Mirror Trading on Housecat
Housecat will open up an opportunity for decentralized co-investing in crypto assets for the very first time. We’re launching later this month and are welcoming portfolio creators or subscribers to be part of our first user batch - make sure you get your spot!
Housecat relies on three core pillars that enable mirror trading - smart contracts, a UI, and a network of ‘Executors’, which are responsible for enabling mirroring through asset rebalancing. Today we’ll dive into the role of the Executors in the Housecat protocol.
Before jumping in: Over the past few weeks, we’ve published a series of blog posts that flesh out more details about Housecat - we recommend going through those to get some background before jumping into this post, which is more technical by nature and concentrates around the technical side of the protocol.
On Housecat, users subscribe to investment strategies through pools that mirror assets in a specific wallet. To do that, users deposit MATIC tokens into a smart contract that is linked to the mirrored portfolio, to which they are then subscribed. A smart contract holds the tokens in the same proportions as the copied wallet and uses the deposited funds to purchase tokens and increase the token balances while maintaining the right token weight. The depositing user receives a pool token representing their proportional ownership of the pool, based on the relative amount they deposited.
Owning a percentage of the total supply of a pool token is equivalent to owning the same percentage of the assets held by the pool. When more MATIC tokens enter the pool and increase the total assets, a pool token is minted and sent back to the depositing wallet, representing their updated share in the pool - proportional to the deposits and the total pool value in USD. Respectively, if a user chooses to withdraw their share in the pool, the corresponding percentage of each token in the pool is sold for MATIC and sent back to the user. In such a case, the protocol will also burn a corresponding amount of the pool token - adjusting the overall token supply of that pool.
Pool tokens are tradable and transferable in the open market as any ERC-20 token. That opens up a whole new market for trading complete asset pools (portfolios) instead of specific assets, allowing people to save on trading fees, active portfolio management, and rebalancing.
As portfolios are dynamic and may change at any given point in time, the pool has to keep track of the wallet it mirrors. Housecat solves this through off-chain workers called Executors, which are incentivized to keep the pools balanced with the strategies they follow. In practice, it means that whenever there’s a change in the token proportions of a mirrored portfolio, Executors rebalance the pool to allow the adjustment in the trading strategy.
Initially, Housecat will carry the task of rebalancing through a centralized setup to ensure a smooth start for protocol users. Later, Housecat will decentralize the task of rebalancing through rewards, allowing the protocol to have better incentive alignment among its participants.
A rebalance occurs when the manager of a mirrored portfolio has traded and changed their portfolio’s respective token weights. In such a case, an Executor will then attempt to rebalance the pool through a comparison of the current token allocation in the pool to the mirrored portfolio. It then resolves the swap amounts that are required to reach the same proportions and passes the information to the smart contract via calldata.
While it seems that Executors have special privileges in the protocol, this should not introduce a centralization risk to token holders and portfolio managers, as they follow specific rules dictated by the protocol to prevent misbehavior. First, smart contracts ensure Executors can only perform transactions that reduce the weight difference between the pool and the mirrored portfolio. Moreover, Executors cannot follow an investment strategy different from the mirrored wallet or withdraw tokens from the pool. At any point in time, users can withdraw the share from the pool, regardless of the actions performed by Executors.
Executors rebalance the pool through transactions on AMM-based decentralized exchanges. As part of their nature, AMMs introduce slippage that can decrease the pool’s value by up to 1% in each transaction. While rebalancing, Executors carry the responsibility to find the best trade routes and minimize slippage. More on slippage can be found here.
While rebalancing, Executors carry the burden of spending gas on transactions. To reimburse for that and incentivize them to maintain the protocol, all pools on Housecat are subjected to a rebalancing fee of 0.25% of the total pool value. The fee is calculated as follows: 0.25% * improvement in the weight difference / 100. An example of a rebalance fee calculation can be found on the Housecat docs page. The fees are paid directly to the Executors, of which Housecat takes a 25% cut as part of the platform fee schedule.
Executors carry an essential role in the Housecat protocol, serving both sides of the marketplace and allowing non-custodial mirror-trading. They get rewarded for their work and are incentivized to execute on the best trade routes. Executors are the middle layer of the Housecat marketplace, allowing subscribers to follow a strategy and mirror a wallet automatically. Despite the fact Housecat will act as the key Executor in the marketplace on day 1, we’re excited about including Executors in the protocol down the road- allowing the decentralization of Housecat through skin-in-the-game incentives.
Get ready to participate
Today, we introduced another way to participate in the Housecat protocol. We believe having Executors on the platform will be key to decentralizing the protocol and allowing it to run autonomously.
We can’t wait to welcome users to the platform within a few weeks. While we’re doing some final preparations on the product side, we’ll continue to educate and prepare the community to get onboarded to Housecat.