Note: You can participate in the Index Coop's first ever rebalancing auction on Friday January 12th. Click here to access our Auctions App.
Index Coop recently introduced Auction Rebalancing, which drastically improves rebalance execution for token holders and token operators. In practice, structured products on Index Protocol will rebalance via Dutch auctions, buying and selling components from participating bidders. This article provides a walkthrough of the bidder experience with additional context for participants!
Rebalance auctions can be either public or private.
In a public auction, bidders can be anyone: liquidity providers, whales, traders, market makers, or bots. Because it is in the best interest of product holders to have as many bidders as possible, Index Coop products–like dsETH and gtcETH–will rebalance via public auctions. In a private auction, a whitelist will restrict which addresses are eligible to bid.
Regardless of whether an auction is public or private, all the details–initial settings, accepted bids, settlement–will be published on the blockchain; this data will also be aggregated in this Dune dashboard for anyone to reference.
In the case of a public Dutch auction, the price of each component will gradually decrease throughout the auction duration; the speed and slope of price changes are determined by the manager in the initial auction parameters. In the case of dsETH and gtcETH, the linear price adapter will be used. As a result, component prices relative to WETH (the quote asset) will gradually decay until each auction is filled or the full duration of the auction elapses.
Bidders help rebalance index products by trading against the index token. New weights are defined by a manager at the beginning of an auction and bidders buy and sell components until the new target weights are reached.
Users will be able to find active auctions in the Index Coop Auctions app, which is pictured below:
For context, individual auctions are run for each component that requires a rebalance. A common quote asset is used across all auctions, which in this case, is WETH. Each “Market” represents an asset the index will buy–like swETH–at a current auction price. In this rebalance example, bidders can sell swETH or ETHx for WETH. They can also buy sfrxETH, osETH, wstETH, and rETH in exchange for WETH.
After clicking into the swETH auction, the users can see the current auction price–(1 swETH for) 1.05 WETH–the number of tokens remaining in the auction–0.0075 swETH–and the time left in the auction.
In the “Size of bid” field, users can input how much swETH they would like to sell at the current auction price, with the “Output” field displaying the amount of WETH that the bidder will receive. Users can input a custom amount or hit the “Max Bid” button to bid on all available swETH in the auction. After a token approval transaction, the user may submit their bid!
For another example, users can sell WETH to the index in exchange for wstETH at the current auction price of 1 wstETH / 1.15 WETH. Put another way, bidders can buy wstETH from the index in exchange for WETH.
After inputting a bid size and checking for sufficient balances, users will be prompted to sign a token approval transaction before submitting their bid.
Each single-asset auction will conclude once the predetermined token amounts have been bought or sold or if the auction runs for the full duration–whichever comes first. As a result, “Markets” will disappear from the primary auctions page as they are completed.
It is worth noting that users may encounter errors if the inputted bid size exceeds the current amount available in the auction; be sure to pay attention to the “Remaining in auction” value towards the top!
Another possible error is an insufficient balance of WETH (the quote asset) available for trade. This happens when other single-asset auctions running in parallel must be filled in order for the index to have enough of the quote asset to exchange for the auction in scope. In this case, users must wait for other active auctions to fill so that the index has more WETH for sale.
There is also a chance that a bid may be unsuccessful after it has been submitted by a user. This could result from another competing bid being accepted right before the user’s bid, but after the user has submitted the transaction. Given the competitive nature of Dutch auctions, this may occur!
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
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