$IBCX Methodology

Suggestion on Operation Methodology of $IBCX

$IBCX aims to represent the fundamental values of the Cosmos ecosystem. Optimizing the portfolio allocation and dynamically maintaining the weight balances are crucial to achieving that goal. In this article, we propose an execution plan for getting the upcoming Cosmos index token started on the right path.

Portfolio Selection

To pick the first batch of tokens that’ll form the beginning of $IBCX, we propose relying on market capitalization/liquidity (a tried-and-true valuation method) and IBC connectivity (one of Cosmos’s prized characteristics). Below is a detailed list of criteria:

• The token must be from a Cosmos SDK Zone
• The collateral tokens must have consistent and substantial liquidity on Osmosis (3-month trailing liquidity average > $150,000)
  - $IBCX leverages the Osmosis AMM for launching and operating the index token. Given that the portfolio assets are going to be the ones traded on Osmosis, requiring the projects to achieve and maintain this criterion is crucial
• Minimum of 3 months of protocol operation history and liquidity
• Minimum of 10 Peers and 10 active Channels connected via IBC
  - For reference, the average number of Peers and Channels of the top 51 Zones are 13 and 29, respectively (as of November 2022)
• The project must be widely considered to be building an objectively beneficial, value-creating product. Projects on competitive trading, Ponzi characteristics, exist primarily for entertainment, or have a history of operation-related issues (ex., issues on CEX) will not be included

The Inaugural Portfolio Weight % Calculation

After selecting the tokens to be included in the $IBCX basket, we need to figure out how many of each of these tokens a unit of $IBCX will hold. We propose to use the formulas below to calculate the initial portfolio weight %s:

We calculate each token’s market share % in the basket’s combined market capitalization and Osmosis liquidity. To achieve the most accurate representation, we plan to use trailing (ex., past 3 months) performance for both market cap and DEX liquidity. Also, to minimize the excessive influence of a single large token, the square root is applied. A rough representation of the weights we currently have is as below:

Weights of $IBCX Portfolio [60 days average data]

To avoid confusion, we’d like to emphasize that these weights represent share %s of the dollar value of tokens. Market share equals price times quantity, and the prices of the portfolio tokens constantly change. To maintain the fungibility of $IBCX, we’ll fix the token quantities as a constant and let the variable, or the prices, drive the implied weight %s.

In other words, the initial portfolio composition above is an inaugural snapshot to get $IBCX started. After the launch, the market share weight %s will immediately begin changing as the basket tokens perform differently on the market.

Maintenance: Rebalancing & Governance

$IBCX aims to represent the fundamental values of the Cosmos ecosystem. Therefore, it’s imperative to keep its portfolio updated and as a “best representation” of Cosmos. The initial composition proposed above should and will change accordingly, and we’ll call this process portfolio rebalancing. ION DAO will be responsible for this process after $IBCX launches.

We explained above that the token quantities in a unit of $IBCX are held constant to ensure the fungibility of the index token. Therefore, ION DAO proposals on $IBCX rebalancing will change the quantities, whether adding, reducing, or completely removing. After the passing of each rebalancing proposal, the rebalancing logic will perform swaps of the portfolio tokens on Osmosis to match the newly decided weight %s. To avoid a significant impact on the token prices deriving from large trades, the dev contributor team will propose viable solutions, such as maintaining specific intervals between the swaps.

$ION holders essentially decide the future of $IBCX by directly participating in the portfolio rebalancing process via ION DAO. $ION holders will be able to vote on ongoing proposals and propose new rebalancing ideas of their own. We wish and expect to see a vibrant community of Cosmonauts collaborating and freely debating on ION DAO to decide the assets that best represent Cosmos and the future of interchain.

Fees: Management & $IBCX Burning

The dev contributor team will continue to be responsible for leading the operation of $IBCX. We propose to charge an annual Management Fee of 0.55% on the total quantities of the collateral tokens to cover the operating costs. A $IBCX smart contract will incur this fee on every block and allocate 30% for the operation costs and the rest (70%) to the ION Treasury.

In addition, we propose imposing another fee of 0.15% on the burning of $IBCX. This fee is to be used as a safeguard to protect the $IBCX price from sudden sell pressure in the market. We emphasize that there will be no extra fees for selling $IBCX on any of the $IBCX pools available on Osmosis. Like Management Fee, 30% of the incurred Burn Fee will be allocated for the operation costs and 70% to the ION Treasury.

Conclusion

While coming up with the methodology explained in this article, we considered neutrality and safety as core values of $IBCX. As always, we welcome all feedback from the community to improve our ideas.