Crypto and especially DeFi indexes are booming. Every index says they are the best. They have the best tech, best community, best developers... Few publish as many technical details as PowerPool, though. Here I will try to explain what is Dynamic weights changing model and why it's fantastic.
- One Index
- 4 Tokens (I will use 4 tokens to make the example clearer)
- Equal DOLLARS share: 25%
- Index size: $10 millions
Situation one: Price change
This has nothing to do with dynamic weights, but it's a good example to build on.
Crypto s volatile as fuck, so we will look into these first. Imagine the price of 1 composite token changed. Now the dollar share of this token is higher than it should be.
The real amount of Token 2 in the pool didn't change, but it's dollar price, hence the share of the pool increased. Due to the AMM pools design, now able to swap token 2 for any other token in the pool with a better price then you can find for example on Uniswap.
Supply $100 of token 2 -> Get $120 of token 3. (calculation could be off, you need to get the drill tho)
In real life, price changes in small steps, and as soon as the gap becomes sufficient to profit, arbitrageurs jump on this opportunity, swap tokens back and forth and make the pool return to the equilibrium.
Arbitrageurs can do it automatically thanks to the DeFi interoperability, aka Money Legos. Smart contracts can interact with each other and act automatically.
Awesome, not let's get back to the main topic - Dynamic Weights. Power Index is governed by the community of bright people, and they follow the market closely. To get the best returns, they can decide to change weights or get rid of a selected token altogether. It can be caused by different situations:
- A new, AWESOME token was launched
- Team of one of the protocol has a tongue in their ass, and can't do shit
- HACK annihilated trust in one of the protocols
- (Donald Trump) Joe Biden tweet
- You name it
In this case, the community changes the weight of token 2 to 10% and token 3 to 40%. It's similar to the change in the price in a sense. If the weights are changed in one step, we all of a sudden have a huge gap.
15% x 10 m = $1.5 million worth of token 2 will enter the market and have to be sold, while $1.5 million token 3 have to be bought from the market and locked in the index now.
To give you some perspective, here is a BAL-ETH pair on Uniswap. The most liquid pair for BAL and it has only $700k of liquidity. You know what it means, right? It means HUGE losses for everybody.
How to fix it? Easy mate.
You change the weight every second. The bigger the weight change, the more time you need to perform the transition. To build on the same example, the community decided that a 15% change in weights has to be carried over 18 days. In that case, we will expect 0.0000096% change each second.
So the arbitrage gap increases every second. As soon as the gap becomes sufficient to profit, arbitragers execute trades and move the index to the desired transition stage.
WHY DO I CARE?
Ok, cool story mate, I don't care about all that tech shenanigans. I just buy shit Andre tweets about. Fair point, but:
- All this means that PowerIndex will earn more fees, and you earn more money.
- Your funds are used as effectively as possible.
- Don't be stupid; you need to understand basic shit.
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