Starting with a broad universe of yield opportunities, Scalara applies a set of screens to arrive at the final set of eligible yield opportunities:
To ensure the investability if the index, 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. The blockchain’s TVL has 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.
Yield farming platform screening
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.
Stablecoin exposure screening
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.
Yield source screening
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).
Risk score screening
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.