Arbitrum Index (Upcoming)

Introduction: About Arbitrum Index (Ticker: $ARBEI)

Arbitrum is a layer 2 solution designed to improve the capabilities of Ethereum smart contracts — boosting their speed and scalability while adding additional privacy features to boot. The platform is designed to allow developers to easily run unmodified Ethereum Virtual Machine (EVM) contracts and Ethereum transactions on a second layer while still benefiting from Ethereum's excellent layer 1 security.

Following Ethereum, Arbitrum is currently the biggest network in the DeFi industry, with the most promising ecosystem of DeFi dApps. The Arbitrum index aims to give a simple way for investors to gain exposure to this prominent ecosystem of applications without having to worry about buying all the different tokens of each protocol.

Index Composition: Blockchain based ecosystems

Functionality of a blockchain and its ecosystem (dApps) go hand in hand. The blockchain based category reflects that by having a composition of 85% dAPP weight and 15% assigned to the native index token. Note: we may change this composition in the future after further research and backtesting index performances, those results will be published.

dAPP weight system: how to select native tokens?

A point ranking system has been created to reflect ecosystem dAPPs that are most dominant within and most native to a given blockchain. Protocols with the least points are given an index weight. The philosophy behind this index is that we punish protocols that do not ‘tick all the boxes’, where it is better to rank everywhere second then to have one category rank 40th (for example) and the rest first. Points are given for:

• TVL ranking present on all chains

• Relative chain TVL; comparing the TVL on the chain of interest with overall TVL of a protocol, multi or cross chain protocols still usually have a ‘preferent’ chain where most trading takes place.

• Active addresses, trailing 30 days

• Volume

• Open interest (upcoming)

Example: Index Composition as per 21-7-2024

Name	Ticker	Weight
Arbitrum	ARB	15
Aave	AAVE	12.5
Clipper	CLIPPER	12.5
Pendle	PENDLE	9.375
Silo Finance	SILO	9.375
Pancake Swap	CAKE	7.5
Dodo protocol	DODO	7.5
DXSale.Network	SALE	7.5
Penpie	PNP	6.25
Convex Finance	CVX	6.25
Trader Joe v2.1	JOE	6.25

Technical breakdown of index token creation

A completely decentralised method of purchasing assets is used through smart contracts, Uniswap is used as the primary exchange to secure trading actions based on available liquidity at the correct price.

Key smart contract functions

Oracle An oracle is responsible for updating on-chain data from off-chain sources. Here, we obtain the top asset list from our API. The oracle sends this asset list to the smart contract, enabling the smart contract to trade and manage the vault balance according to this list. The asset list will be updated each month. Limitations are set on the oracle signal to provide minimal impact monthly transition rotoation, yet have enough freedom to give weight to the tokens with the highest expected return. For example, ARBEI is not allowed to be changed by the oracle by more than 2 index constituents per month.

Factory The Factory contract at the heart of the index functionality. It is responsible for trading underlying assets and minting/burning index tokens. Users interact with the Factory contract to initiate mint (creation using stablecoin) or burn (the reverse). Additionally, the Factory contract is responsible for reindexing and reweighting actions.

Vault The Vault is a Nexlabs smart contract responsible for holding underlying assets on-chain. Only the Factory contract can manage the Vault smart contract through specified functions, including issuance, redemption, reindexing, and reweighting.

Uniswap Uniswap is the exchange component that enables the Factory contract to swap user input tokens for underlying assets (in issuance) or swap underlying assets for a specific output token (in redemption). Uniswap is also used for reindexing and reweighting actions.

Issuance Process The oracle updates the Index Factory with the on-chain asset list each month, and the Factory contract stores the asset list and relevant weights. The user sends input tokens by calling the issuance function from the Factory contract. The Factory contract swaps these input tokens for the underlying assets according to the list received from the oracle, with these swaps being executed by integrating with the Uniswap router contract.

After swapping the input tokens for the underlying assets, the underlying assets will be stored in the Vault contract. Finally, the index tokens will be minted to the user by the Factory contract.

Redemption process The oracle updates the Index Factory with the on-chain asset list each month, and the Factory contract stores the asset list and relevant weights. The user calls the redemption request by burning the index token. Underlying assets are withdrawn from the vault smart contract. Factory contract Swaps underlying assets to the output token using uniswap.

Output token is sent to the user from the factory contract.

Smart contract ReIndex and Reweight process API will update the new list according to new data. Oracle sends the new list to the blockchain. Factory contract calculates swap amount to maintain the current weight to the oracle weights. Underlying assets are swapped according to the calculations using Uniswap.

Question: How does the price of the index asset follow the underlying closely?

In our issuance and redemption processes, the Factory smart contract integrates with Uniswap liquidity pools. Therefore, there is no difference between the index price and the pool market price since underlying assets are traded in the open market. Slippage may occur, but users will be able to set a limit order (which is similar to setting max slippage one sided). Users will be able to check in our frontend whether the expected price they receive on the index token closely reflects the average market price given by aggregators such as cmc and coingecko.