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As token purchasers elect to acquire DFI, new tokens are minted and sent to the investor’s Ethereum wallet upon receipt of WETH.
User sends funds from their wallet to the token contract. After this transaction has three confirmations, the rebalance flow kicks in. This entails fetching the most current index mapping to determine the approximate amount of tokens to purchase. This is determined with the following formula:
After conclusion of the swaps and conversion into the underlying constituents, the next phase in the process is the minting of tokens. The amount of tokens to mint is determined by the below logic. The first step would be to determine the current Token Value. Given the set of token in the index denoted by i ∈ [1, ..., 20] , and the time intervals from time t = 0 until time T. The Net Token Value (NTV) at time T is formally expressed as :
Where PerBasketToken(NTV,t=0) is the initial value of the token at time t=0, and
is the compounded product of the weighted average returns of the underlying tokens in the index from t = 0 → T , such that wi,t represents the weight of token i at time t and ri,t,t−1 represents the return of token i from time t − 1 to time t.
Moreover, since each basket token represents a pro-rata share of the underlying index assets then it also holds that :
where the numerator is the sum of the underlying assets purchased in USD value at time t based on the reference prices provided by the index, and the denominator is the number of outstanding basket tokens at time t.
Given that the execution of the swap may incur price slippage, the amount of underlying purchased, and subsequently the number of tokens to be minted are a function of the actual execution price (Blind auction mechanism). Mathematically, the number of tokens that are minted is expressed as :
where the per token slippage is the USD value of the slippage for trade execution of the underlying assets in the predefined proportions.
Once tokens have been minted and sent to the original sender of WETH, the process is concluded.
Conversely as investors exit their positions and remove liquidity from the pool, DFI tokens are burned. Investors receive a basket of assets upon exiting the pool.
These tokens will be rebalanced on a monthly basis in order to ensure it is properly tracking its underlying index. In addition we will make use of rebalances whenever orders are made on our platform to mint or burn the tokens. When a rebalance takes place, the contract will fetch the target index allocation through an oracle to obtain the real-time weightings of the underlying tokens. Additionally, once per month the token balances are rebased such that each underlying once again represents 12.5% of the basket.
DFI allows for dynamic fees based on the bidirectional change in demand for individual pool assets. Fees can be determined by the DAO or algorithmically. Also, dynamic fees are used to influence trading activity within the pool and incentivise or disincentivise rebalancing until the current blend has deviated from the ideal proportions by a certain amount. Fees for DFI are waived through 2021.