Curated and tailored Indexes reflecting specific market metrics and trends
An index is a statistical measure that represents the performance of a group of assets. It serves as a benchmark to gauge the overall performance of a particular market or sector.
Indexes provide a snapshot of the market by tracking the price movements of the underlying assets within the index.
Carbon Custom Indexes:
Maximize returns while reducing volatility and individual token risks
Eliminate the limitations associated with investing in individual tokens
Capitalize on the latest trends in a diversified and safe manner
Enable the creation of markets around them; Carbon has its own decentralized oracle service, enabling the creation of various types of indexes that track cryptocurrency assets
On Carbon, the index methodology consist of four key components:
Construction
This component determines how the assets are selected for inclusion in the index. It involves defining criteria such as established, have a unique selling point, and strong growth potential.
Weightage
The weighting component determines the importance or significance assigned to each asset within the index. Weighting is based on factors such as:
Market Capitalization: The overall value and market worth of the protocol. This holds significant importance as it serves as an indicator of the token's success and credibility. A higher market capitalization is considered favorable.
30-Day Volume: The total trading volume observed over the past 30 days. This metric provides insights into the level of trading activity and demand for the token. A higher trading volume is generally preferable. However, it is important to note that this metric is given less weight due to the potential for manipulation.
Volatility: The annualized volatility of a token, calculated using the square root of 365 (as the crypto market operates 24/7/365) multiplied by the standard deviation of the token's daily log returns. This measure indicates the expected magnitude of price fluctuations in either direction throughout a year. Higher volatility offers more trading opportunities and is beneficial for traders. The LSD governance tokens, as observed, belong to a highly volatile sector, which presents favorable conditions for trading.
Circulating Supply: The circulating supply is determined by dividing the total circulating supply by the total supply of tokens. This metric provides insights into the remaining token emissions. A higher value is preferable as it indicates less emission, resulting in lower inflation and reduced selling pressure.
Calculation
This component outlines how the index values and returns are calculated. It involves determining the formula or methodology used to aggregate the performance of the individual assets or variables in the index.
Carbon employs a price-normalized and weighted index methodology.
Here's a breakdown of how it operates:
At each block:
The price of each asset in the index is determined based on the price feed.
The normalization factor is applied to adjust the price of each asset, accounting for their respective weights in the index.
The normalized prices of all constituents are added together to calculate the updated normalized index value.
Carbon operates with a block time of approximately 2 seconds.
Review
The review component addresses how the index is maintained on an ongoing basis. It includes processes such as periodic rebalancing, additions or removals of assets based on predefined criteria, and adjustments to the weighting or methodology if necessary.
The Carbon team will conduct a review of the LSI every 2 months to make necessary adjustments such as rebalancing, modifying variable weights, and introducing or removing constituents.
While there may be changes to the constituents, the index price will remain unchanged.
By incorporating these four components into our index methodologies, Carbon ensures a systematic and transparent approach to index construction, resulting in accurate representation and tracking of the selected assets for each index.
