Backtest

This is an example of backtest of RPI and all products will be examined through same process to decide relevant parameters and validate the product details.

Objectives

With selected component tokens, the backtest using historical data has been performed to assure factors as below:

Optimal Rebalance Period: How frequent the rebalance needs to be executed.
Competitiveness: How is holding the index token would be competitive compared to holding a single component token.
Validate the component token performance: Assure no component tokens have behaved in a way that introduces risks to the product.

Methods

Used the historical dataset of components tokens during February 2023 to June 2024 from CoinMarketCap.
Applied a same rebalance logic with 30% Max. cap and 2% low threshold with assuming no slippage / swap fees included during the rebalancing.
1. The 30% max cap is applied in the allocation calculations by averaging raw value and the max cap.
2. The allocation lower than low threshold will be set to 0%.
3. Any excess weight is redistributed proportionally among the other tokens in the index.
Compared the price changes of the certain period to calculate the price change and profit and losses.

Rebalancing Frequency: Monthly vs. Quarterly

Even though prices of component tokens are volatile affecting the market capitalization to be volatile as well, the RPI product follows a square root of market capitalizaion methodology, which makes the allocation weight less volatile. Figure 1 shows that the highest fluctuation of the largest component token, MKR, was within a 2.3% range during monthly rebalances, except for the time when the ONDO token was launched. Considering that performance of the index token does not have a significant difference between monthly or quarterly rebalancing, quarterly rebalancing was determined to be a reasonable period to reduce non-negligible operational costs that incurs during the rebalancing.

Figure 1. Changes in allocation weight of component tokens by rebalancing with different period: monthly (top) and quarterly (bottom)

Competitiveness Compared to Holding a Single Token

Figure 2 below shows the price changes of the tokens on a logarithmic scale. As demonstrated, diversifying a portfolio can hedge risks when some tokens perform weakly while others perform strongly. For instance, from March 2023 to April 2024, the value of the RPI token would have been increasing monthly by 21.89% to 334.86%, even while the market was relatively flat. This reveals that the index token can provide more stable performance and enable secure diversification of portfolio to hedge.

Figure 2. Comparison of token price changes between index token and its component tokens.

Index token may incur a potential opportunity cost compared to holding a single outperforming token, such as OM, which performed exceptionally well from November 2023 to April 2024. However, it could also work the other way around in a bear market. For example, the index token was down only 5% when MKR, GFI, and PRO were down 15% to 30% during April to June 2024. This demonstrates the protective benefits of diversification in reducing losses during market downturns.

Figure 2 also suggests that the no components tokens have introduced risks or volatility to the index product in terms of their price changes.

Profit and Loss Comparison

Figure 3 compares the profit and losses by holding the RPI token (red) versus component token (blue) since February 2023. This comparison illustrates that while diversification provides risk mitigation, it might miss out on substantial gains from a single, high-performing asset.

Figure 3. Profit and Loss comparison between index token and component tokens: MKR (top) and OM (bottom)