Testnet Simulation

We conducted a simulation test within a controlled testnet environment to test our protocol's functionality and validate its performance. This simulation allowed us to test the system’s capacity to support the growth of a regular DeFi token and serve as a proof of concept. Below, we present key insights and visual data from the first test, showcasing initial performance metrics and practical outcomes.

The above image presents the price action of a crypto index token (INX) using real market data. The index includes different digital assets such as Bitcoin, Ethereum, and others. Since the price of the index is influenced by the value of the underlying assets, we observe steady and less volatile growth over time. We analyzed data from 2018 to 2020. As the purpose of this analysis is to study the price movements of the assets the actual price values are irrelevant.

The red line shows the price movements of a regular DeFi token (RDF). Our system was trained with real data from multiple DeFi token price movements from the market to project this behavior. The price behavior of the DeFi token from this scenario also validates the Chainalysis 2024 Crime Report which indicates that over 80% of newly launched DeFi tokens fail within their first year of launch.

In the above image, we analyze the DeFi token’s price movements under two zones:

1. The Post Launch Zone

In the first zone, the DeFI token presents several price spikes, likely from the usual hype and speculation that come with the token’s market launch, driven by the team’s promises or pump-and-dump scheme. Early investors may also be taking advantage of this liquidity to sell off their holdings.

1. The Wipeout Zone

In this zone, the token’s price begins to decline. As the initial hype fades and the team falls short of its promises, investors start losing trust, causing the price to drop.

According to the Chainalysis 2024 Crime Report, which analyzed over 370,000 tokens on Ethereum alone in 2023, this pattern is common for typical DeFi tokens.

At this moment in the image below, we have two separate assets:

1. The Crypto Index Token (INX)

2. The Regular DeFi Token (RDF)

Let’s consider the index token as an investment portfolio holding the same assets as the index tracks, but linked to the DeFi token through the IO protocol. Now, the index token acts as an underlying portfolio that supports the DeFi token’s value (represented in blue).

Although the index token and underlying portfolio represent the same assets, you can see their price movements differ. When the index token acts as the underlying portfolio for the DeFi token, its price movement changes, as profits generated are now used to support the DeFi token’s performance.

The green line represents the index token’s price movement before linking with the DeFi token, while the blue line shows the movement after linking, where it serves as an underlying portfolio supporting the token’s value.

The protocol links the token’s price to the underlying portfolio using a flexible ratio set at the time of linking. In this example, the ratio is set at 1:10, meaning the token’s price fluctuates around $0.10, while the underlying portfolio's price value (ex-index token) fluctuates around the $1 range.

This explains why the chart doesn’t display any specific asset values as the focus is comparing the price movements of the assets, which happen at different price ranges.

To maintain the ratio between the assets, the protocol automatically triggers arbitrage transactions whenever the ratio shifts, moving liquidity between the underlying portfolio and the token's liquidity pool to maintain the ratio.

The ratio itself is flexible and will vary over time based on how the two assets perform. The protocol includes advanced computation systems to calculate the amount of liquidity to be moved between the assets. This approach ensures that the token reflects natural market movements while being consistently supported by the portfolio’s performance.

Supporting the token’s value’ means that when the token’s price falls below that of the underlying portfolio price, profits generated from asset appreciation are used to buy and burn the token supply, effectively raising its price. Supporting the token’s value” means that when the token’s price falls below the price of the underlying portfolio (represented in blue), profits generated from asset appreciation are consistently used to buy back and burn the token supply, effectively raising its price.

In the image above, the highlighted red line shows the price movements of the DeFi token when linked to an underlying portfolio, where the profits generated by the portfolio are consistently used to buy and burn the token supply. This link significantly improves the token’s price performance and stability compared to the initial scenario, represented by the faded red line.

In the initial scenario, the DeFi token lacked any underlying value, making it vulnerable to the challenges that commonly lead to token failure. By linking the token to a portfolio of established assets, the protocol creates a safeguard, helping to stabilize and support the token’s value during critical market moments. This transformation provides a stronger foundation for the token, addressing the weaknesses seen in the initial scenario.

Price Analysis In the image above, in the zone marked with one, we observe how the IO protocol neutralizes the DeFi token’s volatility by transferring additional liquidity into the underlying portfolio.

By linking the DeFi token to an underlying portfolio, extreme price surges and volatility are significantly reduced compared to the initial scenario.

To observe the token’s volatility, you can compare the highlighted red line, which represents the DeFi token linked to an underlying portfolio and shows reduced volatility, with the faded red line, which represents the DeFi token in its initial stage, where volatility is higher.

In the image above, in the second zone, we can observe that the price of the underlying portfolio, represented by the blue line, is underperforming compared to the initial price movements of the index token, represented by the faded green line. Although both the blue line and the green line represent the price movements of the same asset (the index token), we can observe the difference. We observe this difference because when the price of the DeFi token, linked to the underlying portfolio and represented by the highlighted red line, is below the price of its underlying portfolio represented by the blue line, the profits generated by the portfolio are used to buy and burn the DeFi token supply, supporting its value.

This effect is visible on the graph, where the underlying portfolio’s price, formerly the index token, represented by the blue line is well below the initial price movements of the index token, represented by the faded green line.

As a result, the DeFi token linked to the underlying portfolio gains sufficient support to navigate the critical zone, avoiding a price collapse.

In the image above, in the third zone, we can observe the price of the DeFi token, represented by the highlighted red line, rising above the price of the underlying asset, represented by the blue line. In this zone, we can observe that the price of the underlying portfolio starts increasing because the profits generated by the portfolio are no longer used to support the token’s value, and part of the token’s liquidity from the secondary markets is redirected to the underlying portfolio in order to increase the assets under management, allowing the portfolio to generate more profits.

When unusual price swings or heightened volatility occur, the system automatically triggers instant arbitrage transactions to stabilize the token’s price, directing extra liquidity in or out of the underlying portfolio.

As a fun fact in the image above, this is the DeFi token’s price if it weren’t linked to the collateralized portfolio, assuming it survived the wipeout zone under normal conditions. We can observe that the price of the DeFi token, linked to the underlying portfolio and represented by the highlighted red line, is lower than the price of the regular token under normal conditions, represented by the darker red line. This occurs because, as noted, when the DeFi token’s price is above the price of its underlying portfolio, part of the liquidity is redirected to the portfolio, increasing its assets under management and profit potential.

In conclusion, our approach provides a balanced solution that reduces the risk of token failure while offering investor protection against volatility and fraud.