Blend Methodology

PoS assets considered for inclusion into the basket are filtered by minimum thresholds of a $500mn market cap and $1mn in daily volume. Assets are then multi-factor ranked through the following two inputs: staking ratio (number of tokens staked on the network relative to the supply) and reward ratio (value of rewards generated relative to the price of the token). We believe the staking ratio maximizes a ‘quality’ factor while the reward ratio maximizes a ‘growth’ factor. These factors are equally weighted. The basket is then comprised of the top 3 tokens, is market cap weighted, and rebalanced monthly.

*This basket is expected to expand to 4 tokens when Polkadot is live

Other Forms of Implementation:
Note: We are not interested in data mining for the best possible model, but below are other possible implementations.

Equal weighted – We would not want to implement this model because it requires frequent rebalancing, which incurs transaction costs, slippage, and security risks, all the while underperforming a market cap weighted basket.

Lower market cap threshold – The purpose of this initial offering is a blue chip-like index of PoS assets. Staker intends to work on a small-cap implementation at a later date.

Real reward rate – PoS assets, in our opinion, trade independently of reward and inflation rates because robust valuation frameworks do not exist for this asset class yet. Staker does not believe inflation rates generally impact the value at which a network’s token trades at.

How often do you think we should evaluate the basket, and how often update it? Also, what are your thoughts on having a maximum cap for market weight. I could see Tezos or Eth 2.0 becoming more than 50% at some point.

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Basket rebalancing should occur on a monthly basis. A higher frequency like daily rebalancing may result in additional costs and risks. A lower frequency like quarterly rebalancing slows the basket’s ability to replace constituents or include new and promising assets into the basket.

As new PoS assets launch, the basket would consider these assets into its universe if it meets the thresholds. It’s likely that the basket should wait until after 1-3 months of open market trading to allow for price discovery before inclusion.

On related note, in terms of ranking the assets, in the event that two assets consistently change ranks. For example, in the case of Tezos switching with another asset between 3rd and 4th, then both can also be evaluated over X period until a trend is in place and a switch can be made if required.

A maximum cap is definitely something to consider. Given the current limited universe for ‘blue-chip’ PoS assets, a 50% cap would likely work well. As other assets launch in 2020 and as ETH 2.0 comes online, a 20-25% cap would likely serve the basket better.

My understanding is that assets are purchased from respective POS platforms for the BLND basket. For instance XTZ would be purchased and delegated to how many different bakers/validators? If a STKR token holder runs a bakery can that baker be considered to be a validator?

Welcome to the forum!

An exact number of validators has not yet been determined. STKR token holders can definitely be considered as a validator! We think we’d like to hear from all STKR token holders who would like to be considered and discuss their fees, security, experience, and so on.

Here are my thoughts off the top of my head… Creating a set of metrics to assess suitability

  • baker performance over a set number of cycles,
  • Minimum security requirements,
  • adaptability- ability to upgrade node in a timely manner to meet protocol changes,
  • Baker’s capacity
  • Baker’s willingness to dedicate services to validate StakerDAO assets exclusively
  • creating criteria for a baker to lose validator status with StakerDAO
  • Creating a waiting list of bakers

@christianarita you mentioned this previously around a minimum time of open market trading to qualify for inclusion, but my sense is it should be longer than 1-3 months. Perhaps 6-9 months. This should give enough time for a wider token distribution which makes the asset less prone to market manipulation by large holders.

One analysis you could do is look at the top X PoS coins by market cap and calculate the average “time to bottom” from the introduction of that asset to the market.

Thanks for posting this! Definitely think a waiting list and criteria to lose validator status is interesting. We’ve got some questions we’ll post that anyone seeking to validate Blend’s underlying assets should be able to answer.

Welcome to the community!

Definitely think we can do more analysis around this. A rough analysis below:

There is an assumption around when exactly it is considered as available for public trading as not all exchanges may have listed at the same time. This also does not account for external events that may have driven the price up/down.

I consider a local bottom when price seems to have bottomed out for X period after becoming available for trading, but eventually fell further to an all-time low. Decred and Qtum are NA because they were largely up after becoming available to trade and Algorand is NA because it continued downward without any kind of local bottom.

Other types of analysis:
Token distribution within wallets and seeing if there is an equilibrium that developed in previous PoS tokens.
Lock-up periods within new assets being considered. When will the team/investors be able to sell?
If we look to public markets, a stock cannot be included into the S&P 500 until after it has traded for 1yr.

Thanks for doing that analysis! Looks like the average was a blend of our estimates, pun intended :slight_smile:

Token distribution would definitely add more rigor (e.g. # of addresses with balances greater than X).

Lock-up periods are tricky since it’s always not public information, but the effect is probably reflected in the other criteria.