HomeCoinsPieDAO DEFI Small Cap (DEFI+S)Inside the Bakery: How We Build Pies | by Gabriele | PieDAO...

Inside the Bakery: How We Build Pies | by Gabriele | PieDAO | Dec, 2020

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Gabriele

Our Pie Baking Methodology

PieDAO employs an open and responsive process for the modeling of its different Pies through discourse. This approach maximises feedback input from the Community, with DAO governance eventually giving the green-light to launch a pie.

The formal process begins with a community member submitting a proposal (PIP) on the Forum. As an example, here you can find the PIP proposals for our DEFI+L & DEFI+S indices.

This can be done by any DAO member, usually summarizing more informal Discord conversations held where some preliminary consensus was formed around the idea.

Once the community has established a rough idea of the relevant assets to include it’s time to construct the weighting allocation. You might have noticed some of our Pies have large allocations to certain assets.
For example the upcoming YPIE has a 40% YFI allocation: this is not an arbitrary decision, but the result of a methodology aimed at maximising the scalability of each pie.

The allocation methodology we follow can be summarized in a tagline as Correlated Risk-Adjusted Market Cap.

As soon as consensus is reached around a shortlist of underlying assets, the Pie modeling follows the steps below:

  1. Computing the 30 Day Average Circulating Market Cap for each underlying asset.
  2. Considering the 30d Market Cap to weight in each asset allocation, applying an ”x” % Cap to their allocation (exceeding allocation would be iteratively redistributed among other assets), getting to an Adjusted Market Weight
  3. Introducing a Sentiment Score to weight in for all underlying assets the shared sentiment according to the 3 following pillars
    Innovation (Solution & Roadmap/Timeline)
    Functionality to the DeFi Ecosystem (Uniqueness & Composability)
    Growth Potential (P/E Ratio, Volume & Outstanding Supply)
    Each of the above gets graded on a 1-to-12 scale, resulting in a Sentiment Score for each underlying asset.
  4. Calculating the Overall Weight as weighted average among the Adjusted Market Weight (80%), and the Sentiment Weight (20%) calculated from the Sentiment Score.
  5. Computing the number of tokens constituting the collateral for each asset as a function of its live price (Coingecko price feed), and its resulting Overall Weight allocation.
Example of resulting allocation for PieDAO’s DEFI+L index
Example of Sentiment Score computation (I/II)
Example of Sentiment Score computation (II/II)

NOTE: the “x” % Cap (point 2) is recursively selected through a stress test run on all underlying assets, highlighting the % of their Circulating MCap potentially locked in the Pie for different liquidity profiles, in order to avoid possible scaling bottlenecks.

Stress-test run on % allocated MCap for growing liquidity volumes

The whole model is eventually validated through an extensive risk analysis run on a defined period (MCTR & correlation-based).

Example of Marginal Contribution to Risk (MCTR) analysis
Example of correlation matrix

Fancy trying your hand as a baker?

Here you can find a spreadsheet template that can be used to simulate a Pie given a handful of inputs. Simply fill in the few cells highlighted on the Input Tab:

  • Token Ticker & its Coingecko API key (full list can be found here)
  • Proposed Max % Allocation Cap (“x” % Cap described above)

Based on your inputs, the spreadsheet will compute:

  • the 30 days MCap for all assets
  • the overall Pie allocation adjusted as per process above
  • the stress-test based on the % MCap of the underlying assets
  • the Pie performance (return) over a 15 days backtesting period
  • a comprehensive risk assessment of the Pie over the same period.

The Sentiment Score would then be considered at a later stage, being subject to a broader inputs-base gathered from the community.

Everybody is welcome to fork this spreadsheet and bake his/her own Pie! (please note that, given the amount of data pulled live, the Coingecko feed could occasionally be not responsive during high-traffic periods).

We can’t wait to discuss your proposals on our Discord. So far the community have produced some incredible Pies giving DeFi users the opportunity to automate their strategy.

Balanced Crypto Pie (33.33% between BTC, ETH, and DeFi) has been a huge success, going from community member proposal to hot out of the oven in just a couple of weeks!

Don’t forget, you can always mint BCP and DeFi++ gas-free using our brand new Oven.

Stay Crusty!

The PieDAO is a decentralized organization dedicated to bringing market accessibility and economic empowerment to anyone with an internet connection through Pie Protocol. Anybody in the public community may support these efforts by completing bounties, making feature requests, or proposing new Pies. DOUGH token holders are the DAO’s decision-makers, governing which proposals are accepted. If you want to know more about PieDAO:

PieDAO on Aragon

PieDAO website

Discord

PieDAO Forum

Official Documentation

Github



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