This is the expanded version of the robust methodology we’ve built for CAI.
CAI, the Colony Avalanche Index, is the benchmark index for the Avalanche ecosystem consisting of AVAX and the leading Avalanche applications. The index is rebalanced monthly and follows a stringent methodology to determine which tokens should be in the index, and their respective weights.
CAI’s methodology comprises of three key sections:
- Token inclusion criteria
a. Project and token characteristics
b. Token supply requirements
c. Liquidity requirements
d. Security requirements
- Defining asset weights
- Index maintenance
In this article, we are going to explain the reasoning behind each category and some of the most pertinent criteria in each. If you want to take a full look at the methodology you can do so on Phuture or Colony’s documentation.
Token inclusion criteria
Before any asset can be considered for the Colony Avalanche Index it must pass every aspect of our token inclusion criteria. Its objective is to protect investors’ funds by ensuring that the index only invests into tokens that meet our high standards. For new investors, investing into CAI backed by our methodology makes certain that you will avoid the usual pitfalls that first time investors experience. For experienced investors, CAI selects the highest quality tokens, generates additional interest on those tokens and should be a core part of your portfolio.
Let’s dive into each section of the token inclusion criteria:
Project and token characteristics
This section covers the underlying attributes of the project such as the blockchain it operates on, the team, the level of usage of the product, the value accrual mechanics of the token and more.
Let’s take a look at CAI’s key requirements for the project and token characteristics.
- The project’s token should have been listed on CoinGecko with pricing data at least 6 months prior to the date of inclusion in the index.
Every project’s token should have a data feed that we can access through CoinGecko and should have at least 6 months worth of pricing data. We stipulate a minimum of 6 months to ensure that the project has had sufficient time in the market.
This achieves several objectives including: improved perception of security due to time in an adversarial environment and allows for price discovery of the tokens before they are included into the index, which helps to avoid investing during the initial pump and dump cycle of popular tokens.
- The project should have a token that is native to Avalanche. This excludes wrapped variants, where the underlying tokens are locked on an alt-L1.
All tokens on CAI should be built on the Avalanche network. This removes any vulnerabilities associated with asset bridges between layer 1 blockchains.
- The project’s protocol or product must have significant usage.
Tokens supported by CAI must derive from products that generate significant usage. This is imperative as it provides avenues for the token to gain intrinsic value through cash flows or claims on protocol assets in the future and avoids investing into purely speculative tokens.
- The project must be widely considered to be building a useful protocol or product. Projects that have circular feedback characteristics at the core of their offering will not be considered.
CAI will only invest into projects that are building positive sum applications for the Avalanche ecosystem whether that is in DeFi, GameFi or another category.
- The project’s token must not have the ability to pause token transfers.
The tokens included in CAI should not have the ability to pause token transfers as this would negate the index’s ability to mint, redeem and rebalance. Our investors must always be able to access the underlying capital held in the index at any time.
Token supply requirements
- The project’s token must have a circulating supply greater than 30% of the maximum supply. In cases where a token does not have a max supply, the minting mechanics would need to be assessed.
- The token must not have locking, minting or other patterns that would significantly disadvantage passive holders.
Having a widely distributed token supply dampens the effects that new tokens have on the value of existing tokens, because all else being equal they account for a smaller percentage of the total circulating supply. In addition, it is important that passive holders of tokens (index products) are not significantly disadvantaged through the distribution of new tokens via locking mechanisms or unfettered minting functions.
CAI’s unique architecture allows it to generate yield on the underlying tokens, through Yield Yak, which mitigates the typical dilution suffered by passive holders of tokens Currently, 20% of CAI’s AVAX reserve is staked on Yield Yak earning an additional 5%!
That being said, we value liquidity higher than anything else and so we never participate in staking programmes that require lockups. To protect investor returns, CAI never invests into yield bearing vaults that suffer from impermanent loss, charge entry and exit fees, or that use unsafe leverage.
- The token must be listed on a supported exchange.
- The token should have in aggregate at least $2mm of on-chain liquidity across Trader Joe and Pangolin.
- The token must have shown consistent DeFi liquidity on Avalanche.
Deep liquidity is absolutely paramount to the orderly operation of an index. Without it, the costs of entering, exiting and rebalancing the index are much greater. CAI stipulates a high minimum level of liquidity of $2mm for each token the index holds, in order to minimise costs for our investors and improve the overall performance of the product.
CAI can access liquidity across every major exchange on Avalanche ensuring the best possible execution and support for even the largest investment sizes.
- The project must have been audited by smart contract security professionals with the audit report(s) publicly available. Alternatively, the protocol must have been operating long enough to create a consensus about its safety in the decentralised finance community.
We take security seriously, which is why any asset held by CAI must have undergone security audits and have stood the test of time by being live for at least 6 months (see project and token characteristics).
This minimises the chance that the token’s price is adversely affected by security breaches.
Defining asset weights
CAI weights each asset by its respective circulating market cap. However, to ensure that AVAX doesn’t dominate the performance of the index we have capped its maximum weight to 50%. We expect this weighting to decrease as the application layer matures and increases in value over time. Any excess weight is proportionally redistributed to the other tokens in the index.
In order for a new asset to make it into CAI it must have a weight of at least 0.5% to justify the cost of its inclusion.
CAI is rebalanced on a monthly basis, is open for investment 24/7 365, without any lockups or withdrawal freezes, ever. Check Phuture or Colony’s gitbook for documentation on past rebalancing events.
CAI’s objective is to give investors regularly managed, diversified exposure to the growth of the Avalanche ecosystem. The methodology has been put in place to protect the capital held by the index, reduce the costs of entering and exiting the index and ensuring the index is always allocating capital to the best projects the Avalanche ecosystem has to offer. If you are looking to get exposure to the Avalanche ecosystem in a responsible, well balanced manner then head over to either Phuture or Colony’s app now.
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Available on the Phuture app or Colony’s platform.
Phuture (PHTR) is a decentralised protocol that gives users passive exposure to crypto assets. With leading index products built on Ethereum and Avalanche, Phuture is at the forefront of innovation in crypto passive investing. Phuture has a global team and community to support and grow its mission.
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Colony is a community driven accelerator, evolving into an inclusive DAO, to boost Avalanche’s ecosystem growth. Powered by a governance token: $CLY.
Colony deploys capital within Avalanche on early stages projects, provides liquidity to DeFi protocols, validates networks through stacking capabilities and will maintain an Index on top Avalanche projects. The true sustenance and value generated by Colony’s investments is routed back to the community through airdrops, a buyback mechanism, and staking rewards.
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