Automatic Rebalancing Mechanism

The Automatic Rebalancing Mechanism (ARM), stored in the smart contract, stands as the most pioneering component within our platform.

The system ensures the proper distribution of assets in the index by regularly monitoring market capitalizations, triggering adjustments to align with the desired weights, and executing trades accordingly.

This way, the ARM enables us to automatize the rebalancing process, saving considerable resources that wouldn't be possible without smart contracts and blockchain technologies.

The constituents, chosen monthly from the top n based on (f.e.) market cap, are proportionally weighted according to their relative free float market values:

𝑖 = Each index unit 𝑡 = The moment of measurement, usually monthly for reindexing and reweighting 𝘕 = Nominal units at t 𝑃 = Price at t

The numerator represents each individual token. The denominator represents the total combined market cap of the constituents. The calculation for each asset is based on the ratio of the current weight in the portfolio to the new weight provided by the oracle. For assets that are newly added to the list, we implement a reindex code that involves selling one asset completely and replacing it with another. It's important to note that reweight and rebalance actions are distinct but executed in parallel to optimise gas consumption.

Example: $ARBEI

The Aribitrum Index focuses on the top 10 protocols most prominent to the Arbitrum ecosystem. For an Excel representation for the ranking and pointing Mechanism Click Here

Re-Balancing

The index constituents are re-evaluated monthly to reflect changes in protocol performance. This re-balancing occurs on the first day of each month, updating the weights of our underlying assets. The new weights are applied for the entire month until the next re-balancing, which will take place at the beginning of the following month.

The formula for daily index value is determined as follows:

,where the "Base Multiplier" is a mathematical constant required to determine the new weights. For the first rebalancing event, one month after the index inception, the base multiplier is set to 1 and the index token value starts at 100. The "Divisor" is another constant, but one that never changes throughout its lifetime. It is calculated to ensure that the weighted sum of all index tokens, each with their own price, is 100. By the monthly transition, in order to mathematically guarantee the continuity of the index value, using the newly required index constituents weights, a new base multiplier is calculated. This base multiplier is then use in the frontend to display index values consistent throughout history, but serves no value for smart contract purposes. The smart contract only deals with tokens amounts and the relative share of index tokens a user holds to determine their partake. This a highly secure method as amount of tokens per user is secured on the blockchain and cannot be altered.