MVI Methodology Update
Today we are sharing an update to the methodology of the Metaverse Index (MVI), specifically covering a change to the rebalancing frequency.
Rebalancing frequency is reducing from monthly to quarterly, with flexibility to rebalance sooner if beneficial. Methodology wording will be updated to reflect this.
Changes are driven by data showing a monthly rebalance schedule is not optimal for performance, frequent rebalancing is also harmful to product profitability.
MVI will move in-line with Index Coop schedule to begin with (July, October, January, April) meaning the new methodology will go into effect from July 2022.
Currently, the MVI rebalances monthly. This cadence was chosen prior to launch based on an amount of backtesting, research into TradFi products and very little idea of just how gas-intensive the process of rebalancing on-chain would be!
Informed by data compiled by Julien at Cercle DAO however, we see that rebalancing quarterly since inception would’ve outperformed the current methodology of monthly rebalancing. Furthermore, bi-monthly rebalancing would’ve yielded even better performance than the quarterly rebalancing.
There is also a commercial aspect at play, which affects our partnership with the Index Coop. In simple terms, any index product needs to be profitable after accounting for maintenance costs in order for it to be viable. As rebalancing is a fixed cost, reducing the number of rebalances increases the profitability of the product. The last 12 months of data supports this point, and we’ve seen that monthly rebalances drastically eat into the economic viability of the MVI. If you would like to dive deeper into the numbers, the Coop has put together a dashboard detailing the profitability of their index products. You’ll see MVI only became consistently profitable after we started focusing on rebalance efficiency toward the end of 2021.
Taking this data onboard, we will be changing to a somewhat flexible rebalancing frequency that occurs at least quarterly, with the ability to rebalance sooner at our discretion. This will begin in-line with a schedule requested by the Index Coop of July, October, January, April, hence the first rebalance with the new methodology will be July 2022.
Managing a product on the Ethereum mainnet is a constant and delicate balance between the cost of rebalancing and adding new tokens so that the product can continue to effectively capture its theme. Rebalancing quarterly allows for 4 inclusion opportunities per year, which could prove inadequate for at least the next 12 months, given the growth in the space. However, while we might want to include more tokens, sometimes market conditions and the underlying liquidity make it rather challenging. A flexible rebalancing frequency allows us to strike the right balance between a product that can move with and adequately represent the space, while still responding to market conditions and taking costs into account.
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