Fund swaps
If swapping between funds is easily and inexpensively accomplished, participants will be less likely to leave the ecosystem, even if they become bearish on a particular fund. The savings generated could be passed directly to fund managers and investors, or to the protocol treasury (or a combination of the two).

Proposed mechanisms for trade between funds

It is proposed that there are two mechanisms to switch between funds on the protocol. This first is the simple redemption of the fund that the investor wishes to sell (entailing the sale of the underlying holdings) and the subscription for the fund that the investor wishes to purchase (using the proceeds of the redemption to purchase the underlying assets for subscription).
The second mechanism is that market makers are encouraged to make markets for fund token pairs. Since fund tokens can be listed directly on the Serum, the way that this would work is simple and is explained below.

Protocol market makers

To the extent that the holdings of each fund are reflected on the blockchain, it is relatively easy for a market maker to work out the transactions that need to occur to switch Fund A to Fund B.
As an example if Fund A and Fund B hold the following percentage weightings by asset:
Fund A
Fund B
B - A
Then a switch of a specific value from Fund A to Fund B, would mean only the difference between the funds needs to be transacted to convert the exposure from the exposure of A to the exposure of B. This would save on the execution costs of making the conversion via the default route entailing full liquidation of Fund A.
The market maker would hold inventory of both Fund A and Fund B tokens (assume equal price) β€” as well as hedging out their overall exposure to the funds’ underlying assets. They would provide a bid and ask price for trading the two funds. If a trade is executed with the market maker giving up 1 Fund A token and receiving 1 Fund B token, to hedge the position the market maker would adjust their hedge accordingly, but crucially less trading volume is needed than via the default route.

Benefits to the ecosystem

Market makers could offer prices for trading between Fund A and Fund B that are more competitive on a cost basis than the default route. It is expected that markets for larger, similarly-composed funds will be the most liquid. In the case where there is reasonable overlap between funds the cost savings could be significant.
This mechanism would have added value in the situations where the specific fund managers A and B do not offer instant liquidity; perhaps only allowing subscriptions on a daily or weekly basis. Participants would be able to gain immediate liquidity through the market maker.
Last modified 6mo ago