Creating Indices On Top of Balancer by PowerPool
PowerPool explained how to create an easily rebalanced index without impermanent loss while generating yield from the composite pool token.
The PowerPool team has been building indices on top of Balancer since October 2020. To date, we released five mainnet products, including AMM-based indices and a stable-yield structured investment product (Yearn Lazy Ape). All these products were launched on top of a Balancer V1 fork with innovative modifications from our side. These include the ability to use the pool’s liquidity for staking and meta-governance, a dynamic weights model, and rebind strategies.
The introduction of Balancer V2 changes the landscape and allows building more complex and efficient solutions thanks to custom AMM pools, asset managers, and gas optimizations.
However, Impermanent Loss (IL) is still a major problem for building indices (actively tradable basket of tokens) on top of Balancer.
Market volatility is good for traders and arbitrageurs but it is very unlikely to be profitable for LPs. The composition of the pool constantly changes through swaps, balancing the pool’s prices with the wider market price. Arbitrageurs extract some value from the pool while changing its composition. The more tokens there are in the pool, the bigger is the set of potential arbitrage opportunities.
🔹PowerPool’s “rebalancing window” approach
Due to problem of IL and the fact that fees and possible yield from the underlying tokens almost never offset IL given the average historical volatility, we came to the following conclusion:
A static basket of tokens (without swaps) will be generally more profitable for LPs than a tradable pool.
If the basket is static, any major growth in some token will be fully captured by the index price.
We started R&D devoted to a simple question — how can we launch a static basket of tokens on top of Balancer and at the same time ensure easy on-demand rebalancing. Easy rebalancing through swaps is one Balancer’s best features given PowerPool’s vision of offering actively managed index funds based on fundamental metrics of protocols.
The idea is simple:
Swaps are disabled in the pool most of the time, except for short periods of rebalancing in so-called “rebalancing windows.”
Thus, LPs don’t suffer any IL and receive all possible capital gains from the growth of the assets and their staking rewards (since PowerPool indices use underlying tokens for yield generation).
About PowerPool
PowerPool allows token holders to lend, pool, borrow, and gain income from governance tokens, while accumulating governance power in protocols based on the Ethereum network. PowerPool’s mission is to expand the utility of governance tokens and improve decision making in DeFi.
📰 INFO
https://medium.com/powerpool/a-new-approach-for-creating-indices-on-top-of-balancer-1c0d7abe2804
