In order to reduce gas costs, we have created secondary markets for people to buy and sell their Sets without having to go through the much more complex transactions of issuing and redeeming them directly. However, this runs the risk of a price deviation between what is on the DEXs and what is that actual Net Asset Value (NAV) of the assets in the Set.

The important thing to keep in mind is that when the price of Index Sets is above the NAV of the components, there is an arbitrage opportunity to be made by minting a Set and selling it in that market. Symmetrically, when the prices on DEXs are below the NAV, then there is profit to be made by exchanging the Set for its components and selling those components on the open market. This mechanism is also similar to how price is kept in line in the ETF industry.

Naturally, because there is a profit incentive there, financially savvy individuals will come to take advantage of it. In order to make sure that this effect is taken advantage of since day one, we have recruited several market makers that we know to deploy automated trading bots that take advantage of such opportunities. In this way, price deviations on DEXs should never be significant from the NAV.

Interested in creating your own bot? Check out our docs here

Reach out to us on our community Discord to ask questions!

Did this answer your question?