Methodology of MatrixETF Index
Matrix Index Introduction
Matrix Index is an encrypted index fund purposed to track the qualified tokens of crypto market and blockchain. The Index fund will be weighted by each token’s market value with a basket of assets. MatrixETF recognizes, sell and redeem share by the new share minted by a basket of tokens.
The platform presents on of the easiest ways to participate in the crypto market and decentralized finance through Matrix Index, users do not need to purchase the token from exchanges, they can gain potential response rate from the crypto market and realize transform of one asset to another asset, via only the simplified placement of asset.
In order to weaken or eliminate unqualified tokens, increase the proportion of qualified tokens or ensure a balance for new tokens, further to reflect the whole trend and development potential of the crypto market, Matrix Index will be evaluated and adjusted once in a month.
Standard of MatrixETF Index
MatrixETF make use of Fundamental and Market Capitalization weighting methods, which is weighted by %30 of fundamental and %70 circulation market value to account the allocation and weighted proportion of each basic sheet.
Fundamental Weighting
In most cases when fundamentals is thought about, we always exclude the fund project according to the 5 standards of the token economic model, project development, the security of protocol, the trading risk of the token, and community infrastructure.
Model of Token Economics
· The allocation model of every token has to be detailed
· The release and supply of the initial circulation should be reasonable
· Tokens needs to be with practical utilities and internal values
· There is no mandatory manipulation hence the amount and location of token holders should be appropriate
Project Development
· The project must not have the characteristics of a Ponzi scheme or gambling purpose, must be used on the useful protocol or production
· The project must be implemented by a clear roadmap
· Github code must be included in the project and has to be submitted regularly
· The project must have a completed product design or products (test version or official version)
· The protocol or product must ne issued at least 90 days
· Project ecology and application development
· The status of protocol and project cannot be bankrupted
· Market prospect of the project track
· Current market status and future potential of the project
Protocol Security
· If the project is audited by the experts or well-known audit institutes to ensure the security of smart contracts and user’s assets
· Days of smart contract running and amount of trades on-chain, in order to reflect the level of smart contract
· If the project is with the completed documents and risk mechanism plan. Once there is an accident, the team must alarm the users immediately and provide users with reliable solutions to avoid asset loss
· Tokens must have enough liquidities in different exchanges
Transaction Risk
· Very small market value of token, makes it easy for violent fluctuation of token price and risk manipulation.
· Fluctuation of token price is related with fluctuation of BTC/ETH
· If the token can be traded smoothly, if the token will be listed on main exchanges, if there are derivatives such as futures, options
· Normality of the liquidity, average daily trading volume and turnover ratio of token
· Amount and locations of token holders
Project Community
· The must have canonical community governance process
· The project should have international communities such as; Twitter/telegram/facebook/Medium/Discord
· The user amount, participating proportion and average daily data of community
· The project should be with weekly news to release project process and interactive with community users regularly
Matrix DeFi Index(MDI) is a capital weighted index fund by one of the best DeFi protocols in the crypto market (components as UNI, LINK, AAVE, GRT, MKR, COMP, DYDX, SUSHI, YFI, CRV) to track the popular DeFi assets presentations on Ethereum in the crypto market.
According to the 5 weighting factors of the fundamental weighted method, Matrix DeFi Index fund computes the fundamental weights of different kinds of component tokens as below:
Market Capitalization Weighting
Market Capitalization refers to the project circulation market capitalization, according to the authoritative data CoinGecko and Coinmarketcap, to compute circulation market capitalization by obtaining Token prices and circulation data.
Circulation Market Capitalization= Token Price* Circulation Volume
There are 3 market wide accepted methods to weight the project market capitalization:
· Market Capitalization Weighting
· Market Value Square Root Weighting
· Equal Weighting
Market Capitalization Weighting refers to the weighting of tracking each asset of crypto index, the distribution, the distribution to each asset will be proportional with market capitalization weight, this implies that the asset with larger market capitalization will occupy more investment share than the smaller one.
If only a simple market value weighting rule is adhered to, it is extremely unfavorable for new projects and qualified potential projects, reason be that there may be capital to enhance Token market capitalization increasing sharply in a short term then dropping sharply afterwards, which truly cannot reflect the real status of the project. Therefore, when weaving some encrypted ETF indexes, another market capitalization weighting method should be put into consideration: Market Capitalization Square Root Weighting.
To restrain each asset impact on the portfolio, Market Capitalization Square Root Weighting will compute the project weight in the portfolio according to each project square root data.
Equal Weighting is said to be the index of average distribution proportion of all assets. Given that there are 4 assets in the portfolio, each asset can gain 25% of the portfolio value.
Below is an example of the DeFi fund MatrixETF to compute the market capitalization.
The image below shows how Matrix DeFi Index(MDI) computes different component token weight according to Market Capitalization Weighting:
Weight Calculation
MatrixETF performs further weighting calculations on the basis of fundamental weighting and market value weighting, weighting 70% of the circulating market value and 30% of the fundamentals to obtain the final weight.
When considering the weight, we set the minimum and maximum asset allocation.
· Minimum asset allocation: A minimum limit is set on the percentage of ETF funds that can be allocated to a single asset. This prevents the use of market capitalization weighting methos resulting in a large number of low-weight assets. (Min ≥ 2%)
· Maximum asset allocation: A maximum limit is set on the percentage that can be allocated to a single asset in the ETF fund portfolio. This prevents the use of market capitalization weighting method to cause a single asset to account for too high a situation. (Max ≤80%)
Taking Matrix DeFi Index (MDI) funds as an example, based on fundamental weighting and market value weighting, the final weighting ratio of each component token is as shown in the table below:
Looking closely, you will discover that UNI has the highest weighting ratio of 27.32%, and CRV has the lowest weighting of 4.77%, which exceeds the threshold of minimum asset allocation (Min ≥2%).
Rebalance of MatrixETF Index
After configuration of the encryption index fund according to the initial weight, changes will take its effect on the proportion of its component token due to factors such as;
· The project’s own development
· Market cap
· Encrypted market trend
· Funding level and community
· Actual status component token weight inconsistent with the initial weight
Once all of the above happen, the deviation between the two is large, this is why we need to rebalance the index.
Rebalancing occurs in 2 phases:
1. Confirmation
Normally this phase takes place on the fourth week of every month. This phase is all about confirming the details of recombination including:
· If adjustment is made to the circulation supply
· If Token weighted proportions is adjusted
· If new tokens are added or deleted
· Add the new token information
2. Rebalance
Adjustment will be made to the index and fund according to the announcement after confirmation, among them the relevant token (delete/add/weighted proportions) will be completed on the first week of the following month.
