*Originally posted August 2022*
The Phuture DeFi Index (PDI) is our leading index comprising the top tokens within the decentralised finance sector. The index is rebalanced on a monthly basis and currently holds 10 underlying tokens.
PDI’s constituent assets, as of August 2022.
Each of our indices follows a thorough and stringent methodology that encompasses three main categories:
1. Token inclusion criteria
- Project and token characteristics
- Token supply requirements
- Liquidity requirements
- Security requirements
2. Security requirements
3. Index maintenance
In this blog post we are going to explain the reasoning behind each category and some of the most pertinent criterion in each. If you want to take a full look at the methodology you can do so on our docs.
Token inclusion criteria
Before any asset can be considered for the Phuture DeFi 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 our indices backed by our methodologies makes certain that you will avoid the usual pitfalls that first time investors experience.
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 PDI’s key requirements for the project and token characteristics.
The project must have a listing on Defi Llama.
The project’s token should have been listed on CoinGecko with pricing data at least 1 year 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 1 year’s worth of pricing data. We stipulate a minimum of 1 year to ensure that the project has had sufficient time in the market.
This helps to increase the trustworthiness of the project as well as avoids investing into overly hyped projects that have not stood the test of time.
The project should have a token that is native to Ethereum L1 or L2. This excludes wrapped variants, where the underlying tokens are locked on an alt-L1.
All tokens on PDI should be built on the Ethereum mainnet or an Ethereum rollup. 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 PDI 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.
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.
PDI will only invest into projects that are building the infrastructure and products that support productive use cases, which advance the industry and get us closer to widespread adoption.
The project’s token must not have the ability to pause token transfers.
The tokens included in PDI 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 small 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.
PDI’s unique architecture allows it to generate yield on the underlying tokens which mitigates the typical dilution suffered by passive holders of assets.
That being said, we value liquidity higher than anything else and so we never participate in staking programmes that require lockups.
Liquidity requirements
The token must be listed on a supported exchange.
The token should have in aggregate at least $5mm of onchain liquidity across Uniswap v2, Uniswap v3, Sushiswap, Balancer v1, Balancer v2, Bancor v2 and Bancor v3.
The token must have shown consistent DeFi liquidity on Ethereum.
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. PDI stipulates a high minimum level of liquidity of $5mm for each asset the index holds, in order to minimise costs for our investors and improve the overall performance of the product.
Due to Phuture’s latest improvements to its exchange infrastructure, PDI can access token liquidity across all the major exchanges on Ethereum, providing greater asset choice and vastly superior trade execution.
Security requirements
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 at Phuture which is why any asset held by PDI must have undergone security audits and have stood the test of time by being live for at least 1 year (see project and token characteristics).
This minimises the chance that the token’s price is adversely affected by security breaches.
Defining asset weights
PDI weights each asset by its respective circulating market cap. However, to ensure that no single asset dominates the performance of the index we have capped the maximum weight to 30%. Any excess weight is proportionally redistributed to the other tokens in the index. At the time of writing this, Uniswap is currently capped at 30%.
In order for a new asset to make it into PDI it must have a weight of at least 0.5% to justify the cost of its inclusion.
Index maintenance
PDI is rebalanced on a monthly basis, is open for investment 24/7 365, without any lockups or withdrawal freezes, ever. See here for documentation on past rebalancing events.
Conclusion
PDI’s methodology helps investors avoid the usual mistakes first timers make when investing into crypto and it does that by having a robust strategy.. PDI will never be the first to adopt a new token, always preferring the safety of our investor’s funds over quick returns. If you are looking to get exposure to the DeFi sector in a responsible, well-balanced manner then head over to our app now.
