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An empirical approach and practical framework for a decentralized Ethereum Ecosystem Index (EEI)
Manoel Fernando Alonso Gadi1, Maximilian Schmidt2, Noah Ruemmele2
1Department of Computer Science, University of Alcalá de Henares, Alcalá de Henares, Madrid, Spain.
Peerj. Computer Science
|January 10, 2024
Summary
A new capitalization-weighted (CW) index, the CW30, outperforms equal-weighted (EW) indices and existing benchmarks in the Ethereum ecosystem. It offers a robust benchmark for decentralized finance (DeFi) and crypto index products.
Area of Science:
- Decentralized Finance (DeFi)
- Cryptocurrency Market Analysis
- Financial Index Construction
Background:
- Stock market indices are crucial for benchmarking and risk management.
- Decentralized finance (DeFi) requires tailored token indices.
- Challenges in DeFi index creation include transaction fees and token availability.
Purpose of the Study:
- Introduce a novel index for the Ethereum ecosystem.
- Compare capitalization-weighted (CW) and equal-weighted (EW) index performance.
- Provide a comprehensive guide for token eligibility criteria in index construction.
Main Methods:
- Developed exhaustive criteria for token selection in Ethereum.
- Conducted comparative performance analysis of CW and EW indices.
- Evaluated index performance against established benchmarks like DeFi Pulse Index (DPI) and CRypto IndeX (CRIX).
Main Results:
- Capitalization-weighted (CW) indices consistently outperformed EW indices in return and risk metrics.
- A 30-constituent CW index (CW30) demonstrated superior performance.
- The CW30 index showed significant advantages over DPI and CRIX.
- Arbitrum was identified as the optimal Layer 2 network for implementation.
Conclusions:
- The CW30 index serves as a superior benchmark for the Ethereum ecosystem.
- The study provides a strategic framework for DeFi index implementation and network selection.
- This research pioneers a comprehensive analysis of an index accurately reflecting the Ethereum market, advancing crypto index construction methodologies.
