Digital Asset Pool Active Rebalancing
One of the RIALTO.AI core activities is arbitrage and market making which represent a simultaneous buy and sell of the targeted token or cryptocurrency. One of the main benefits is its very low trading risk and stable rate of return. RIALTO.AI investment capital for arbitrage and market making activities is based on the Digital Asset Pool (DAP), a structured entity composed of crypto and fiat currencies.
Additionally, for the purpose of additional trading pairs, number of covered exchanges, optimal performance and reduction of risk exposure, the currency portfolio may change in time. Frequency of portfolio rebalancing is not constant and it depends on many factors, mainly on the historical performance of particular currency, its volatility and predicted arbitrage opportunities and market dynamics. For example, due to the limited market depth of a particular exchange which trades with a handful of cryptocurrencies, only a portion of the DAP is allocated to it for arbitrage purposes. When a new, less efficient exchange is added to the trading portfolio, the DAP structure is adapted accordingly in order to maximize the volume of arbitrage executions of available currencies pairs.
The figure below depicts a general example of arbitrage sequencing. Within each arbitrage trading window, the structure and active share of the DAP remain the same while the multi-order book is connected to the predefined number of exchanges. When market conditions change to the extent that the DAP or list of the connected exchanges should be adapted, DAP rebalancing occurs and new trading window starts. The time periods of the trading windows are constantly adapting.
In order to further decrease profit volatility and reduce the impact of varying cryptocurrency trade pairs, the profits made are converted into fiat currencies on a 24h basis. This ensures a predictable rate of return on the capital allocated to the arbitrage processes. As can be seen below, arbitrage profits are converted to the fiat currency at the end of the trading day and transferred to the separate fiat profit fund.
Nevertheless, high volatility of the crypto market is continuously changing the price of cryptocurrencies while they are consequently changing the total value of the DAP. However, when the profit is converted into fiat, it is not exposed to the price movements of single cryptocurrencies. Therefore, the DAP serves as RIALTO.AI benchmark portfolio which outperforms comparative passive holding strategy due to excess trading return.