This model portfolio design places model portfolio data on the blockchain as a smart contract for flexibility and portability, enabling on-chain evaluation of alignment of the consumer’s portfolio against the model through interoperability between the model portfolio smart contract and the asset tokens in the consumer’s portfolio.
Once any need for realignment has been identified, instructions are generated off-chain.
This model offers advantages for the distributor through on-chain automation and flexibility. For the consumer, the model provides portability and flexibility.
Model Portfolio Smart Contract
The model portfolio is designed by a provider. The provider will establish the assets to be included in the model, as well as the percentages to be held by value. The provider will also define the frequency of revaluation and any tolerances to be applied. The provider may supply additional parameters as required.
Once the parameters are defined, a smart contract is placed on the chosen blockchain network: one smart contract per model.
The smart contract will contain all of the rules defined by the provider, with functions that can be invoked to align a consumer’s portfolio to the model and to trigger the evaluation. There should also be functions to allow the model issuer to amend the parameters of the model, adding or removing assets, amending target valuations, tolerances and so on.
The smart contract will belong to the issuer (the model provider) and only the issuer will be permitted to amend the parameters. However, distributors will be permitted to align portfolios to the model and request an alignment check.
Tokenbridge would be able to help a model portfolio issuer to tokenize their model portfolio, through TBDirecT.
Model Portfolio Personalization Token
Use of the model portfolio by a consumer is (usually) the choice of the distributor (an adviser or a wealth manager)
The distributor will invoke a function of the provider’s smart contract, which will create a personalization token in the consumer’s wallet (one model token per consumer). This token indicates that the consumer’s portfolio will follow the rules of the model.
Model Evaluation against Asset Tokens
A re-evaluation of the model could be triggered in one of several situations:
- Periodic (e.g. quarterly) re-evaluation
- Change of model parameters by the model provider
- Large subscription or redemption within a portfolio
- Large price change for an asset
- Change of model for a portfolio.
Some of these triggers (such as the periodic re-evaluation which would need to know the real-world date) may require data to be retrieved from off-chain. This will be achieved through the use of an oracle.
Once triggered, the smart contract function will gather all the data it needs to perform the re-evaluation. Again, if data is needed from off-chain (such as an asset valuation), this will be achieved through the use of an oracle. Not all of the asset tokens can be expected to reside on the same blockchain network as the model portfolio smart contract: data will be retrieved from other blockchains through cross-chain interoperability, or a bridge mechanism.
Once the smart contract application has evaluated the alignment of the model and tested it against the tolerance, any re-balancing instructions will be initiated off-chain.
Tokenbridge would be able to support this re-evaluation and re-balancing process through the use of TBConnecT to act as the oracle node, linking the model portfolio smart contract to the necessary off-chain and c ross-chain data.
Advantages for the Distributor
For the distributor, the design provides an easy way to link a consumer’s portfolio to a model. Changes to the model by the provider can be instantly reflected in all consumer portfolios.
Depending on the level of autonomy the distributor is prepared to give, the re-balancing of portfolios against the model could be effected entirely within the Tokenbridge suite of products.
Advantages for the Consumer
For the consumer, the design offers flexibility. Any change to the model parameters by the provider is instantly reflected in the on-chain smart contract, meaning that the consumer’s portfolio is as current as it can be.
In addition, the model token exists in the consumer’s digital wallet. It is conceivable that should the consumer wish to change advisers, the model can travel with the consumer’s other data as control of the wallet passes to the acquiring adviser (with no need to liquidate or even transfer individual assets).
Advantages for the Model Provider
By placing their model portfolio on the blockchain, the owner of the model is able to reach a global span of advisers.
The Role of Tokenbridge
Tokenbridge can support the issuers of model portfolio tokens through software (TBDirecT) as well as by providing expertise during the design and implementation process, and through the Tokenizer Playbook.
For the distributor, TBConnecT is available to create model portfolio tokens for each consumer and can also facilitate automated rebalancing. Once deployed, the smart contract will invoke functions within TBConnecT to effect automatic rebalancing of each client portfolio according to their chosen model.