All You Need to Know about Alongside (AMKT)

Introduction

In the traditional financial system, investors entrust their funds to fund managers for management. Investors lose control over this part of the funds, but the fund system will have third-party custodian banks, auditing, and supervision, etc., to control the funds to prevent fund managers from reckless actions and restrict fraudulent behaviors by fund managers. Therefore, in the traditional asset management market, there needs to be a third party involved to solve the trust problem between fund managers and investors. This, to a certain extent, guarantees the security of funds for both parties, but at the same time, it also brings about increased costs and prolonged business processing time.

With the continuous expansion of the DeFi market, many investment institutions are entering the field. For investors who are optimistic about the cryptocurrency sector but also want to invest in index-like funds similar to traditional financial market ETFs, holding assets directly can come with high transaction fees and the risk of holding strategy errors. Therefore, the traditional finance index investment method is introduced on the chain, and the trust issue between investors and fund managers is resolved through smart contracts. Index investment is an investment strategy. By purchasing investment products that track specific market indices (such as index funds or exchange-traded funds ETFs), investors can partake in the overall market growth and benefit from long-term economic growth without the need for frequent trading.

Index fund investment is a passive investment. The fund manager must only imitate the index to buy the corresponding constituent stocks. There is no need for human intervention. It only needs to replicate the index as much as possible. However, there are two core problems for on-chain crypto index investment. First, the selection of targets must be able to represent the changes in the market value of the entire cryptocurrency market over a long period. Second, in the bull market, the types of cryptocurrency assets and the total market value will experience explosive growth. And the tokens that cause this explosive growth may be altcoins that emerge in the later period. Therefore, encrypted indexes face the need to frequently rebalance the constituents of the indexes, and require fund managers to track the fundamentals of the selected projects for a long time. In this case, if the traditional index fund operation model is directly copied, it may not be possible to obtain the corresponding income. This article will focus on the product of the decentralized index protocol Alongside and analyze its operation logic and development status in detail.

What is Alongside?

Alongside is a cryptocurrency index investment platform. Its core product enables users to invest in the crypto market through index tokens. The US-based team was established in August 2021, and its first product, the Alongside Crypto Market Index (AMKT) index token, was officially launched in June 2023.

The project received seed round financing led by a16z in February 2023, with a financing amount of 11 million US dollars. The participating institutions included Coinbase Ventures, Franklin Templeton Investments, Village Global, and Not Boring Capital, as well as several angel investors. The background of the financing party is quite strong.

Index Token AMKT

Currently, Alongside’s first product is the AMKT index token, which represents a basket of cryptocurrencies and tracks the market capitalization of the cryptocurrency market. Each AMKT token is backed by a proportional tranche of crypto assets in the smart contract. The current composition includes 63.29% BTC, 20.32% ETH, 4.20% SOL, 4.04% BNB, and 1.56% XRP, among others. (The asset ratio structure is detailed below.) Considering the index composition, the proportion of BTC and ETH is over 80%, indicating that this is a relatively stable index.

AMKT tokens are redeemable, mintable, and programmable. Using AMKT will incur a management fee, and each year’s increase in AMKT will reduce the management fee by 0.95 basis points.

Image source: https://amkt.com/

Index Reconstitution

To ensure the accuracy of the AMKT index token in tracking the cryptocurrency market, the team will reconstitute the constituents of the index. The reconstitution proposal for various assets is published and voted on by AMKT holders. If the proposal is approved, then multisignature holders will confirm the signature. The reconstitution will take effect quarterly, effective on the first day of January, April, July, and October each year. If the DAO passes an emergency governance proposal, reconstitution can occur under special market conditions. It should be noted that a low frequency of reconstitution may cause the AMKT index price to deviate from the cryptocurrency market, and a high frequency of reconstitution may lead to more expenditure on fees.

When selecting the constituent assets of AMKT, the team follows these principles: (1) It must be custody by a licensed and reputable security institution to ensure the asset has a certain market maturity and sufficient liquidity; (2) The price should not be pegged to other assets (such as statutory collateral, reserves, algorithms, etc.); (3) It must be an asset supported by exchanges; (4) It must be an asset with no known vulnerabilities. It can be seen that the team has certain checks on the selection of underlying assets to reduce the risk of index investment.

Since AMKT is composed of various cryptocurrencies in a certain proportion, the price of AMKT is also calculated by reasonably calculating the market prices of these assets. The protocol stipulates that:

• Select representative assets with the largest fully diluted market cap to be included in the AMKT index. The fully diluted market cap must account for 0.01% of the total fully diluted market cap, and the number of representative assets is limited to 15.;
• Use the five-day moving average circulating supply of the asset’s fully diluted market cap multiplied by the five-day moving average price. The moving average is used to avoid price manipulation.

We all know that activities like hard forks, burning, or airdrops of crypto assets can affect the asset’s market price and thus affect the price of the AMKT index token. The team has set corresponding rules: If a hard fork occurs, the AMKT index token will consider the tokens before and after the fork as aggregated assets from a pricing perspective and estimate their fair value. If burning occurs, AMKT will not track the token or count this reduced amount in the calculation. If an airdrop occurs, it will also not calculate this part of the token, and tokens rewarded for staking will not be counted in the index.

Index Price Tracking

Minting (Issuance) and Burning (redemption) functionality is an important factor in ensuring that the market price of AMKT does not deviate significantly from its net asset value.

Mint AMKT Tokens

Users must send underlying assets to the minting contract to initiate the minting process. After verifying the amount of underlying assets, the index system creates a transaction to mint the corresponding amount of AMKT. Users can then receive AMKT tokens at their designated address.

Currently, the official website supports 16 types of underlying assets.

Image source: https://amkt.com/mint-and-redeem

There are two ways to invest in AMKT tokens, one is to mint using underlying assets, and the other is to directly purchase (supported by Arbitrum, Ethereum, and Polygon).

Redeem AMKT Tokens

Users can initiate the redemption process by burning a certain amount of AMKT tokens. After receiving the burn transaction of the AMKT tokens, the smart contract will verify the burn and release the in-kind assets. At the same time, the smart contract will release the corresponding number of in-kind assets to the user-specified address.

Image source: https://amkt.com/mint-and-redeem

Current Development

As of March 19, 2024, the price of AMKT is 214.25 USD, with a market cap of 42.68384 million USD, and the YTD performance is 52.78%.

Image source: https://amkt.com/

Conclusion

The index token AMKT, launched by Alongside, represents the overall cryptocurrency market trends. With more than 80% of the composition being BTC and ETH, this is a relatively stable index product. Due to the high fluctuations in the crypto market, the team will periodically rebalance its constituent assets, implemented through community voting and multisignature signing. However, too frequent rebalancing implies the difficulty of tracking market trends, and the investment return rate might not match that of a single asset investment.

The core of traditional index funds is passive investment, where the fund manager only buys in and does not analyze. However, the cryptocurrency market has a certain cyclicity. To build an index product, you must regularly rebalance it. Therefore, in practice, it does not completely replicate traditional index funds. The cryptocurrency index track is still in a very early stage of development. Alongside is a leading product supported by renowned venture capital firm a16z. However, whether it can accurately track the cryptocurrency market trends remains to be seen.