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tokenomics

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Tokenomics

Agents:

  • DAO: The Decentralized Autonomous Organization that governs the fund and executes the issuance of new instruments.
  • Investors: Individuals or organizations that buy and sell tokens from the fund’s various investment vehicles.
  • Market Maker (MM): Entity that provides liquidity in the secondary market.
  • Smart Contract (SC): The smart contract governing the issuance, redemption, and rebalancing of the fund’s tokens.
  • Machine Learning Model (MML): Flask server trained with on-chain dataset to calculate optimal proportions based on BTC/USDC, ETH/USDC rates.

Nomenclature:

The terms instrument and investment vehicle are used interchangeably.


- `t`: Point in time measured in Coordinated Universal Time Timestamp.
- `t`': Ethereum block (Block time unit of measurement)
- `S_i(t)`: Price of the underlying asset `i` at block `t`' (e.g., WETH, BTC).
- `V(t)`: Net Asset Value (NAV) of the instrument at block `t`'.
- `N`: Number of instrument tokens.
- `P(t)`: Fund token price in the secondary market at period `t`.
- `w_i(t)`: Weight of asset `i` in the fund's portfolio at period `t`.
- `c`: Transaction cost (proportional to the transaction value).

**Algorithmic Mechanics:**

1. **Initial Issuance (t=0):**
    - The DAO determines the initial weights `w_i(0)` for each asset `i`.
    - Investors deposit USDC into the SC.
    - The SC uses the USDC to purchase the underlying assets in the proportions `w_i(0)`.
    - The SC issues `N(0)` tokens, where `N(0)` = `V(0)` / `P(0)`, and `P(0)` is a predefined issuance price.
    - Tokens are distributed to investors in proportion to their USDC contribution.
2. **Rebalancing (t > 0):**
    - **Every `T_rebalancing` or when a rebalancing criterion is met (e.g., deviation from target VaR) or on a predictable schedule (daily):**
        - The SC obtains current prices `S_i(t)` from the oracles.
        - The SC calculates the current NAV: `V(t)` = Sum `w_i(t-1)` * `S_i(t)` * (1 - `c`).
        - The SC uses the oracle model to consume the optimal weights by executing a serverless function of the ML model to determine the new optimal weights `w_i*(t)`.
        - The SC sends orders to the MM to buy/sell assets in the secondary market to adjust the weights to `w_i*(t)`, incurring transaction costs `c`.
3. **Token Liquidation:**
    - **Underlying Liquidation:** If t'>T', the SC liquidates its token portfolio in the secondary market to acquire USDC and disperses (disperse.app) the proportion of USDC/N, or alternatively acts as a redemption house, depending on whichever is more convenient in terms of transaction costs.

**Market Interaction:**

- **Primary Market (SC):**
    - Initial token issuance and token redemption/destruction at liquidation time.
- **Secondary Market (Exchange):**
    - Investors buy and sell tokens among themselves.
    - The MM provides liquidity and facilitates price discovery.
    - The SC interacts with the MM to execute rebalancing orders.

**Rebalancing Example:**

If the ML model predicts that ETH will outperform BTC, the SC could send an order to the MM to sell some BTC and buy more ETH, adjusting the weights `w_WETH(t)` and `w_BTC(t)` accordingly.

# DAO Governance Parameters

The DAO can vote on the following parameters for each investment vehicle issuance:

- $T_{duration}$: Vehicle duration (e.g., 6 months, 1 year, 10 years)
- $T_{rebalancing}$: Rebalancing frequency (e.g., every hour, every day, every week, every year)
- $n_{tokens}$: Number of tokens to include in the vehicle (e.g., 2, 3, ...)
- $A_i$: Set of token addresses to include in the vehicle, where $i \in \{1, 2, ..., n_{tokens}\}$

These parameters allow the DAO to adjust the characteristics of each investment vehicle to adapt to different strategies and market conditions.

**Additional Considerations:**

- **Governance:** The DAO can adjust the token creation/destruction criteria through voting.
- **Fees:** The SC can charge fees for fund management and rebalancing, which will be deducted from the NAV.

See also: [[ethonline-hq/optimizer-finance-dao|Optimizer Finance DAO]] | [[ethonline-hq/rwa-financial-model|RWA Financial Model]] | [[ethonline-hq/documents/chainlink|Chainlink]]

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