Digital Currency Index and Index Tokens
What are index and index tokens?
Traditional Indexes
In the traditional financial industry, “index” usually refers to equity indexes that include a variety shares. It is data reflecting the comprehensive value of a given market and is often used to represent a group of stocks. Examples would be stocks trading on the same exchange, belonging to the same industry, or having the same market value. Many indexes serve as benchmarks for performance reviews by newspapers and journals.
In the traditional financial industry, indexes are mainly used to evaluate the performance of a given market. Several derivative products including index funds, exchange-traded funds (ETF), stock index futures and stock index options also exist.
Digital Currency Indexes
Similar to the stock market, the digital currency industry also needs indexes to weigh the overall performance of the digital currency market. At the same time, it can enrich the profession of digital currency’s trading products, increasing overall fluidity.
Index token characteristics
Because index tokens do not have actual functionality, but used for investment standards, as it is used to reflect a degree of overall market price, it is recommended as Security Token.
Factors that decide an index
Index values are decided by the weighted average value of multiple tokens.
- Sampling: Choosing representative constituents from a source of many different tokens
- Weighing: Weighing average or not according to a single value or total value
- Calculation: What is the average, value of consideration, and total
Calculation
- Calculation of average = (P1+P2+P3+…+Pn)/n (Dow Jones Stock Average)
- Calculation of weighted average = (P1*Q1+P2*Q2+P3*Q3+…+Pn*Qn)/(Q1+Q2+Q3+…) Q being the weighted number, decided by the relative importance of the token
Currently, most digital currency indexes use this method of calculation. JEX, OKEX, HUOBI, BINANCE use different methods.
Product Categories
Here, we will separate digital currency indexes into centralized indexes and decentralized indexes. Centralized indexes will include exchange indexes, trend indexes, and ETF-type index derivatives; decentralized indexes are index tokens which have ETF function and are freely traded. The difference between centralized and decentralized indexes is in that the two have different staking and generation mechanisms. Because decentralized exchanges’ value-transfer needs tokens as a medium, at the same time making convenience for index tokens to flow between different platforms, thus index tokens came to be.
Centralized Indexes
Description: An index tailored in reference to the traits of the traditional financial industry and the digital currency industry that meets the laws of the digital currency trading market. Often used to directly reflect the market price, and used as a base for related financial derivatives.
Exchange Indexes
- HuoBi Index (https://www.huobi.com/huobi_index/)
- OK06 Index (https://www.okex.com/futureTrade/futureIndex?currencyId=10002&type=1&name=OKX)
Market Trend Index
- Global Blockchain Index (GBI) (http://gbi.inblockchain.com/gbi_method)
A weighted average index calculated using 17 mainstream digital currencies.
- Coinlist 25 Index: 25 mainstream digital tokens, not including BTC, LTC, etc. monetary tokens
- Coinlist 50 Index: 50 mainstream digital tokens, not including BTC, LTC, etc. monetary tokens
TokenInsight General Platform Index
- TokenInsight Index
This component index is a reflection of the overall performance of the blockchain industry. Comprised of 30 token projects that are major, fluid, and are transferable on many exchanges. At the same time, the component projects need to have a rating of CCC or higher on the Token Insight rating system.
- TokenInsight General Platform Index
This component index is a reflection of the overall performance of the multi-use general public chain projects in the blockchain industry. Abbreviated as “TIG index”, it is composed of 10 general public chain projects that are major, fluid, and are transferable on many exchanges. At the same time, the component projects need to have a rating of CCC or higher on the Token Insight rating system.
Comprised of 100 tokens that are the biggest, most fluid on the market. Comprehensively reflect the token market’s overall price trends.
Index Derivatives
- JEX Index (ETF)
Others
Trends are rated 0–100, 0 being extreme fear; 100 being extreme greed.
Created by ChaiNext according to Metcalfe’s law and other theories. The degree of the bubble of the current market is calculated by the number of active trading addresses and the public chain’s reasonable price. Trends are rated 0–100, 0 being a total underestimate; 100 being a total bubble; 50 being a reasonable valuation.
Decentralized Index Tokens
Decentralized index tokens are tokens with index value which are generated through smart contracts. Tokens go through the process of staking generation, trade, and conversion, a total of three steps.
- EthereumX (Top 10 ERC20 token of May 2018)
- StableSet (Stable Coin index, DAI, TUSD)
- DEXSet (Mainstream DEX platform token, ZRX, KNC, AST)
Top 20 most valuable mainstream digital currencies
Business Model of Index and Index Tokens
Market Roles of different Indexes
- Index of mainstream digital currency on an exchange
- Reflect overall market trends
- Expand the influence of platform tokens on the market
- Establish a foundation for multi-dimensional development in the future
2. Market Trends Index
- Reflect overall market trends
- Index provider provides other professional financial services
3. Index Derivatives
- ETF Trading Index
- Futures trading
4. Index Tokens
- Index token trading
- Arbitrage
5. Others
- Reflect market mood
- Provide market moods for traders to reference
Index Token Models
Token Generation
The generation of tokens is separated into two categories, centralized staking and decentralized staking. The centralized staking process is through the index token issuer guaranteeing the stake, and selling the index tokens to outside buyers; the decentralized staking process is completely dependent on users actively initiating it, the total count of index tokens is dependent on the amount of stake guaranteed by the user.
Token Trading
Tokens received from conversion can be freely traded in exchanges. Because of market fluctuations, index token prices will fluctuate near the staked objects’ prices. The price difference will encourage trades to conduct trades involving index tokens.
Token Conversion
When an index token user wants to lock-in profits, they will convert the index tokens to equivalent index tokens according to index weights. The conversion process is actualized through smart contracts.
Index Token Market Size and Demand Analysis
Index token conversion data
From the exchanging of index tokens and addresses holding index tokens, we can presume that as of now, the safer method of decentralized index token model is not popular yet. Users favor traditional index trading. Decentralized index tokens have a lot of potential, but requires more knowledge to be commonly known among digital currency traders.
Technical Implementation of Index Tokens
Description: The implementation of index token is focused on the generation and conversion of index tokens. Decentralized index tokens are mainly implemented by smart contracts. As cross-chain technology becomes more common, it will enrich the types of stakes guaranteed in decentralized index tokens.
Understanding the contract implementation of index tokens through Tokensets:
Staking
A user sends the staking tokens to the contract address, and at the same time, the contract generates index tokens and sends them to the user’s address.
Conversion
A user initiates a transaction with the contract and transfers an ERC-20 (ETH-5–18) token to the burn address. The user will receive the corresponding staking tokens through the contract address.
The Prospects of Index and Index Token
Index Token
Currently, decentralized exchanges have become the main competitive field for many mainstream centralized exchanges. Binance will release a decentralized, public chain exchange at the beginning of next year; they have also acquired Trust, a decentralized wallet. Coinbase has already acquired Toshi, also a decentralized wallet. BitFinex also has plans for a decentralized exchange.
As decentralized exchanges become more popular, users become more demanding in terms of the safety of assets, fluidity, and diversifying transactions. The introduction of index tokens will break the staking-object prices, which is hard to anchor. Because index tokens have the characteristics of tokens, it will also largely increase the fluidity and diverse the variety of index tokens.
As the battle of digital currency exchanges unfolds, there is a high possibility of an exchange acquiring the rights to prepare and calculate index tokens. The right to staking tokens is shared between platforms and users; centralized and decentralized coexisting beside one another.
Index Related Derivatives
Futures, Options
Currently, the digital currency futures market is relatively matured, but there has not been a futures or options product for indexes. The main reason is that there isn’t an index with a stable authority to support a market for futures and options. As the digital currency market and surrounding technologies become more complete, index futures and index options will definitely have a large share in the future digital currency market.
Index Fund
Because stock index funds are a very mature product in the traditional financial market, it becomes a viable path for the future digital currency market. But because the current digital currency regulatory compliance is immature, digital currency index funds are still experiencing a level of resistance.
FAQ
Why are index tokens needed if ETF can meet trading needs?
The value-transfer needs of decentralized exchanges require tokens as a transmission medium, at the same time, it helps index tokens to flow between different exchanges.
Why do indexes have centralized and decentralized characteristics?
The difference comes from the distributor. The centralized index distributor is an independent entity. The preparation, calculation, and distribution of the index are all completed by the distributor. Decentralized indexes have their preparation and calculation completed by the index regulator, the distribution process can be done by any third party entities.
What are the essential differences between index and index tokens/ETF?
Indexes are only used as the overall performance of the market, meaning they don’t have actual value. Index tokens/ETF have value because they are staked and guaranteed by objects with actual value, therefore, they have actual value by implication.
In the current market, what are some index derivatives that can be traded?
The current market, as of now, only have market trends type indexes that can be traded. There are not index related futures or other derivatives.
Reference:
[EthereumX_Etherscan] https://etherscan.io/token/0xfa10e13fe555760a5297dc14eb6562a1a53e4e37
[StableSet_Etherscan] https://etherscan.io/token/0x02ec0c9e6d3c08b8fb12fec51ccba048afbc36a6
[DEXSet]
https://etherscan.io/token/0xf860f90e1f55e3528682e18850612cbb45bbf1bc
[Wiki Stock Price Index]
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