We are very excited today to be speaking with Thomas Hepner, co-founder of the DATA Economy Index, and Methodologist at the Index Cooperative.
SW: Thanks for joining us Thomas. To start things off, can you explain what a methodologist is and how you came into this type of role?
TH: Sure, thanks for having me Sean. As a methodologist, I maintain the methodology of the Data Economy Index ($DATA) for the Index Cooperative. This involves token additions, deletions and the rebalancing process to maintain the methodology of the index over time. The methodology is akin to say the S&P, but with crypto based products instead of traditional securities. And Index Cooperative is like an asset manager such as Vanguard or BlackRock that licenses the methodologies.
As for how I got into this role, I’ve basically been in tech, data and finance my entire career. I started out with Amazon where I got really interested in data science. I began participating in online data science competitions and eventually quit my job and taught myself how to be a data scientist completely on the internet. This research brought me into crypto through Numeraire ($NMR), a crowdsourced hedge fund that uses a native token to reward data scientists who contribute to the network. I was one of the first data scientists to use Numeraire, and began earning tokens. It pulled me into the space, and ever since I'd been looking for a way to blend my passions for investing with data science, machine learning, and crypto. And I think I’ve found it with the DATA Index.
SW: That's awesome. I love that you were able to teach yourself just by using the internet. It speaks a lot to the kind of world we're in now. If you want it, you can go out and get it. And I think that's very much what crypto is about - simply making it easier for people to do things, just like the web did, and cars did before that.
TH: Yeah, you can really learn from the internet and establish your credibility and reputation. It used to be that you needed to get good grades and good test scores to get into a great university and get a desirable job. Now with open source technology, like GitHub there is the ability to create things in the public domain. You can build your own credibility and reputation and show people what you're capable of, all on the internet.
SW: Now with regards to the DATA Index, can you talk a little bit more about the data economy? What is it and how is it different from other economies and markets out there, particularly in the crypto space?
TH: The Web3 data economy is probably one of the largest and certainly the least well understood by investors. In the simplest of terms, it’s an ecosystem of data based protocols and applications that spans things from oracles (a bridge between a smart contract and the outside world) to computing to storage. It’s the infrastructure that powers Web3 sectors like DeFi and the Metaverse.
For example, a lot of people have probably used or know of Uniswap ($UNI), which is the most valuable DeFi application in the market. But very few people are aware of Chainlink ($LINK) which actually has a higher market cap. Chainlink is a decentralized oracle network that provides price data to the smart contracts that power DeFi applications.
Another area is NFTs which have exploded over the past year. People are excited to make their profile pictures with these funny JPEGs, but where do you think all that data is stored? Is it on Amazon Web Services or Azure? If it is, that's kind of breaking the whole point of these, right? It's supposed to be that you own your NFT. The data economy is what allows for true ownership of that file in a shared open state, tracked on the blockchain. Most NFTs are stored on Filecoin ($FIL). As recently as a few months ago there were over seven million NFTs stored on Filecoin and as such it’s one of the tokens in the Data Economy Index.
SW: It's interesting to learn about this data layer that's driving all of the things that you're hearing about today in the news like NFTs and the Metaverse. People naturally tend to focus on the end product, but to know there is this whole other set of technologies behind the scenes making it all happen is fascinating.
TH: As a data scientist, you learn that data is valuable when it's aggregated. The most valuable tech companies in the world are all built on having a very large data set that they monopolize. A quintessential example of this paradigm is Google. They built the best search engine to attract the most users so they can collect and index massive amounts of search data. That creates a natural monopoly where the more people use Google, the more data Google has to make their algorithm better which leads to even more usage. It’s extremely difficult for competitors to displace Google's monopoly.
Tesla is doing the same thing with cars. The vehicles they sell are actually just a network of data collecting devices such that they can build a fleet of self-driving cars. They're always going to have the advantage on data collection, so they're always going to have the best algorithm, which is going to make their cars safer and more efficient.
What's so interesting about Web3 is that the value of data monetization is captured by users who own these platforms rather than by companies.
SW: That's really cool. So we've talked a lot about the data economy and clearly there’s a lot to learn. But this may not be something someone can just jump into immediately. A good starting point may be a product like the DATA Index where you’re doing some of the work for them in terms of the research and analysis. With that in mind, what are the objectives and methodologies of the DATA Index?
TH: The goal of the DATA Index is to provide simple one click exposure to the growth of the Web3 data economy via a single token. For context, in the traditional markets we’ve had an index revolution. It used to be that very few people owned stocks, but now ~50% of all stocks are owned in passive funds like ETFs and mutual funds. Currently in crypto, just ~0.7% of tokens are passively managed. What that tells me is that ordinary people don't have an easy way to get exposure to the growth and value that is being created in this space. Most investors are just buying individual tokens. But there's over 4,000 different tokens in the market right now. So I personally started making this index because I found it overwhelming to decide what to invest in for myself.
SW: And in terms of the specific token selection, do you have a criteria to make sure that when you are selecting the various protocols, there's consistency in the methodology?
TH: There’s an inclusion criteria we use to select the tokens in the index and really what we're looking for is tokens that provide a data-based service or product. These include tokens such as the previously mentioned Numeraire ($NMR), Chainlink ($LINK) and Filecoin ($FIL). The Graph ($GRT) is another one that provides a token indexing protocol so that developers can retrieve data from blockchains very quickly without relying on a trusted 3rd party. And then there's others like Basic Attention Token ($BAT), which is building a decentralized competitor to Google. So it's a broad theme of protocols that captures value from data economies as opposed to financial networks or NFTs or virtual entertainment.
SW: How often is that criteria reassessed? Is there a quarterly rebalancing process?
TH: The DATA Index is a little different from the other methodologies in the Index Coop because we reevaluate quarterly. In addition to looking at what tokens are available, we’re also assessing feasibility. Can we add them safely and at a low cost for users? There are tokens that we would like to add, but for technical reasons we can't yet. And of course, we're working on those too because one of the largest benefits of an index is that you're getting broad exposure to an entire sector.
SW: From the end user perspective, it's helpful to know that you are frequently reevaluating the index. Things can change so quickly in these markets which can be challenging for investors. And while there is no shortage of information, it can be hard to sift through it all. Being able to access and learn about a particular theme all in one place is critically important.
TH: Definitely. It's not just providing a token that makes it easy for people to invest in the theme, but it's also about educating them on the opportunity. My co-founder Kiba Gateaux and I have a blog where we share research from ourselves and from community members. I would also strongly encourage using Web3Index.org as well. They provide a lot of data and analytics around these different tokens from a fundamental perspective. If you were researching a traditional business you would want to look at things like cash flows and recurring revenue. The Web3 Index does the same thing, but for data protocols by demonstrating information like the amount of fees collected [revenue].
SW: That's a key point as newer people enter the space, especially from a traditional finance background. They're going to want to see and understand the fundamentals. Being able to demonstrate how to independently and correctly value these protocols will be extremely beneficial in terms of bringing more people in.
TH: Absolutely. We’ve already seen a great example of this in the DATA Index. Livepeer ($LPT) is a decentralized, live streaming protocol whose market cap in 2021 increased from $30 million to over $800 million. So we wanted to know, is that just speculative fervor or are there some actual fundamental drivers at play? Based on information on the Web3 Index, we could see fee revenue from this protocol increased 32x during the year, and usage of the protocol increased 6x, so the value is appreciating commiserate with the platform’s adoption and growth.
SW: That’s another important element of the blockchain - the transparency of data to support these fundamentals. It’s all there and continuously available for public consumption which is a huge advantage over traditional finance.
TH: There are a lot of Web3 projects like Web3 Index that surface fundamental data for users, researchers, and investors. These projects are constantly pulling in token data to generate real time reporting on the different protocols. You’re not having to wait on quarterly earnings reports, audit sign-offs or annual filings to assess their value.
SW: These efficiencies are moving things forward at what feels like lightning speeds. On that note, thinking about the future, what do you foresee for the DATA Index product in the next 12 months? Are there any industry trends that you anticipate which will impact how you approach the market?
TH: There are two major trends happening in the data economy that I think are really interesting. The first one is this idea that a lot of these tokens are almost like tech infrastructure, and they're unbundling the products and services offered by Big Tech companies. Google offers search engines, file storage, maps, photos and much more. Similarly Amazon provides music, books, data storage, compute, and many other disparate services. This is very different from what’s happening in the data economy where each protocol is offering a very specific service. So I could see people starting to build applications that combine these decentralized services. For example, Brave (another project in the DATA Index), is a crypto native web browser that is competing with Google Chrome. Rather than creating a protocol offering all of these different services under a centralized tech infrastructure, they could offer something like a Brave drive, which could actually be a user-friendly front-end into a decentralized storage protocol like Filecoin. And maybe they have a decentralized YouTube that's powered by Livepeer. Developers are going to be able to create applications that use all these decentralized protocols rather than relying on one centralized technology service provider.
The other item is around data monetization. Currently most of our data is siloed in companies and applications, but in Web3 users own their own data. This ownership model is leading to the creation of data unions where users can share a portion or all of their data to a pool. As I mentioned earlier, data is valuable when it’s aggregated. So as more people contribute to these data unions, they're going to be able to create better applications and services. And the users will be rewarded for that. The Basic Attention token is an example of that today. Whereas Google keeps all the ad revenue, the Brave browser actually returns ad revenue back to you for contributing your attention. Another example is Numeraire where you have different data scientists contributing their predictions about the stock market. The Numeraire hedge fund aggregates those predictions to make trades and the value gained is then returned back to the data scientists. I think you’ll see that model proliferate over the coming years.
SW: This has all been tremendously educational Thomas. Thank you for taking the time to speak with us about the data economy and provide some insightful observations about the future of this emerging market. We wish you, the DATA Index and Index Coop continued success with these exciting theme based crypto products.
The DATA Economy Index($DATA) is a digital asset index capturing the growth of data-centric Web3 protocols. The DATA token provides simple, 1-click exposure to the growth of the Web3 data economy in a single token.
Index Coop is a collective of finance professionals, engineers, DeFi experts, meme-makers, content marketers and crypto enthusiasts focused on making crypto investing simple for individuals and institutions through a broad variety of investment vehicles from token baskets to leveraging.
Please note, this article is intended for informational purposes only and should not be considered investment, tax or legal advice. Consult your investment, tax and legal teams for definitive guidance on any digital asset.