PONY Index follows a rules-based methodology developed and maintained by Scalara.
The core of the index methodology is the rigorous process of selecting eligible yield opportunities. This selection process filters down the vast universe of yield opportunities by considering the following aspects:
Finally, the Weighting scheme determines the index allocation. The PONY Index is rebalanced monthly to ensure that the index provides an attractive yield unless the new composition does not significantly improve the index yield.
PONY Index selection.
PONY Index is implemented with asset management protocol Kuiper that provides the token vault contract with mint, redeem and rebalance functionality. Kuiper is native on Ethereum and all vaults have to be brought there. Therefore, only yield opportunities on chains that are connected to Ethereum are feasible. There has to be a cross-chain router that allows for efficient bridging and listing of new vaults. This ensures that the index token can be arbitraged to maintain a small spread between net asset value and exchange price.
The chain needs to hold a substantial Total Value Locked (TVL) in its DeFi protocols. A high TVL shows economic activity that is an indicator of sustainable yields. At index inception chain TVL had to be greater than $1bn.
Lastly, the bridge to be used for a specific chain has to be audited and considered safe by security professionals.
The following chains and respective bridges have passed the above criteria at the last rebalancing:
Yield farming vaults play an important role in the PONY Index design: They are the actual index constituents. Hence, the vault tokens have to be transferable ERC-20 tokens.
Vaults have to be auto-compounding. They have to automatically claim, sell, and reinvest any fees or rewards they are earning. This is necessary since $PONY is a passive vehicle by design.
Only existing "off the shelf" vaults are considered that have been live long enough to ensure that the vault design has been thoroughly tested.
The yield farmer's contracts need to have been audited.
For the purpose of comparing yields, only net yields after fees are considered. Prohibitively high deposit or withdrawal fees can be a reason for exclusion as they prevent efficient minting and redeeming.
Currently, the following yield farming platforms' vaults are considered:
Yield Farming Platform
Avalanche, Fantom, Polygon
PONY Index applies very strict screening when it comes to its stablecoin selection. Only vaults that hold and farm a small set of high quality stablecoins can be selected.
Of course, the stablecoin has to be pegged to the US Dollar.
The stablecoin has to be either fully collateralized with fiat USD or be significantly overcollateralized with crypto assets. This implies that so called "algorithmic" stablecoins are not eligible.
The market cap of the stablecoin has to be greater than $100 million and the price must have shown price stability over the past 6 months.
The issuer of the stablecoin must have been audited.
Currently, the following stablecoins are eligible:
There are plenty of strategies that vaults employ to generate returns or yields.
The vault's strategy cannot put the index notional at risk. An example of such a strategy would be collecting options premia.
Only strategies without impermanent loss are eligible. This limits the set of strategies to lending and stable-stable liquidity pools.
The vault has to be running without incident for at least 30 days.
The underlying yield source (not the vault size) needs to have at least $10 million TVL (in the case of constant product pools; more efficient AMM designs may qualify with lower TVL).
PONY Index utilizes the Beefy “Safety Score”. This score aggregates several important safety aspects of yield farming: Complexity and maturity of the strategy, impermanent loss, market capitalization of assets and their volatility, audits by trusted reviewers and contract verification. Only vaults scoring above 8 (out of 10) can be selected.
If the Safety Score is not available Scalara will mimic Beefy’s methodology.
All vaults that pass the previous eligibility screens build up the selection list.
Several metrics have to be considered when determining the final weights of the eligible yield opportunities: Yield, risk, diversification, capacity, and turnover. PONY Index solves this problem by solving a simple optimization problem:
- maximizes the combination of a yield/capacity score (weighted geometric average) and diversification score
- while ensuring index risk score and index capacity are sufficient and turnover is manageable
Afterward, very small weights are removed to limit the number of transactions and allow for efficient minting.