DEXTF’s mission is to create an infrastructure that facilitates a fully decentralized assessment management system. Rebalancing is a huge step forward in this. Depending on market conditions, the ability to strategically adapt and upgrade one’s fund (XTF2) brings us one step closer to emulating traditional asset management practices on the blockchain.
The concept of Rebalancing is simple. When a fund manager decides that their fund offers them exposure that feels no longer aligned with their strategy, they can easily change asset weighting and add/remove assets in their fund.
The reasons for implementing Rebalancing are threefold:
- This will allow Fund Managers to proactively and reactively adapt their fund
- Investors will have a higher quality of fund selection. As AUM grows, fund managers will be incentivized to activate the fee module (module is under development and completed soon), meaning investors reward Fund Managers who provide the best service.
- There will be a significant reduction in ‘dead funds.’ Previously, the way to update a fund was to simply create a new one and leave the existing fund inactive. Now Fund Managers can simply update their funds, saving on time, effort and gas!
The process is simple; several tutorial resources are available on our website if you wish to be guided through step-by-step. However, the outline is explained below along with certain concepts that you should be familiar with when dealing with Rebalancing both from a Fund Manager and Investor perspective.
For Fund Managers
- Fund Manager creates a ‘Dynamic Fund.’
- Once the Fund Manager decides to Rebalance the Fund, a simple interface helps them modify their fund.
- This action will notify their investors that a change is imminent (we’ve set up a DEXTF Bot notifying users both on Telegram and Discord (#⚖️rebalancing-notifications), giving them a chance to either continue investing or withdraw their investment.
- Then the process of Rebalancing begins. Anyone holding the XTF2 token may participate.
- Each XTF2 token must be rebalanced for the process to be 100% complete. For this to happen, holders must have the new weightings in their wallets and have enough to execute the trade. The transaction itself will take place using the new rebalancing infrastructure, clearly showing you any profit or loss on your transaction.
- The inflows and outflows of assets are made clear, allowing investors to take advantage of the Rebalancing, often incentivized with a profit from the Fund Manager.
- For a Fund Manager, deciding what level of slippage to apply on the rebalancing proposal is crucial to how quickly the market makers (Investors) will work to fill that order. A rebalancing proposal can be seen as a market leave order if the slippage is set to positive because the FM is requesting the market to provide them with more valuable inbound tokens relative to how much they are willing to give up. This proposal goes through as the market may change drastically, making that order with positive slippage suddenly very attractive. Of course, the opposite is true; when slippage is negative, the FM may have information that the underlying assets will be even more valuable and he is willing to give away more than they are expected to receive.
When investing in a fund, you must be aware that a ‘dynamic fund’ that you have invested in is subject to change. You will always be fully in control and can decide to withdraw or continue investing. To have access to the most up-to-date‘ Rebalancing Alerts,’ we recommend that you join the official Telegram and Discord (#⚖️rebalancing-notifications), with your notifications turned on. When a Fund Manager has launched a Rebalancing proposal, they will have to wait for 6 hours before Rebalancing can start, giving you, the Investor, time to take action. A notification message will be sent to the channels mentioned above, explaining the changes very clearly. The reason for the 6-hour delay is to give you time to divest in a fund that does not align with your wishes while not being too long that market conditions change enough to disrupt the rebalancing process.
During both the proposal and the trading phase of the rebalancing, an Investor will always be able to mint and/or redeem even if the rebalancing has not been completed 100%. As a result, an Investor mints or redeems the fund based on the prevailing weights. Do note that an Investor will always hold the same amount of tokens purchased. What changes are the proportions of the underlying assets within the fund token that you’ll need to supply or receive when you decide to respectively mint or redeem.
For regulatory reasons, the rebalancing module is, of course, optional. This gives individuals flexibility in using the platform, customizing their settings to conform with national authorities. This is simply done by selecting ‘Static’ when creating a fund as a Fund Manager. You will not be penalized in any way for not having a dynamic fund in terms of rewards or exposure.