Rebalance

There's 2 types of rebalance:

1. Natural Rebalance: Occurs at regular, predefined intervals called Epochs. This type of rebalance is scheduled and happens automatically according to the set time periods.

2. Early Rebalance: Triggered by severe market downturn. Specifically, this occurs when RiskON is close to going to zero as a result of breaching the threshold pre-defined in the RiskON/RiskOFF Product Specifications (see example below).

How Rebalancing Works

At the end of each epoch, SMART Tokens undergo a rebalancing process that resets token prices while preserving each holder's dollar value. Think of it as a fresh start that carries your gains (or cushioned losses) forward into the next period.

Here is a walkthrough of exactly how rebalancing works—with real numbers you can follow along with.

The Core Principles

Before diving into the examples, here's what you need to know:

1. Your dollar value is always preserved. At rebalance, you receive new tokens at reset prices that equal your end-of-epoch value. No value is lost in the transition.

2. Prices reset to 50/50. Each new epoch starts with RiskON and RiskOFF priced equally—each representing half of the underlying collateral value.

3. The "losing" side stays in their token. Holders of the token with the lower Net Token Value (NTV) at epoch end receive the same token (RiskON or RiskOFF) in the new epoch.

4. The "winning" side gets a mix. Holders of the token with the higher NTV at epoch end receive mostly their original token type, plus some of the other token to balance the system (so they will receive both RiskON & RiskOFF).

5. RiskOFF's protection is always honored. Even in extreme scenarios, RiskOFF's embedded put option is made whole. RiskON can go to near zero, but never negative—you can never owe more than your initial stake.

Scenario Analysis

Let's walk through some scenarios using the following assumptions:

Parameter	Value
Initial BTC Price	$100,000
Collateral Deposited	1 BTC
SMART Tokens Minted	1 RiskON BTC + 1 RiskOFF BTC
Starting RiskON Price	$50,000
Starting RiskOFF Price	$50,000
RiskOFF Floor (−10%)	$45,000
RiskOFF Cap (+15%)	$57,500

Our Cast of Characters

We have three users, each starting with $50,000 of value but with different risk preferences and holdings.

User	Holdings	Value	Risk Profile
User A	0.5 BTC	$50,000	Neutral
User B	1 RiskON	$50,000	Aggressive
User C	1 RiskOFF	$50,000	Conservative

Scenario 1: Regular Rebalance (BTC Doubles)

Let's see what happens when Bitcoin has a spectacular run—doubling from $100,000 to $200,000 by the end of the epoch.

End-of-Epoch Results

Here's where each user stands when the epoch closes:

User	Holdings	Token Price	Value of Holdings at Epoch end	Return
User A	0.5 BTC	$200,000/BTC	$100,000	+100%
User B	1 RiskON	$142,500 (NTV)	$142,500	+185%
User C	1 RiskOFF	$57,500 (NTV)	$57,500	+15%

Notice the risk transfer in action: User B's RiskON captured amplified upside (+185%) because they took on User C's upside above the cap. User C's RiskOFF was capped at +15%—the trade-off for having downside protection.

The Rebalancing Process

When Epoch 2 begins, token prices reset to equal values based on the new BTC price:

Token	Epoch 2 Beginning of Period Price
1 BTC	$200,000
1 RiskON BTC	$100,000
1 RiskOFF BTC	$100,000

The protocol must now deliver the correct value to each SMART Token holder:

• User B needs to receive $142,500 worth of new tokens

• User C needs to receive $57,500 worth of new tokens

How Tokens Are Allocated

User C (Lower NTV Holder) → Gets Only RiskOFF

User C held the "losing" side (token with lower Net Token Value at epoch end). They receive their entire value in their original token type:

User C end value of holdings = $57,500

RiskOFF tokens = $57,500 ÷ $100,000 = 0.575 RiskOFF

This keeps User C's conservative risk preference intact—they stay fully in RiskOFF.

User B (Higher NTV Holder) → Gets Both Tokens

User B held the "winning" side (token with higher Net Token Value at epoch end). They receive mostly their original token type, plus some RiskOFF to balance the system:

Token Type Received by User B	Quantity	Value of User B’s Holdings
RiskON	1.000	$100,000
RiskOFF	0.425	$42,500
Total	—	$142,500 ✓

Why This Allocation?

The total RiskOFF in the system must equal the total RiskON (since each pair backs the same collateral). At the new epoch prices:

• Total RiskOFF distributed: 0.575 (User C) + 0.425 (User B) = 1.000

• Total RiskON distributed: 1.000 (User B)

This maintains the 1:1 token balance required by the protocol.

What Happens Next?

If User B wants to continue with pure RiskON exposure (no RiskOFF), they can simply swap their 0.425 RiskOFF for more RiskON in the Risk Marketplace. The rebalancing preserves their value—what they do with the tokens afterward is their choice.

Scenario 2: Barrier-Triggered Early Rebalance

Regular rebalances happen at the scheduled epoch end. But what if the market moves so violently that it threatens RiskON’s ability to provide downside protection to RiskOFF (remember that the collateral underwriting RiskON’s obligation is melting in line with the market). That's where the barrier-triggered early rebalance comes in.

When Does This Trigger?

An early rebalance is triggered shortly prior to the threshold point at which Riskon goes to zero. For RiskON/RiskOFF SMART Tokens, the threshold is known in advance and is mathematically equal to half the put strike. At the threshold, the put obligation of RiskON exactly equals the value of the collateral that RiskON owns (50% of the underlying collateral) and RiskON’s value is equal to zero. To prevent RiskON from going to zero, the Product Specifications dictate that the barrier knocks out shortly before the threshold and RiskON transfers its 50% share of the underlying to RiskOFF. Simultaneously a new epoch starts with RiskON and RiskOFF prices reset to be equal to each other. Such a barrier event and early rebalance is anticipated to be extremely rare. Based on five years of stress simulations, this extreme scenario would only have been triggered once.

In our earlier example, with BTC starting at $100,000, triggering an early rebalance would require BTC to crash to around $45,000—a 55% drop within a single epoch.

Example: The Extreme Crash

Let's say BTC crashes from $100,000 to $45,000 (−55%) mid-epoch. Here's where each user stands:

User	Holdings	Token Price	Value of Holdings at Epoch end	Return
User A	0.5 BTC	$45,000/BTC	$22,500	−55%
User B	1 RiskON	~$0	~$0	−100%
User C	1 RiskOFF	$45,000	$45,000	−10%

The Critical Guarantee: RiskOFF's Put Is Always Honored

This is where the protocol's design shines. Even in this catastrophic scenario:

• User C (RiskOFF) is protected at their floor—they only lost 10% despite BTC crashing 55%. Their embedded put option was made whole.

• User B (RiskON) absorbed the excess losses. Their token went to near zero—that's the trade-off for having leveraged upside potential.

• Crucially, RiskON can go to near zero but never negative. User B can never owe more than their initial stake. There are no margin calls, no liquidations, no debt.

How Value Is Preserved

The total collateral in the system (1 BTC = $45,000) is distributed to make RiskOFF whole:

• RiskOFF receives: $45,000 (the full remaining collateral value)

• RiskON receives: ~$0 (effectively extinguished to honor RiskOFF's put)

A new epoch then begins immediately with both tokens reset to equal value, giving User B a fresh start (albeit with significantly less capital).

The Rebalancing Rules Summarized

1. Value is always preserved. Your dollar value at epoch end carries forward exactly into the new epoch.

2. Holders of the token with the lower NTV at the end of the epoch stay in their token. If you held the token that ended the epoch with a lower value, you receive only that token type.

3. Holders of the token with the higher NTV at the end of the epoch receive both tokens. If you held the token that ended the epoch with a higher value, at the beginning of the new epoch the majority of your holdings will be in the same token but you will receive some of the other token as well.

4. Total number of tokens remains balanced. The protocol always maintains a 1:1 ratio between total RiskON and total RiskOFF.

5. RiskOFF's protection is sacred. Even in extreme crashes (~55%), RiskOFF's embedded put option is honored.

6. RiskON can go to near zero, but never go negative. You can lose your stake, but you'll never owe money.

7. You can always swap back. After receiving mixed tokens, use the Risk Marketplace to return to your preferred single-token position.

Bottom Line: Rebalancing ensures SMART Tokens are perpetual—they never expire or settle in cash, but roll over continuously. Your risk preferences are maintained, your value is preserved, and the system remains solvent even in black-swan events.

For the mathematical derivations, please see protocol-papers-and-user-guides/math-proofs-and-derivations.