Rebalancing
Last updated
Last updated
As per the current protocol implementation, there is no continuous auto-rebalancing towards the assets target weights. While auto-rebalancing can help not being overexposed to one asset, it also doubles down on the "losers" by essentially buying more when their prices are low. Further it takes upside away from the "winners". In a highly volatile market like crypto, the vision of KujiraIndex is to let the winners run and not over-invest into the losers. Hence the protocol does not auto-rebalance constantly.
However, there are still two ways the protocol rebalances the indices: soft-rebalancing and manual rebalancing.
The smart contract for each index stores initial asset weights (see Index Composition). While these weights do not take into account asset prices, the actual share of each asset in the index changes constantly.
When an index asset (e.g. KJI) is being minted, the amount of assets that are added into the smart contract vault are based on the weights set in the contract. Hence every mint soft-rebalances the index slightly back to the original weight.
In order to act in situations where an index has to be completely rebalanced and/or assets have to be added & removed, there needs to be another way to update the weights. For this reason, there exists a function that can be triggered by a multisig committee that has rights to update weights and rebalance the index.