Index Methodology

The explicit, on-chain criteria for determining which assets are included in the index. This eliminates subjective judgment and ensures the index is composable and verifiable. Common rules filter for:

• Market capitalization or total value locked (TVL)
• Liquidity thresholds on specific DEXs
• Security audits and protocol age
• Tokenomics (e.g., inflation rate, vesting schedule)

The mathematical formula determining each constituent's proportion within the index. This dictates the index's risk/return profile and rebalancing needs. Common schemes include:

• Market-Cap Weighting: Proportional to asset's market value.
• Equal Weighting: Each asset holds an identical share.
• Fundamental Weighting: Based on metrics like revenue, fees, or TVL.
• Liquidity-Weighted: Prioritizes assets with deeper market depth.

The predefined schedule and rules for adjusting the index's holdings to maintain its target weights. This is critical as market prices drift. Mechanisms include:

• Periodic Rebalancing: Scheduled updates (e.g., monthly, quarterly).
• Threshold Rebalancing: Triggered when a weight deviates by a set percentage (e.g., ±5%).
• On-Chain Execution: Uses smart contracts and DEX aggregators to execute trades with minimal slippage and MEV resistance.

The divisor is a normalization constant used in the index's price calculation formula, ensuring continuity after corporate actions like constituent changes or splits. The index value is typically calculated as: Index Value = (Sum of (Price * Weight) for all constituents) / Divisor This ensures the index level is meaningful over time and allows for the creation of derivatives and index tokens that track its performance.

The transparent process for proposing, debating, and implementing changes to the methodology itself. This ensures the index remains relevant and credible. A robust process includes:

• Formal Proposal (CCIP/BIP): Detailed specification of the change.
• Community/Stakeholder Discussion: Open forum for feedback.
• Timelock & Voting: On-chain governance by token holders or a committee.
• Documentation Updates: All changes are logged in versioned methodology documents.

The verified, decentralized sources for the price and on-chain data (e.g., TVL, liquidity) that power the selection and calculation rules. Reliable data is foundational. Key considerations:

• Oracle Redundancy: Using multiple sources (e.g., Chainlink, Pyth, DEX TWAPs) to prevent manipulation.
• On-Chain Verifiability: Preferring data that can be cryptographically proven.
• Transparency: Publicly documenting all data endpoints and aggregation methods.

Assets are weighted proportionally to their market capitalization. This is the most common methodology, providing natural exposure to the largest and most established protocols.

• Example: An index where 60% of the weight is in the largest asset, 30% in the second, and 10% in the third.
• Pros: Self-cleansing (declining assets shrink in weight), low turnover.
• Cons: Concentrated risk, can become a momentum play.

Each asset in the index holds an identical weight, which is periodically rebalanced back to the target allocation.

• Example: A 10-asset index where each token represents exactly 10% of the portfolio.
• Pros: Increased diversification, captures upside from smaller assets.
• Cons: Higher gas costs from frequent rebalancing, can increase exposure to less liquid assets.

Weighting is based on fundamental metrics like Total Value Locked (TVL), revenue, or user count, rather than market price alone.

• Example: A yield-generating index where protocol weights are determined by their annualized fee revenue.
• Pros: Can identify undervalued assets, reduces price-based speculation.
• Cons: Requires reliable, on-chain data oracles and subjective metric selection.

Assets are selected based on a specific investment thesis or sector exposure, with weights determined by the strategy's rules.

• Examples: A Layer 2 Rollup Index, a DeFi Blue Chip Index, or a Stablecoin Yield Index.
• Pros: Provides targeted, passive exposure to a narrative or sector.
• Cons: Thematic risk; performance is tied to the success of the broader theme.

A quantitative methodology that constructs a portfolio to minimize overall volatility, often using historical price correlation data.

• Mechanism: Uses optimization algorithms to assign weights that reduce portfolio risk.
• Pros: Aims for a smoother return profile, especially in sideways or bear markets.
• Cons: Complex to calculate, relies on historical data which may not predict future correlations.

The process of adjusting portfolio weights back to their target methodology. This is a critical operational component.

• Time-Based: Rebalances at fixed intervals (e.g., monthly, quarterly).
• Threshold-Based: Triggers a rebalance when an asset's weight deviates by a set percentage (e.g., +/- 5%).
• Impact: Rebalancing enforces discipline but incurs transaction costs and potential slippage.

The mathematical rule determining the proportion of each asset within an index. Common methods include:

• Market-Cap Weighting: Allocates based on the total market value of each asset.
• Equal Weighting: Assigns an identical percentage to each constituent.
• Fundamental Weighting: Uses metrics like revenue, fees, or active addresses instead of price. The choice of mechanism directly impacts index performance, diversification, and rebalancing needs.

The criteria and process for including or excluding assets from an index. This involves objective rules, often called a screening methodology, which may filter for:

• Liquidity (minimum trading volume)
• Market Capitalization (minimum size threshold)
• Security (proof-of-work vs. proof-of-stake)
• Custody (availability on major custodians) Transparent, rules-based selection is critical for index legitimacy and prevents arbitrary changes.

The periodic process of adjusting the index portfolio to align with its target weights. This is necessary because asset prices change, causing weight drift. Rebalancing enforces the index methodology and can involve:

• Selling assets that have become overweight.
• Buying assets that have become underweight.
• Reconstitution, which may add new assets or remove existing ones based on the selection criteria.

A standard index used as a reference point to evaluate the performance of investment portfolios or other indices. Examples in traditional finance include the S&P 500 or MSCI World. In crypto, a benchmark provides a neutral, rules-based performance baseline against which active funds or other strategies are measured for alpha generation.

The organization responsible for designing, calculating, maintaining, and publishing an index. Key responsibilities include:

• Defining and documenting the methodology.
• Performing constituent selection and rebalancing.
• Calculating and disseminating the index value in real-time or daily.
• Ensuring governance and handling methodology changes. Prominent providers include S&P Dow Jones Indices, FTSE Russell, and MSCI.

An index calculation that assumes reinvestment of all cash distributions from the underlying assets, such as staking rewards (for Proof-of-Stake assets) or dividends. This provides a more accurate picture of an asset's overall financial return compared to a price return index, which tracks only capital appreciation. It is essential for comparing long-term performance across asset classes.