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PONY Index: How to calculate its Net Asset Value

PONY Index simplifies the tedious task of finding attractive yield opportunities for stablecoins all around the blockchain world.

In this article we show how the Net Asset Value (NAV) of PONY, the token implementation by PONY Finance that tracks PONY Index can be calculated. The NAV of an index token is an important metric for both traders and holders.

Why do I need NAV?

An index is a basket of assets. PONY Index specifically is a basket of auto-compounding vaults holding stablecoins. Currently these vaults are all from Beefy Finance. The NAV of such a composite index token is the sum of the values of all its constituents.

Related: Why invest in an index?

When buying an index tracking token on a decentralized exchange (DEX) the user doesn’t necessarily pay this NAV though. Instead she pays the current market price quoted by the automated market maker (AMM) on a specific DEX pool. This market price is deterministically set by the AMM based on the current token ratio or liquidity distribution in the pool. If the market price is above the NAV, the token is said to trade at a premium, if it is below NAV, it is trading at a discount.

Schematic of index token trading at a premium or at a discount.
Schematic of index token trading at a premium or at a discount.

Ignoring any fees and gas that have to be paid to acquire the constituents, NAV is an approximation of the value of the assets that are necessary to mint an index token. Equivalently it is the value of the asset a holder receives when redeeming (burning) the index token. Minting and redeeming (actions often referred to as happening in the “primary market”) is fully permissionless in DeFi and therefore open to anyone – in contrast to TradFi.

Keeping an eye on the difference between NAV and market price is important when dealing with index products.

For example, see below the spread between NAV and market price for DPI, the token tracking the DeFi Pulse Index:

DPI NAV-price spread
DPI spread. Data from Dune, @jdcook, Feb. 25, 2022

How to calculate NAV

As written above, the NAV of an index token is defined as the sum of the values of its holdings:

\[NAV = \sum_{V\ in\ PONY} value_{V}\]

To find the value of vault token V in PONY, one has to multiply the weightfactor of V with the price of V. The weightfactor (not to be confused with the “weight” which typically refers to the percentage allocation) quantifies how many units of vault V are in one unit of PONY. Since there is a streaming fee continuously deducted from the token balance, the index implementation protocol Kuiper introduces an IBRatio factor. The IBRatio is used to adjust the token balances so the weightfactors can remain constant between rebalances. At index inception the ratio is set to 1 and afterwards it is decreasing according to the streaming fee:

\[value_{V} = IBRatio \cdot weightfactor_{V} \cdot price_{V}\]

IBRatio and weightfactors are publicly accessible on the Kuiper website by looking up PONY’s Ethereum contract address:

Kuiper Finance basket manager for PONY.

Current Beefy vault prices are available through Beefy’s pricing API. As of writing, the following vaults are part of PONY Index:

Beefy API KeyVault
mooMaiUSDC-miMATICMAI-USDC LP (Quickswap/Polygon)
mooMaiMAI-av3CRVMAI/DAI/USDC/USDT (Curve/Avalanche)
mooJoeUSDC.e-USDCmooJoeUSDC.e-USDC (Trader Joe/Avalanche)
mooCurveAm3CRVDAI/USDC/USDT (Curve/Polygon)
mooCurveG3CRVfUSDT/DAI/USDC (Curve/Fantom)
PONY Index constituents as of July 1, 2022.

The respective vault pages show a more granular break-down of each Beefy vault.

Break-down of MAI/DAI/USDC/USDT vault on Beefy Finance.
Break-down of MAI/DAI/USDC/USDT vault on Beefy Finance.

Note that even stablecoin prices fluctuate. This fluctuation is typically small though, in the order of +/-25bps around $1 at regular times. Hence, the vault prices and as a result PONY NAV will fluctuate as well. The diversifying effect of having exposure to several stablecoins may lower this volatility though on the index level.

Combining above formulas, the NAV can be calculated as:

\[NAV = IBRatio \sum_{V\ in\ PONY} weightfactor_{V} \cdot price_{V}\]

Scalara publishes the current NAV on the index page (“Data” tab).

What to do with NAV?

The previous sections hopefully made it clear that a discrepancy between NAV and market price can indicate an arbitrage opportunity. In reality, of course, there are a lot more practical considerations to be made. Gas fees, bridging fees and delay, price impact, to name a few, have to be considered. On the other hand there may be pool imbalances (e.g. on Curve) or “positive” slippage that can be at times in favor of the minter. We will not get into details of the profitability of such strategies though.

Below chart shows a high level schematic of minting PONY. This is only one path though, vaults and pools often allow any asset combination in it to be deposited (e.g. MAI or USDC or any mix of it in the Quickswap vault).

PONY minting schematic.
PONY minting schematic (USDC path).

None of the above should be considered investment advice. Please do your own research.

Scalara, a subsidiary of DeFi Pulse, creates and maintains indices for a decentralized world.

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