Tokenomics

Agents:

• DAO: The Decentralized Autonomous Organization governing the fund and executing the issuance of new instruments.
• Investors: Individuals or organizations buying and selling tokens of the various fund investment vehicles.
• Market Maker (MM): Entity providing liquidity in the secondary market.
• Smart Contract (SC): The smart contract governing the issuance, exchange, and rebalancing of fund tokens.
• Machine Learning Model (MLM): 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: Moment in time measured in Coordinated Universal Time Timestamp.
• t': Ethereum block (block time unit of measurement).
• $S_i(t)$: Price of 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.
• $P(t)$: Price of the fund token 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 initial weights $w_i(0)$ for each asset i.
   • Investors deposit USDC into the SC.
   • The SC uses USDC to purchase underlying assets in 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 predictably (daily):
     • The SC obtains current prices $S_i(t)$ from oracles.
     • The SC calculates the current NAV: $V(t) = \sum w_i(t-1) \times S_i(t) \times (1 - c)$.
     • The SC uses the oracle model to consume optimal weights by executing a serverless function of the ML model to determine new optimal weights $w_i^*(t)$.
     • The SC sends orders to the MM to buy/sell assets in the secondary market to adjust 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 USDC/N proportion or acts as an exchange house, depending on which is more convenient based on transaction costs.

Market Interaction:

• Primary Market (SC):
  • Initial token issuance and exchange/destruction of tokens 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 ETH will outperform BTC, the SC might send an order to the MM to sell a portion of 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:

• $T_{duration}$: Duration of the vehicle (e.g., 6 months, 1 year, 10 years)
• $T_{rebalancing}$: Rebalancing frequency (e.g., hourly, daily, weekly, yearly)
• $n_{tokens}$: 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 may charge fees for fund management and rebalancing, which will be deducted from the NAV.