The Heimdall Social Index
A self-managed portfolio that tracks the most popular currencies in the cryptosphere.
Disclaimer: This index will not be released. The information in this article regarding the Heimdall Social Index and the $HEIM token should be treated as a proof of concept.
Introduction
Nowadays, those who want to invest in cryptocurrencies are faced with an exorbitant variety of tokens, all with different projects and use cases. It is not easy to analyze each project and decide if it is worth investing in or not. It is also the case that the investor does not wish to fully understand the cryptosphere but simply to invest in the most popular projects.
A financial product that aggregates multiple tokens into a single one in the form of an ETF will attract investors willing to participate in the crypto space but not wanting to immersive themselves completely. At the same time, investors who are used to the cryptosphere and are enthusiastic will be interested if the product offers flexibility in the form of decentralization and governance. It is possible to join ease of use and depth into a single financial product. That is the objective of the Kassandra Protocol with the introduction of its first financial product the Heimdall Social Index.
Heimdall and Kassandra
Heimdall is a company devoted to providing real-time data about the cryptocurrency market. It provides the Twitter sentiment and social score of more than three thousand cryptocurrencies. Empowered by tools of machine learning and other powerful algorithms, Heimdall is an essential tool for exploring the crypto space.
Kassandra is a decentralized autonomous organization that governs a set of tokenized data-driven investment funds, bringing a new class of investment products to the DeFi ecosystem. All investment products made available through the Kassandra Protocol are permissionless, non-custodial, and actively managed by a third party.
Together we are able to develop an ETF based on real-time social data and managed by users in a decentralized fashion. Heimdall will provide the social data while Kassandra will enable a decentralized portfolio that works as a liquidity pool of multiple tokens and is rebalanced by arbitrageurs.
The Heimdall Social Index
Goal
The index's primary goal is to offer exposure to the most popular cryptocurrencies in a simple and easy way. The investor needs only to acquire the index token. With this goal in mind, it is paramount to develop a tool that can measure the popularity of particular crypto, this tool is the creation of Heimdall and the bedrock of the Index.
The Thesis
One may ask, why use a social metric, such as popularity when building a portfolio? What is the investment thesis?
While Bitcoin is not the most technologically sophisticated cryptocurrency, nor the most efficient, it is the largest, most popular, and successful cryptocurrency. Therefore it is a prime example of the network effect. As important as the value proposition and the capacity to execute, it’s also the people around the project. As an example, consider Uber: with enough capital to hire a dev team, any company could build an app to solve the problem of public transportation. However, the chances would be very small that this project would come close to the size of Uber. When you look at companies like Uber, their most important asset is not material or technological, but the network of people who work with or use Uber, and that makes it a successful company.
In the same manner, the community around crypto projects plays a very important role. Starting from the thesis that many successful crypto projects increase in value when they get the necessary social acceptance (traction) to popularize and grow, we propose the creation of an index that makes use of the social engagement of each cryptocurrency to define an investment plan.
The Index
The Heimdall Social Index (HEIM) tracks the performance of a portfolio composed by selecting the most socially active cryptocurrencies in the last 30 days. This portfolio is balanced according to the values of the social score made available by Heimdall and the technology provided by the Kassandra Protocol. The index is accompanied by its own token $HEIM, allowing investors to buy the index by purchasing the token, just like an ETF.
But what do we mean by most socially active? The answer is simple, a cryptocurrency with lots of engagement, that is, a strong Twitter following with active participants, a true community. However, engagement is not an easy thing to measure. The Heimdall team developed a tool to collect and analyze tweets about crypto, and together with ranking algorithms, it made it possible to quantify how much engagement a community actually is, by considering the number of tweets and most importantly who are the authors of the tweets. This metric is called Social Score.
Heimdall Social Score
The Heimdall Social Score is a household metric used to evaluate the relevance of communities. It measures how socially active a cryptocurrency really is, without distorting it with market data. It is the real interaction between members of the community (users), catching the FOMO or the FUD in real-time.
Twitter can be interpreted as a graph where, for instance, we would have users and tweets as vertices. The relationship between users and tweets would be the edges of the graph. For example, an edge can represent a tweet tweeted by a certain user.
When we calculate the centrality, we are discovering which users are the most important, that is, the users that are most mentioned responded to, or retweeted. But not just any other user, as our algorithm does not treat users equally, it gives more weight to users with higher centrality. It weighs more being followed by other very central users than by a large number of unimportant users. Quality wins over quantity.
To wrap up, the social score of a community tells us how socially active a cryptocurrency is, user by user, tweet by tweet. All in real-time.
Analyzing this new metric, the social score, we can begin to imagine a portfolio based on a social metric, instead of market cap. It is common to define the weights of a portfolio by the market capitalization of each coin. Since many cryptos with relatively small-cap have appreciated a lot in recent times, it may be better to use some other metric to define the weights. In the Heimdall Social Index, the weights of each coin are defined by the social score.
With the new metric in hand, we propose a portfolio of cryptocurrencies weighted by their respective social scores. More than that, the weights are not fixed but dynamically adjusted based on the changes in the social score. Applying this system, our portfolio will always increase the weight of tokens that are becoming more popular. If we remember our basic investment thesis, that is, to invest in projects with social traction, this is precisely what the social score enables us to do.
However, it is still necessary to select carefully what cryptocurrencies will be part of the portfolio. This is done via the creation of a whitelist.
The Whitelist
To ensure the safety of the investors of the HEIM index, a whitelist will be used to restrict which tokens (crypto) the protocol will invest in based on governance approval.
The creation of a whitelist, besides protecting the investor, brings a second layer to the investment thesis, which depends on the ability to judge and analyze projects. With a whitelist defined by governance mechanisms, we can avoid investing in projects which are only popular but do not hold any fundamental value.
Using the governance systems of the Kassandra DAO, those who hold the protocol governance token, $KACY, will have the ability to propose changes to the whitelist which underlies the HEIM index.
Backtesting
One important question is, how this portfolio compares to other common strategies? To answer this question, we propose a whitelist of forty cryptocurrencies. The weighting will be done in the following way: each hour we will compute the social score of each member (coin) of the whitelist and make a sum, resulting in a total social score for the hour. From this total score, we calculate the weight for each coin in the portfolio. We can see in the next graph that it performs very well compared to bitcoin or a usual market cap portfolio. It is important to remember that the weights change by the hour in both the Heimdall Index and the Market Cap Index.
That is it, we have a portfolio that can outperform a simple holding bitcoin strategy and can be made into an ETF. In this way, when buying our index, that is, buying the $HEIM token, the investor will be automatically exposed to the most active communities of the cryptosphere.
Conclusion
The thesis of constructing a portfolio composed of cryptocurrencies with growing popularity is solid and can be implemented using an adequate tool to measure social engagement, the social score. The backtest has shown that such a portfolio can compete with other common strategies and even beat them. Now the next objective is to create a decentralized ETF based on social data and its token, $HEIM. All managed by its most active investors through the Kassandra Protocol.
The $HEIM Token
Having just described the Heimdall Social Index, we now move on to another part of the product, the index token. It is by acquiring this token that the investor can benefit from the index performance. Unlike an ETF there is no central organization managing the index nor the selling of the token. All will be managed by the Kassandra DAO, ranging from whitelist composition to the weights defined by external data.
Smart Indexed Pool and Index Token
The portfolio will be a pool of multiple tokens, similar to other liquidity pools so common in DeFi. For purposes of rebalancing, it will work as an Automated Market Maker in the form of a SIP, a Smart Indexed Pool.
A SIP works essentially as an Automated Market Maker (AMM) for multiple assets, but with dynamically adjustable weights that can be changed using external data. The use of this approach removes the need for active rebalancing operations by creating small arbitrage opportunities that external users can profit from and ensure that the desired proportions of each asset in the investment basket are maintained.
By making a monetary (crypto) deposit in a SIP, the user will receive (mint) a token, the index token. It represents a fractional ownership of assets in the pool. The assets managed by the pool will have adjusted participations changed by the data provider, and at any time, the user can return his index token to the protocol to redeem his investment, which will be evaluated by the total value of the assets managed by the pool at the time of the redemption — functioning similar to a traditional market ETF. A 3% fee is implemented when redeeming any SIP token, which will be sent to a wallet under the control of the Kassandra DAO.
In our present case, the Heimdall Social Index is the SIP and $HEIM is the index token. As we already know, the tokens in this portfolio will have their weights defined by the Social Score data provided by Heimdall, becoming a financial product that delivers exposure to the most socially active cryptocurrencies in the market. The interested investor will acquire the token by depositing the desired quantity of crypto in the pool.
As a general rule, every SIP must hold at least 5% of the $KACY token as part of the portfolio. This holding percentage of the $KACY token ensures that the success of the SIPs will result in the growth of the $KACY token value.
Dynamical weights
As said before, the main aspect of the SIP is that the weights are not fixed, but change according to the social score dynamics in order to keep track of the most active tokens.
We have tested the optimal frequency by which the weights are modified. The amount of tokens that will be present in the portfolio is fourteen, for the sake of cost reduction and simplicity, but can be increased or decreased by the users via governance.
The frequency and the amount which the weights for each cryptocurrency inside the SIP are updated directly affect the value of the pool. Since any weight change can offer the opportunity for arbitrage, therefore decreasing the value of the pool. In addition, gas costs must be considered because changing weights means writing new information on the blockchain. The gas costs will be covered using funds from a wallet managed by the DAO and funded by the exit fees collected from the users.
In general terms, the logic behind updating weights is the following:
1.Social score data is retrieved using Heimdall API.
2. Using API3 we make the weight data available in the blockchain.
3. The new data is used to define the new weights in the SIP, incurring gas costs.
For the reasons above, we have determined that the weights will be updated day by day. To avoid jumps and to make the changes more predictable, the updates will occur at each block by calling a custom function named pokeWeights.
The First Whitelist
The creation of a whitelist has the role of curation since it is essential that for every investment a fundamental analysis is carried out a priori. In this way, any Index Pool uses a double system to make investments, at first a market curation is made, defining which cryptocurrencies are worth investing given the analysis of $KACY token holders, and then investments are automatically managed by SIPs data providers.
At first, the Heimdall Social Index will have a whitelist already determined by the Kassandra Foundation. However, as mentioned before, the $KACY token holders will be able to alter the whitelist if they managed to reach a consensus. It is required that any token to be added to the whitelist must be available on the Ethereum blockchain and meet other conditions such as:
- Accurate market data. Price, market cap, and circulating supply
- The project’s protocol must have significant usage.
- The project’s protocol must not be insolvent.
The initial whitelist will be composed of the following cryptocurrencies:
wbtc, eth, matic ,link, uni, sushi, save, chz, yfi, theta, rsr, grt, enj, ocean.
Index Value
The value of the Heimdall Social Index will be calculated in the following way:
Fees
Any swap carried out through the pool is subject to a fee of 0.3% that goes directly to the portfolio holdings.
Time to beat the market
If being exposed to the most active and dynamical crypto projects gets your attention and you are afraid of missing out on good investment opportunities, the strategy explained in this article and its accompanying financial product solve both of these problems. It is simple, by acquiring the token $HEIM you will be investing in the hottest crypto projects.
Stay close, the $HEIM token will be available in the following month at https://kassandra.finance/
Learn more about Kassandra:
- Website: https://kassandra.finance/
- Twitter: https://twitter.com/dao_kassandra
- Github: https://github.com/KassandraFinance
- Medium: https://kassandrafoundation.medium.com/
And get to know Heimdall:
- Website: https://heimdall.land/
- Twitter: https:/heimdall.land/HeimdallLand
