Silk peg composition

Shade Protocol
1

The week has arrived - time to finalize Silk’s peg composition ! :raised_hands: :partying_face:

If you plan to hodl/use Silk, voting on 1 of 3 options listed here is highly recommended and appreciated.

Since the earlier models proposed in Jan - July 2022, several improvements have been made, while the core concepts remained the same.

What’s new:

  1. Simplified - the makeup of Silk’s assets is now comprised of 6 assets (USD, EUR, JPY, CAD, Gold, Bitcoin) instead of 15 assets.
  2. Redeemable - because its simplified to include only liquid on-chain assets, in a worst case scenario, each asset within Silk will be redeemable 1:1 to its corresponding on-chain asset.
  3. Indexed - complexities requiring human interaction to periodically update Silk’s peg were drastically reduced to reflect a durable, predominantly static peg composition.
  4. Fundamental - 100% of Silk’s peg is driven by diversification requirements and fundamental GDP metrics; technical models used to predict outperforming assets are not used in any.
  5. Universal benchmarks - previously, we used a proprietary benchmark to measure success; To provide ease of clarity to users, Silk is now measured against DXY, USD, EUR, and CPI data to gauge performance.
  6. Purchasing Power - We applied additional focus towards purchasing power maintenance over long periods, in turn accepting marginally higher volatility when compared to single fiat currencies over short time intervals.

Changes allowed for more robust back testing of hypothesized models over 32 years using monthly data intervals.

Structure of the model:
Silk’s model summary: X%(basket part 1 fiat ) + X%(basket part 2 hard assets) = Silk 100%

Basket part 1 (fiat basket) = X%(fiat group A) + X%(fiat group B)

  • Fiat group A intent → equal allocation to each fiat available for Silk which increases diversification
    Fiat group A = (X% allocated to fiat group A) / (sum of all fiats available to Silk)

  • Fiat group B intent → weight highly influential nations’ fiat greater than less powerful nations’ fiats.
    Fiat group B = for each fiat available to Silk -->(GDP of country) / (GDP sum of all countries fiats
    available to Silk)*X% allocation to fiat group B

Basket part 2 (hard assets) = Gold and Bitcion

  • Basket part 2 (hard assets) intent → retain purchasing power over long time periods
  • Basket part 2 (hard assets) = (basket part 2 X%).25(BTC) + (basket part 2 X%).75(Gold)

Basket Options:

Within the parameters established form previous models, there remain three options to tweak the Silk basket and optimize for slightly different outcomes.

TLDR:

  • Option 1: Purchase Power Retention – over 32 years: 260% upside gain, 24.7% max drawdown, expected annual volatility of 6.7% vs USD

  • Option 2: High Fiat Diversification – over 32 years: 229% upside gain, 24.5% max drawdown, expected annual volatility of 6% vs USD

  • Option 3: Low Volatility vs USD – over 32 years: 195% upside gain, 24.0% max drawdown, expected annual volatility of 5% vs USD

For all addition details, please see references in the link below to compare and contrast models.
Silk peg details

Vote will be posted Friday in discord under Silk Peg channel.

3 Likes
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Great work Kyle! Really love the new basket options. I think I’d lean toward option 2 or 3. Is it possible to see the returns of each these baskets by year? I think it would be helpful to see the frequency of the drawdowns, not just the absolute worst, and be able to calculate things like Sharpe ratio to see which has the best return for risk.

2 Likes
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Appreciate all of your hard work, would you be interested in hopping on a twitter space with us to discuss the various options? Would love to give the community a chance to give real time feedback on what SILK can look like in its final form for V1 :slight_smile:

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Here’s some more information to help with the conversation. My takeaway from this is the low volatility option has a lot of volatility in it as a starting point (~5-6%). I had original thought I’d like that option the best, but now I believe you’d be better off accepting the increased volatility and expected return that comes with the retaining purchase power option. Due to the expected returns increasing at a faster rate than the volatility.

It’s interesting that any of the SILK options are better volatility for the user than holding 100% of their non base currency. This should be intuitive since a portion of SILK’s basket consists of their base currency, but still worth pointing out. Thinking about this from a marketing perspective, for EUR users, this should be pretty clear message that they cut your volatility in half compared to their normal USD stables. From a USD perspective the message can be giving some return over longer periods rather than simply holding the dollar (which is being inflated away). For this reason I like the retain purchasing power which outperforms the FEDs 2% target inflation over long periods.

TL;DR: I like option #1 Retain Purchasing Power

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Here’s two charts from a USD perspective for people to think about Kyle’s options. I kept this to lower time horizons like 1 year and 5 year since it feels more relevant trying to resemble something a bit more like cash. You can assume 0.00% is the benchmark for just holding USD natively.

  1. It does show the bias definitely skews upward.
  2. It shows all the options have effectively the same return profile, but the purchase power option has a bit more beta.
  3. You can see where the BTC was added in around Jan-18 as the spikes up start hitting above 20%