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The Index Coop executes trust-minimized reweight and rebalance of dsETH

Our new Dutch auction rebalancing mechanism enables best execution on rebalancing trades

On January 12th, the Index Coop hosted its first-ever public auction rebalance of dsETH.  gtcETH was rebalanced, also via public auction, a week later. 

The auctions reduced the costs associated with trading constituents within the indexes, allowing the indexes themselves to become a maker rather than a taker of liquidity. The public Dutch auction mechanism allows swaps to be fulfilled as soon as it is profitable for any actor in the ecosystem. For product holders, this results in better performance and for the Index Coop, it offloads the burden of paying gas costs on rebalancing transactions.

Previously some of our onchain structured index products suffered from suboptimal rebalancing drag—where the net asset value marginally decreases over time due to inefficient rebalancing trades. Before auction rebalances were implemented, products rebalanced directly with specified DEX pools which often have thin liquidity. This lack of liquidity could cause price impact, slippage, and swap fees to slowly erode the NAV of a product. To combat this, the Index Coop had previously made rebalancing trade sizes small, so that liquidity outside of the target pool could arbitrage the price between trades. Although it gave users better execution, it took many trades to rebalance illiquid tokens and incurred tens of thousands in additional gas costs borne by Index Coop.

Our new rebalancing module has solved that problem. Rather than “take” whatever DEX liquidity is available and accept the associated price impact, slippage, and swap fees, auctions enable you to “make” liquidity available using a Dutch auction – where prices decline until they meet the fair market price. By enabling liquidity providers or arbitrageurs to trade directly with an index, auctions eliminate intermediary DEX dependencies and greatly reduce rebalancing drag.

In the first rebalancing auction of dsETH, a known party was the only participant in the auction. It resulted in a slightly increased dsETH NAV by 0.01%. In the second rebalancing auction of gtcETH, an unknown arbitrage bot was able to fill an auction before the known party, a testament to the incredible advantages of open finance. Moving forward, it is expected that more arbitrageurs and bots will be participants, sourcing liquidity from across the ecosystem including centralized exchanges. Furthermore, Index Coop seeks to integrate liquidity from auctions into aggregators such as CoWSwap.

Aggregator integration can lead to even better execution due to a Coincidence of Wants. For example, suppose a CoWSwap user wants to trade wETH for rETH and dsETH wants to trade rETH for wETH. These two parties can be matched to provide excellent execution on both sides and this will create a slight improvement over the arbitrage-only execution.

Going forward, products built on Index Protocol, including existing products like ic21, dsETH, and gtcETH, will be rebalanced using our Auction Rebalance module. In addition to preventing NAV decay, the auction module will enable future upgrades to Index Protocol and the development of products that are trust-minimized and maximally decentralized. 

If you are interested in participating in future auctions, make sure you are signed up for our newsletter. We will notify subscribers well in advance of any future public auctions. You can learn more about how to bid in an Index Coop auction on our blog. And, you can check out our auction module, itself, although there are not currently any live auctions. 

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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