landscape is becoming more complex due to the expansion of Layer 2 (L2) ecosystems. Getting exposure to all of these ecosystems is difficult, even for sophisticated users.
The Index Coop Layer 2 Index (icL2) will provide diversified exposure to L2 Ecosystems with square root market capitalization weighting to provide stability in the category leaders, but also long-tail exposure to emerging L2 ecosystems.
Constituents must adhere to the criteria with data provided by L2Beat. If available, the constituent may be staked via the LST provider/protocol with the highest TVL as per DeFi Llama. The index will be reweighted quarterly via UMA’s Optimistic Oracle and rebalanced via the Index Protocol Auction Module.
Composition
*subject to change
Symbol
Name
TVL*
Marketcap
LST
30d APY
Weight
MATIC
Polygon
$43m
$8,965,486,316
STMATIC
4.24%
22.34%
IMX
ImmutableX
$45m
$4,528,244,071
–
–
15.87%
OP
Optimism
$3.85b
$3,497,797,510
–
–
13.95%
MNT
Mantle
$549m
$2,477,378,615
–
–
11.74%
ARB
Arbitrum
$10.19b
$2,347,752,521
–
–
11.43%
STRK
Starknet
$215m
$1,338,382,611
–
–
8.63%
MANTA
Manta
$1.07b
$828,280,025
–
–
6.79%
METIS
Metis Andromeda
$46m
$454,882,850
–
–
5.03%
LRC
Loopring
$45m
$320,293,989
–
–
4.22%
Totals:
0.94%
100%
Methodology
The goal of icL2 is to provide diversified exposure to the Ethereum Layer 2 Ecosystem. To be included, tokens must have the following attributes:
The L2 must have at least 10,000 ETH worth of non-native token TVL according to L2Beat across all of the ecosystem’s chain, but not across third-party chains built on its stack*
The L2 must not be an app-chain, but may be non-universal (for example, IMX)
The token for the L2 ecosystem must be live for at least 30 days before inclusion
The composition will be weighted by square root market capitalization according to data provided by CoinGecko. Data collection will take place 5 days before the rebalance date and new weights will be provided by UMA. The index will be rebalanced via Dutch auction over 24 hours on the first weekday of each quarter starting at 00:00 UTC.
*Clarifications:
Non-native TVL means that the value of ARB would not be counted on Arbitrum, for example
10,000 ETH means the USD Value of the Non-Native TVL must be greater than 10,000 multiplied by the open ETH price on the collection date per CoinGecko
“across all of the ecosystem’s chain, but not across third-party chains built on its stack” means that Arbitrum One and Arbitrum Nova would be counted towards Arbitrum, however, TVL from Base would not count towards Optimism
Open Questions
How should the index treat side chains that are in the process of becoming L2s?
Should the index be a pure L2 play, or should it include/be more of a “Modular Ethereum Index” which also includes Data Availability tokens such as TIA?
Should the index only include "Universal L2s "as defined by L2Beat?
Should the index be market-cap or equal weighted instead of the proposed Square Root Market Cap weighting?
Is TVL the best way to filter out lower-quality L2s?
Please provide any feedback or questions that you have regarding icL2. The Index Coop product team will incorporate this feedback into a final draft for an IIP which, if successful, would send icL2 to the pre-sale process.
Would you buy icL2? If yes, how much of your portfolio would you allocate to it?
Thanks for the feedback. I think what you are suggesting is no TVL criteria? I still think L2Beat would be useful for determining which ecosystem/chains should be eligible, but we could definitely do without the TVL criteria, in my opinion.
It’s great to see work like this coming out. I like the idea of the index but also second @kindeagle -would be great to see at least core ic products on L2s. The Argent integration used was great on zkSync and would be great to see on Starknet.
I like it, however I think the weighting is a bit off, I prefer what the second recommendation with the simple FDV weighted composition. It would be strange to see Arb in the middle of the weight list.
In case there is a switch that includes a certain asset within this index, it would be really great to have it automatically approved. For example, using an UMA oracle.
IMX weight is higher than OP, ARB and STRK? Something is wrong with this methodology… Feels like it doesn’t reflex market dynamics, TVL and chain adoption (otherwise, IMX would be somewhere between LRC and METIS).
Thanks for the feedback! TVL is filtering criteria not weighting criteria in this methodology, but based on the feedback I think the final version will end up having no TVL criteria. Some chains (like IMX) might lack in TVL but be useful in other ways (like gaming). TVL unnecessarily favors DeFi focused chains
I think the final methodology will also be based on FDV which is a better for valuing things in the long-run.
I’m also considering weighting based on FDV and Market Cap which would take into account short run and long run dynamics. Not 100% sure yet.
Yeah, agree that TVL is a demonstrative parameter only for defi-focused chains. Also, agree that IMX could be useful in other ways.
But the primary question here is, “what is L2-index supposed to represent”? As I understand, it should represent sth like “60-70% - established L2s (so we have a pretty stable wherever the hype is index) and 30-40% - new fancy L2s (so it also reflects market dynamics)”. Btw would be cool to see this kind of rationale behind index composition.
But anyway, it feels like whether we want the index to reflect established L2-landscape or current trends, we need it to be based on some parameters (TVL, FDV, etc.). Imo FDV is not always a very representative number - we understand that it can be manipulated pretty easily (that’s why it’s unlikely we’ll see PLS with $23b FDV or FLR $4b FDV in Index’s products). Also, when we talk about defi-focused chains, we pay more attention to TVL than to FDV - then why do we look at FDV (but not on tx numbers or other metrics) when we talk about other L2s? From my perspective, IMX’s FDV reflects neither L2’s landscape (as I see it) nor market trends (tho my views could be biased since I’m more a defi-user than a gamer).
So my point is that it would be cool (at some point in the future) to articulate more precisely “what does L2-index represent” and consider a more representative methodology for L2s not focused on defi.
Absolutely support it. The more investors we have the better the products will be adopted. Base, Optimism, Polygon, Arbitrum etc. L2 are definitely the way to go. We hear the majority of smaller investors having interest in various products, but ETH fees make their small investments unreasonable. If the project gain the trust of smaller investors, they will grow their investments in the products.
Really excited for this to be released, is there any ETA on when it will happen? Especially as the new cycle comes into swing after the halving it would be good to have a product like this.
Also how about using fees earnt as another metric? I had a look at Token Terminal and some L2s with high FDV don’t have the highest fees. I say this as if I do the same comparison with DPI tokens on Token Terminal it’s a bit more consistent.
Using fees as a metric is interesting and something I originally thought would be cool as well. Ultimately though, fees is backward-looking and it may not actually track the market well.
Hey! Thanks for proposing this. Let me know how I can be of assistance with this at all. I suggested building this product back in 2021 when I was much more active in the IC forums and contributing.
I’ve been building around the L2 space since early 2020.
Would love to see how I can provide value here. Cheers.
