Stellar Community Fund

By Constellation Protocol

Unlock - Stellar Index

SCF #19

$110.0K

Legacy v4.0 Award

Awarded

Gives users the ability to create indices via smart contract, providing ownership of multiple underlying assets transparently.

Products & Services

Unlock is an index protocol that would allow the Stellar community to create and manage indices that provide exposure to various underlying assets. Unlock would achieve this with public-good smart contracts that provide the indexing functionality with meaningful utility in its own right, and as a component of more advanced DeFi products. The index protocol would enable a user to define two or more underlying assets, such as XLM and USDC, assign them a share of the overall “index” being tokenized, and create the resulting index token. Critically, Unlock’s approach would allow for the newly created tokenized asset to capture the proportional yield of underlying assets, unlocking diversification and yield-generating strategies, as well as enabling the move of Real World Assets on-chain.

Problem: While exposure to crypto, NFTs, and other on-chain assets provide opportunities to invest in the future of the internet, these assets lack many of the aspects of traditional financial instruments that enhance outcomes for market participants. Specifically, Web3 assets are inherently volatile and subject to meaningful price fluctuations and do not feature a straightforward way to diversify idiosyncratic risk. With traditional financial assets, intermediaries or “trusted” third parties provide indexed solutions that are responsible for purchasing the underlying assets and constructing the index to diversify risk. An indexed solution is particularly attractive for on-chain assets not only due to the diversification it can provide, but critically that it performs the indexing via smart contract, in a trustless manner.

How it works: Unlock will build upon and extend the Stellar Asset Contract (SAC), adding the concept of an index fund token that holds other tokens as underlying components. Index fund tokens (IFTs) have the property that they can only be minted by transferring each of the underlying assets in specific amounts to the IFT contract. The IFT contract also guarantees that fund tokens can always be redeemed (burned) in exchange for each of its components. This way, IFT holders can rely on the fund token’s net asset value (NAV = holdings of underlying components * price) being realizable. The Stellar Asset Contract can also be used to wrap native assets issued on the Stellar blockchain. This means the entire universe of transferable assets on Stellar today is ready to be used as components inside of fund tokens. Classic assets on Stellar come with powerful features that help both issuers and holders of assets have control over which counterparties they trust. IFTs can be configured to inherit the authorizations attached to components. For example, an IFT could respect the KYC/AML policies of each asset it holds. The attached diagram (Figure 1) shows how Unlock’s Token Factory smart contracts let users deploy a new index fund token by specifying an arbitrary-length array of SAC-wrapped classic assets and Soroban tokens as components.