Smart Indices - TWAP based dynamic indices

Author: pr0
Summary: A smart index which bases allocations between stables / low risk assets during downtrends and risk on assets during bull trends.

Smart Index (SIX)
We are proposing this index on Conjure’s behalf as we were going to fork the indices contracts but were recommended to make a proposal first to make it part of the Indexed ecosystem.

The concept for the smart index is simple, it takes an indicator for trend, using a TWAP construction based around either the Crypto total market cap or ETH mcap (can use other indicators aswell) using our Open Oracle Framework as it allows for historical TWAP construction around data feeds. We take this TWAP (say the 7d) and we take a longer TWAP (say the 21d) or we do a TWAP (14d) along with a trigger threshold (>0.05x drop in ETH) relative price (if the av price for the last 2w has become > the current price, indicating that the price has moved under the trend) then the index will switch configurations for weights to bear configuration. Then if the price moves back above the trend indicating a bull trend it switches into a risk on configuration.

These configurations can be not just trend based but also volatility based (if the volatility for the last 2d has increased rel to last 2w, can switch into risk on volatile assets, if volatility is low, in an up trend can switch to non volatile crypto assets, if the price trend is down with high volatility, switch into non volatile, non crypto assets).

By taking an index’s composition and switching into cash based and risk off assets during downtrends and back into risk on assets in an up trend, you can switch into cash (sell the high) at the start of a down trend, then buy (the low) when trend switches back. This should allow for the index to not only rebalance assets based on performance like all indices, but have smart features to detect how to manage it’s portfolio, simulating even the most advanced hedge funds.

This new construction will allow our indices to go from basic (the just base tokens on performance and hold allllllll the way down), they can react to market trend on which token sets to use, when to use them and how to use them.

Governance will be handled by Indexed Finance’s existing framework including the forums and Discord.

The Sigma committee will add or remove tokens from the index or alternate list regularly based on community feedback. Examples of changes may be adding new tokens if the alternate list is in danger of being emptied or adding or removing tokens from the index due to material changes in tokenomics or project direction. Community members can propose adding or removing a token from the active index or the alternate list at any time.

Further the community and sigma can update the strategies used / parameters, to increase how smart the index is by altering the scoring contract’s implementation.

Initial value of SIX
We will target an initial price of $42 for the SIX token. During the bootstrapping phase, 100 tokens will be funded by pr0 to reach a total value of $4200 (or $42 per token). Once SIX reaches its target value, the pool will be deployed giving anyone the ability to mint new tokens.

Token’s criteria
The index has the following criteria for inclusion:

The token has a market cap from $20 million (as calculated by a rolling 14-day TWAP on Uniswap/OOF).
There is at least $50,000 of liquidity for the token on Uniswap.
No major vulnerabilities have been discovered in the token contract.
The token’s supply can not be arbitrarily inflated or deflated maliciously.
The control model should be considered if the supply can be modified through governance decisions.
The token does not have transfer fees or other non-standard balance updates.
The token meets the requirements of the ERC20 standard.
Boolean return values are not required.
Stablecoins are accepted.

The SIX compositon based on strat and params
We propose a basic bull/bear switch to start with volatility based configurations to follow later once we know the index is performing well.

Bull Composition
.6x FFF
.2x degen
.1x stablecoin (USDC or DAI depending on community)
.1x ETH

Downtrend Composition
.65x stablecoin
.2x FFF
.05x degen
.1x ETH

We are looking for feedback for both the concept and the compositions, this is just a concept proposal as we create a more solid, reviewed proposal.


Nice proposal, I think developing an index like this is certainly something we should pursue, however, this sort of reindexing is definitely more risky.

What timeframe are you looking for the index to make reindexing decisions over? From what I see it sounds like you want the index to rebalance every two weeks based on a 21d and 14d moving average.

Will rebalances be gradual like the current indexes through arbitrage or is the plan to actually make larger swaps between assets each week to immediately hit the new targets? If it’s the latter, do you see slippage being an issue?

I’m somewhat confused by the inclusion of ETH independently of FFF since it seems redundant for what you’re trying to do but I can understand just wanting a larger portion of ETH in a Bull composition but not a Bear composition, or is this ETH to facilitate rebalances?

Are you looking to include yield bearing assets such as Nirn in this for the stablecoin allocation? If so would there potentially be an issue with rebalancing SIX to a Bull composition where the liquid funds in Nirn are not able to immediately facilitate the decrease in weight. I’m probably answering my own question but I’m guessing Nirn would not be included unless it has enough liquidity to buy from a DEX without slippage.

Overall I would love to see a product that can switch from risk-on to risk-off assets and vice-versa, but I’d like to see a lot of backtesting for a product like this since these sort of things tend to behave differently in longer term bull/bear markets.

Honestly need to do more backtesting to find the right params, based on a look a ma for the 9d seems to do alright with a cross on the 21d but these params need to looked at more. So the rebalancing will happen every 1 w same as current indices, and the configuration switches should only happen every say 2m optimally to really let the real runs profit. The rebalancing and weight changes will happen the same way, small weight changes. The components could be nirn based but thats based on liquidity, the important part atm will be seeing what indicators the community might want to use and how they feel about the concept. Can then choose the params based on indicators and finally can choose the actual asset allocations. This isnt an index we deploy tomorrow like many others, but it also means its an index no competition have access to and a new offer by indexed.

ETH was used as a stable medium to trade through the stablecoins and indices, as it’s the most liquid asset, it’s also just a sample, can keep FFF only for ETH exposure, just ETH seems to be a good asset to hold cause most defi assets trade with it but on down trends, these assets flee into stablecoins/ETH so it can play a role in both bull and bear trends.

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So, I like this idea, and it’d be an example of how we can utilise scoring contracts that are powered by ‘more’ than just market cap data.

I would suggest, however, that the ‘minimum TVL’ be removed from the conditions for inclusion: I’m coming to the opinion that these simply remove tokens from consideration in the event of a bear market.

Take for example the US$50mil minimum on the DEGEN index: ‘real’ degen tokens are far less than that now that we’ve slipped a bit, but those limits are in place and cannot be removed except for a proxy upgrade.

Under the US$20 million limit, for example, DEGEN and FFF wouldn’t qualify (nor would the DEFI5, actually). I’d trust the Sigma committee to - as a whole - not be silly enough to throw in some ultra-low cap rubbish - the liquidity requirement for the oracles is ‘enough’ IMHO.

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If we change the assumption that has been going from “All assets which meet the crit are able to be included” to “All assets must meet the crit but are subject to discretion by the multisig” thats fine, just depends on how you want to frame the crit for the assets as being all scoping vs minimum threshold.

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For people that are still not really understanding the proposal

the indices simply change their weights based on indicator, where the indicator talked about can be different.
if indicator = bear and configuration = bull
switch weights slowly from .8 tokens .2 stables to .8 stables .2 tokens
else indicator = bull && configuration = bear
switch weights slowly from .8 stables .2 tokens to .8 tokens .2 stables

where indicator can be
fn spot
if twap(21d) < spot 
if twap(21d) > spot * 1.05 threshold so it doesnt keep switching bull to bear and back
or can do an ma

fn twap
if twap(21d) < twap(9d)
if twap(21d) > twap(9d) * 1.05 threshold so it doesnt keep switching bull to bear and back
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I like this, the inclusion of the deadzone threshold is definitely necessary and I think what you’ve got here is a pretty good configuration.

I’m pretty content with the details of this proposal at this point, I’d like to see some backtesting/paper figures at this point. I’ll also look and see what’s available for testing this strategy and post here if I can get results.