Benchmark Protocol Announces Enhancements to Proprietary Rebase Algorithm
Benchmark Protocol has adopted a proven rebase algorithm introduced by Ampleforth, and added the VIX as a factor to ultimately assist with portfolio management and improve price stability around the PEG.
The Benchmark Protocol Team is dedicated to the discovery and refinement of our algorithms to ultimately enhance precision. Doing so will create true utility to the greater supply-elastic ecosystem, allowing us to deploy tangible use cases in the short term. After performing extensive data testing and simulations, the following enhancements to our algorithm will be implemented on Monday, February 1st.
Benchmark Protocol will implement supply adjustments (rebases) daily, not only on New York Stock Exchange (NYSE) trading days. Rebases occurring on non-trading days will be only factoring in the price deviation of MARK from the SDR PEG (weighted 100%). There will be no Volatility Index (VIX) data impacting the supply algorithm on non-trading days. Supply adjustments will continue to take place anytime between 4:15 - 9:15 PM EST.
The primary reasons for this change helps:
- Increased price stability towards the PEG, countering stablecoin’s inherent inflationary issues
- Promote project integration as a collateral asset with bolstered PEG stability
- Sustainable and efficient long term growth as fresh supply and demand data are used daily
Benchmark originally applied supply adjustments utilizing a static smoothing period of 10 days. With this methodology, the smoothing factor is efficient when the price of the token is close to the PEG, but becomes less effective once the underlying price of the token diverges further away from the target PEG. This is apparent when analyzing historical Ampleforth (AMPL) trading data. The data shows that during sustained periods where the price is below the target PEG, the Ampleforth protocol struggled to narrow the distance between the token price and the PEG. Ultimately, this can result in a series of negative rebases known as the “death spiral.” During the first month of rebases for the MARK token, we have noticed similar patterns and believe a Protocol enhancement would be beneficial.
We have updated our dynamic smoothing period as such:
- When MARK TWAP is above the PEG, we will apply a dynamic smoothing period ranging from 6 days to 2 days. When the TWAP is just above the PEG, we will utilize a 6 day smoothing period. When the price is 100% above the PEG, we will utilize a 2 day smoothing period. The smoothing period will linearly decrease from 6 to 2 days between these intervals. Any price greater than 100% above the PEG will also utilize a 2 day period.
Example a) When MARK TWAP is $1.57, the Protocol will use a 5.53 day smoothing period
Example b) When MARK TWAP is at $2.10, The protocol will use a 4.02 day smoothing period
- When MARK TWAP is below the PEG, we will apply a dynamic smoothing period ranging from 4 days to 2 days. When the TWAP is just below the PEG, we will utilize a 4 day smoothing period. When the price is 50% of the PEG, we will utilize a 2 day smoothing period. The smoothing period will linearly decrease from 4 to 2 days between these intervals. Any price less than 50% of the PEG will also utilize a 2 day period.
Example a) When MARK TWAP is $1.30, the Protocol will use a 3.69 day smoothing period
Example b) When MARK TWAP is at $0.20, the protocol will use a 2 day smoothing period
The VIX Factor
The initial impact of the VIX on the rebase algorithm was derived from a 10 day smoothing period; this resulted in the original decision to import the percentage change of the 5 day SMA of the VIX between consecutive trading days.
After updating the protocol’s smoothing period, the influence of the VIX on the new rebase algorithm must also have a material impact; thus a heavier weight is necessary. Applying a heavier weight allows the Protocol to anticipate market conditions more efficiently. When markets sell off, the protocol will be able withstand liquidation events by utilizing day over day VIX readings without periodic simple moving averages. The impact will be especially relevant during periods of high volatility. We have updated the VIX Factor in our algorithm as such:
- The usage of the daily change in the VIX and the implementation of “Smart Hedge.” Implementing a daily change in the VIX instead of the simple moving average will allow the protocol to immediately respond to the full impact of fear deriving from Capital Markets. Smart Hedge is only activated during times of uncertainty in the market, or when the VIX spikes. This would result in an increase in total supply.
- Conversely, Smart Hedge completely removes the VIX component from our algorithm when there are times of increased certainty and stability in the market, which would be a situation where the VIX drops. Doing so avoids additional and unnecessary supply contractions when the VIX levels off.
When and how will this be implemented?
- The above referenced revisions to the rebase algorithm will fully be in effect for the rebase on Monday, 2/1. In order to smooth the transition, we will gradually reduce the SMA impact on the VIX.
Schedule for Thursday Jan 28, Friday Jan 29 and Monday Feb 1
- 1/28 — Utilize the change in 3 day VIX SMA & the 3 day smoothing period
- 1/29 — Utilize the change in 2 day VIX SMA & the 3 day smoothing period
- 2/1 — Utilize the one day change in the closing VIX price (day over day) and fully transition to the dynamic smoothing model
Why does Benchmark only apply the VIX on certain days?
- Based on the change described above to the VIX mechanic, we will only be applying the VIX in our rebase model on days where the VIX reading is an increase over the prior day reading. This represents a day where volatility is expected to increase going forward and therefore increased supply is triggered.
- Reducing supply during times of increased stability (lower VIX reading) is not as relevant. The market conditions created by stable markets are not the problem we are trying to solve. The SDR PEG mechanic will account for periods of decreased demand sufficiently by reducing supply and does not need dampening features from the VIX.
Why does Benchmark have non-congruent smoothing intervals (6–2 when above and 4–2 when below)?
- The VIX will only be applied to the Protocol’s algorithm when there is a spike in volatility, which will result in an increase to total supply. We believe a longer stretch period should be utilized when the price is above the PEG to foster a sustained, gradual growth curve.
- Utilizing shorter smoothing periods when MARK trades below the PEG should help mitigate extended periods of negative rebases, as the supply contractions will have greater magnitude. We believe this will promote long-term stability as the protocol gravitates towards the PEG.
About Benchmark Protocol
Benchmark Protocol is a Supply Elastic Collateral and Hedging Device, Driven by the Volatility Index. The protocol operates as a rules-based utility that dynamically adjusts supply based on the CBOE volatility index (VIX) and deviations from the target metric — equal to 1 Special Drawing Rights (SDR) unit. Employing the SDR creates a larger use case rather than exposure to just one currency; the application of this creates a larger user base and delineated exposure to markets around the world. The DeFi space needs a collateral utility that retains its efficacy and increases inherent, baseline liquidity during periods of high volatility.
Benchmark is built on the Ethereum blockchain. The MARK token is the native asset in the Benchmark network and provides only the utility value available to it through the Benchmark network.