In the last few months, decentralized finance has seen an explosion in various new types of financial products on the blockchain. Elastic supply tokens, also known as rebasing or rebalancing tokens, are gaining traction and popularity in the crypto space. There are various supply elastic projects that have gained traction such as Ampleforth, Yam Finance and Base Protocol, amongst others. A recently launched supply elastic token that is unique and innovative is Benchmark Protocol. Benchmark Protocol is meant to withstand liquidation events during periods of high volatility by removing or adding tokens to total supply by conforming to capital markets, volatility driven trading activity. As such, the main utility behind Benchmark uses a two-pronged approach: hedge and collateral.
Benchmark aims to connect traditional finance with the cryptocurrency market by utilizing the CBOE Volatility Index (VIX). The native MARK token is pegged to the Special Drawing Rights (SDR), arguably the most stable currency in the world. The SDR is a composite international reserve asset, comprising the U.S. Dollar, Euro, Great British Pound, Chinese Yuan, and Japanese Yen.
Supply elastic tokens are built to adjust for inflation; for instance, Ampleforth targets the price of 1 US Dollar by adjusting for US inflation. However, Benchmark Protocol’s target price, the SDR, is adjusted for global inflation through five major currencies via the SDR. This makes Benchmark Protocol’s inflation adjustment more stable and global.
Speaking to Crypto Daily, Harrison Woytko, Founder of Benchmark Protocol, explains ”The supply-adjustment process is a dominant innovation in the decentralized finance sector, however various DeFi projects have not fully leveraged the potential of the rebalancing mechanism. On the contrary, we intend to utilize this innovation to its optimum potential, as Benchmark Protocol aims to connect traditional markets with the crypto economy by incorporating metrics from the real world economy into the re-balancing mechanism.”
It is crucial to understand the implications of supply adjustment, as this an integral part of Benchmark Protocol’s Utility. Simply put, this is a process where the total number of MARK tokens will be adjusted to adhere to the SDR peg, where 1 MARK equals 1 SDR Unit. Furthermore, supply adjustments are accomplished through implementing a rebalancing algorithm. Rebalances occur on New York Stock Exchange trading days within a 5-hour window after the settlement of CBOE VIX contracts.
Some of the major challenges within cryptocurrency markets today are liquidity fragmentation, volatility and third-party custodial services. These challenges are further amplified by stock-market volatility and the aftermath of COVID-19. Benchmark Protocol is the first cryptocurrency utilizing the Volatility Index (VIX). The application of this benchmark in crypto can potentially add tremendous value to the DeFi space. The derivatives market, which is heavily relied upon by the VIX, is said to be valued at over $1 quadrillion dollars. VIX futures provide market participants with opportunities to trade their view of the future direction of the expected volatility of the S&P 500 Index (reference: Origins of Benchmark Protocol).
Benchmark Protocol recently executed its first supply adjustment on December 28th, 2020. While this is not the first re-basing event in the Defi space, it is a notable event that adds value from a global macroeconomics perspective. Harrison Woytko, Founder of Benchmark Protocol said- “Today’s native crypto market, featuring a mixed straddle of developing and mature asset classes, highlights increased correlation with the movement of capital markets. The integration of a supply adjusting protocol with VIX data is not only relevant, but necessary. The VIX was made to evaluate risk and determine the cost of insurance. Long term, we expect Benchmark Protocol to fill a substantial need in this market.”
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, creating 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 and the MARK token is the native asset, providing utility value within the Benchmark network. The supply of MARK adjusts by tracking the movement of the CBOE volatility index.