As a veteran of the ETF industry, having traded billions of dollars of domestic, international, and fixed income ETFs, I’ve seen first hand the importance of good data, transparent practices, and openness to financial products. This has deeply informed our design decisions around all of FTX’s products, but particularly the tokenized ones. We’ve launched leveraged tokens, volatility tokens, and FTT, and have more innovative products coming in the pipeline. Below I’d like to highlight what we consider to be best practices when designing products.
There are two types of products: ‘black box’ products (e.g. private hedge funds) and passively managed products (e.g. index ETFs). They play different roles in the financial ecosystem.
For passive products, the most important thing is that as much data is publicly available as possible. This means, ideally:
- Current composition
- Rebalance conditions and schedule
- Creation/Redemption mechanisms
You can find a complete description of Leveraged Token behavior here, and a complete description of BVOL behavior here. You can find current compositions of each of them at https://ftx.com/tokens/[token name]. You can find the fee schedule here.
Black Box Products
For black box products, you can’t necessarily give real time composition or behavior. Instead, what’s important is the following:
- It’s made explicit that the products are black boxes
- Potential investors are informed that there is no transparency and that any investment decisions should be made based on their own research, past performance, and/or trust, and that there is no way to understand exactly how they will behave
- Fees are disclosed
- Given the large costs to the lack of transparency, it’s important to only use black box products when it’s necessary: when it would be impractical, impossible, or highly damaging to the fund’s performance to make it transparent.
While it’s a different sort of product, FTT does not track any predefined index--it would not make sense to have one for such a product. However, we are transparent about exactly what it does track, its past performance and burn history, and we never imply that there is any sort of structure that its price action follows.
As much as possible, it’s important that tokenized products are open--that anyone can access them equally. This means:
- If there is a creation/redemption mechanism, anyone can perform it equally
- Any data that is available about the product is available to everyone
- Everyone is afforded equal access to hold, trade, short, long, etc. the token
- Blockchain transfers are enabled if multiple venues list it
These are crucial and they are what separate real financial products from overpriced scams.
Anyone is allowed to create or redeem Leveraged and BVOL tokens; and anyone can hold or trade them. The ability to create for net asset value makes shorting less important, but if FTX opens up spot margin trading and adds leveraged tokens to it all users will be able to access that. All BULL, BEAR, and BVOL tokens are the same across exchanges and you can send them via ERC20 (and potentially other) transfers; they, along with FTT, have had their smart contracts audited by an independent third party. All of the data is publicly accessible without even needing an account via our GUI and API.
FTT has no creation mechanism. It’s data is fully public, and it is freely tradable. While we are the only ones with a requirement to burn tokens, I guess the public is fully welcome to if they so choose.
All the transparency in the world is only worth so much if it’s written in a forgotten language. As such, it’s important that the data provided is not just theoretically accessible, but in fact easily accessible.
This is a surprisingly large problem in finance: products that disseminate information via inscrutable, under-specified, or inconsistent files.
The dangers of not following transparent practices are large. Keeping an open financial ecosystem with competitive markets and clear products is crucial for the functioning of efficient markets. Nothing is perfect, but it sometimes means the difference between a product the usually trades at reasonable prices and one that usually trades at unreasonable ones, and the difference between a product that can be taken advantage of and one that can't.