On-chain indices in the current iteration of the market, fall short of capital efficiency and dampening volatility. Arguably because of poor economic auditing and reliance on the instrument’s secondary market liquidity. The vacancy for passively managed indices is still open, and it outshines the plain actively-managed models that are prone to human bias.
With an outstanding debt of ≈ $17,500,000, revenue is the only means of revival. This document specifies an in-depth strategy to capitalise and accelerate passively managed indices to accommodate every user and organisational demographic.
Sigma program termination
The internal and bi-communal effort to accelerate research and develop more abstract methodologies for indices did not go unfounded. It was without a doubt, a success, even amidst the chaos of the exploit. The committee formed acted faithfully and proactively on their obligations to see the success of the program. Regardless, the situation the organisation finds itself currently is in a state of disarray.
Given the recent token migrations of Reserve’s (RSR) and Rari Capital’s (RGT) tokens, it is clear that there are no mechanisms to migrate index constituent assets if necessary. The only possible course of action to resolve such circumstances is phasing out assets over time through the unbound token seller (which could take months depending on market factors) or reconfiguring the proxy implementations of the assoicated index pools.
In the case of RSR, whom’s engineers disabled the old token’s ability to transact on migration. This has essentially bricked any smart contract that holds a native balance and thus, the index pool model itself from functioning adequately. The DEGEN index, since one of its constituent assets is RSR the migration has resulted in the pool unable to execute multiple asset actions because it requires RSR to be transferred. Meaning the only way to enter and exit the index pool is through singular denominated asset actions, additionally, the pool cannot rebalance as it requires RSR to be transacted.
- Increase portfolio set size to compliment economic performance
- Indexed was not created to make actively-managed products
- Communal participation should not be underestimated in its capacity
- Further experimentation of weighting strategies should be researched and prioritised
- The index pool design is not adaptable to suit the migration of constituent assets
- Focus categorisation on more in demand and capitalised market sectors
All Sigma pools are configured through proxy implementations, while this isn’t ideal in terms of decentralisation - it certainly is a benefit in the case of the technical difficulties the organisation finds itself in. Each index pool has an equivelent unbound token seller contract to handle unbound tokens, it is a proxy owned by the index pool.
Given the unassessed anatomy of the index pool model after the exploits, each index pool model should be reconfigured to a simple implementation that is minimalised to only:
- Reconfigure the unbound token seller proxy implementation allowing withdrawal of all assets back to the parent pool
- Redemption of the pool’s Assets Under Management (AUM) proportional to token ownership
This essentially redacts the logic of the index pool model so all of the assets can be redeemed safely and without further risk of exploitation given the complexity of oracle dependencies and low liquidity markets.
RSR’s token migration was executed by airdropping the new token to the previous addresses, meaning by default it is unbound. Calling the bind function in an index pool will transfer unbound tokens to the unbound token seller, which was done. The AUM in the DEGEN unbound token seller is currently valued at approximately $250,000 denominated in THOR, CRV, and predominately RSR.
This implementation can essentially be framed as a redemption-only vault, where revenue is funneled from protocol cashflows until reaching the vault’s target goal. It will be abstracted from the EIPS-4626 vault standard, which is peer-reviewed and authored by some of the prolific engineers in the industry.
The bond is to be issued proportionally to ownership of the cumulative Net Asset Value (NAV) at the time of the exploit, which is approximately equal to $17,500,000.
Please note that the snapshot implementation is still a work in progress and liquidity positions been to be indepedently calculated, view the implementation here.
NAV snapshot of DEFI5 and CC10 from the Oct 2021 exploit [source]
Among the victim demographic, the treasury is included at approximately 0.03% - as it has collected the exit fees in the denomination of effected assets.
Treasury’s bonds can be provisioned with NDX at inception, to give the possibility of victims to sell their debt positions if they believe it will default. Avoiding the need for outsourcing liquidity and providing an additional revenue stream for the treasury, given that all leading revenue will be pledged towards settlement.
KPI metrics compliments the design, conditioned by select economic factors defined via Time-Weighted Average Price (TWAP) and moving average queries before the target debt is fulfilled:
- If the price of NDX sustains greater than $30 over one month; an additional $1,500,000 will be added as surplus to the outstanding target 
- If the Total Value Locked (TVL) of the protocol is greater than $250,000,000 over a period of 3 months; an additional $1,000,000 will be added as surplus to the outstanding target
If both of factors are met, the settlement of the bond will equal ≈ $20,000,000, complimenting network effects of external markets, TVL, bond speculation and fufillment.
With the realisation that portfolio size arguably dampened the performance and extended the volatility of past products, extending diversification is crucial in new deployments of index pools. While the organisation’s first materialisation of capital architecture will be a flagship or placeholder index to attract the general demographic. Architecting more niche but dominant market sector-specific categories that accommodate demand and areas of growth are forward-reaching goals.
To address the prevalent liquidity issues seen in v1 of the index pool model and the Sigma program. A new fundamental scoring strategy will be modelled that assigns a fix weighting of the native network asset (eg. ETH) and allow the remaining weights to passively follow a dynamic strategy , such as capitalisation-root weighting. Ultimately capitalising on the basis that the index pool model, itself, is an automated market maker (AMM) and saturates the dependency of secondary markets to complement rebalancing.
While official deployments of the index pool model were pushed at the discretion of internal developments throughout the lifecycle of the protocol. There has been a clear demand for open, permissionless, and immutable deployment of index pools. This is a forward-facing milestone for the direction of the protocol as of today, allowing anyone to deploy passively managed portfolios with economic versatility and configuration.
With such empowerment, it is clear to ensure censorship-resistant access to the protocol. Fufilled through deployments on IPFS to negate centralised hosting.
Index pools are architected to accommodate modular weighting strategies, defined through external contracts defined as a scoring controller. Index pools should have multiple options to suit arbitrary financial strategies, research and development of weighting mechanisms are a core focus going forward.
Diversification is a long-winded process to execute independently, many factors can affect the outcome of capitalisation. Individuals want to easy exposure to select assets without complication or complexity, organisations want economic performance to restrategise and negate risk.
This is why the decision has been taken to accelerate the development of interface and product design to suit both basic and advanced demographics. It will be achieved through two independent interfaces, one providing a seamless and simple experience for diversification. The other, is a trading terminal for economic performance and conditioning. Designs for both are in their early drafts.
The course of development planned including the elements described in this specification are as followed below, the timeline of completion is expected to completion is approximately 8 months. This is subject to change if additional actors engage as contributors.
- Sigma termination
- Exploit compensation
- Bond mechanisim
- Indexed [v3]
- Index pool model
- Frontend designs
- Frontend development [v3]
- Capital management
Bi-weekly community calls will be held every 2 weeks every Wednesday @ 2:00pm GMT / 10:00am EST. Located in “community-calls” channel in the Discord, these conversations will facilitate governance digests, operations debriefing and community representation. Participation is open and encouraged, join the Discord.
Proper economic and quantitative research to shape the design of passively-managed financial instruments is key to providing high-performance instrumentation, and reinforcing the thesis that actively managed is subject to bias and unproductive. Advancing internal and aligning external research of passive management and economics is a forward-facing goal to ensure product viability.
In the aftermath of the exploit, it is clear single spear-headed development of the smart contract infrastructure is not a viable option. The autonomy of the organisation should reflect its development practices, attracting talent to contribute and build out the protocol is a priority.
Additionally accelerating peer-reviewing and auditing of architecture, is detrimental to success. Through milestones of orchestrating an audit council consisting of independent auditors and organisations, to constructively produce security reports and review peer submissions.
Since the state-of-the-art testing suite for smart contract development is Foundry, it will be a priority to migrate all unit tests and contracts to this tooling going forward. Additionally using it to simulate all mainnet deployments and configurations will be mandatory.
Contribution and renumeration
While current resources to materialise developments are all originating from personal expenditures, it is not sustainable long-term for the organisation at scale. Indexed throughout its life has not aligned external actors to contribute to the protocol, identifying key contributors and providing remuneration for their efforts will be advocated to maintain coordination.
To align long-term commitments and accomdate available the resources of the organisation, core contributors will be assigned compensation of a fixed USD quote on enrolement. Compensations are fragmented, priced and vested over a quarterly basis, and priced in NDX dictated through TWAP queries.
Governance or the individual, holds the ability to cancel the renumeration at any time. If consensus deems the commitments are infeasible or the individual feels the inability to achieve the needs of the organisation.
The vacant positions of the organisation are as followed, note that proposed compensations and positions are not final and all fall under the discretion of governance.
Maintains lead development and management of therein, which includes identifying priorities and assignments. Additionally critiqing and providing feedback on other peers’ contributions. This also extends to any of the pending needs of the organisation, so an agile actor with multiple skillsets is of importance.
Smart Contract Engineer (Senior)
Develops core infrastructure; smart contract testing, security and associated integration libraries.
Frontend Developer (Senior)
Develops middleware infrastructure; frontend development and design implementation.
- Implemented foundations for a new approach to frontend architecture through refactoring of the drain reversal application
- Identified aspects of improvements for v3 frontend architecture
- Draft snapshot of the victim demographic of the October 2021 exploit
- Pre-draft [v3] frontend mockup designs (WIP)