BTC2X-FLI Parameter Update #4

Product Products
1

title: BTC2x-FLI Parameter Update #4

status: posted

Author(s): Cormac Daly (@afromac), Allan Gulley (@allan.g)

created: June 10, 202

Simple Summary

Raise the Max Trade Size of BTC2x-FLI from 10 BTC to 20 BTC, and increase the Max Trade Size for ripcord from 24 BTC to 50 BTC.

Abstract

Adjust the following parameter on the BTC2x-FLI:

  1. Raise the Max Trade Size to 20 BTC for routine rebalance transactions
  2. Increase the Max Trade Size for ripcord transactions from 24 BTC to 50 BTC

Motivation

In order to proactively respond to market turbulence, the FLI work team plans to change the Max Trade Size parameter for BTC2x-FLI rebalance transactions. This parameter affects the product’s delever speed, which is the most important metric for measuring and responding to risks faced by FLI products.

During normal operation, BTC2x-FLI is constantly rebalancing towards the target leverage ratio by adjusting leverage in the background. However, if the price of BTC drops significantly, the leverage ratio may deviate outside of the safe range of 1.8x - 2.2x. In this scenario, the product must delever quickly to avoid liquidation.

The speed at which the product can delever and return to a safe range is determined by AUM and the Max Trade Size, as well as time needed to complete successful rebalancing transactions. We measure the delever speed as the amount of leverage that can be delevered per minute. For example, if it takes 10 minutes to delever from 2.3x to 2.2x, the delever speed is 0.1/10 = 0.01. This metric enables us to determine how confident we are that we can avoid liquidation in any market conditions. A range of 0.1-0.15 optimizes for safety and capital efficiency. The BTC2x-FLI product is currently operating within that range, and this update enables us to grow our AUM at our current available token supply and remain within that range. A more detailed description of this methodology is being drafted and will be presented to the community soon.

As the supply of BTC2x-FLI increases, so do AUM and the associated leveraged positions. When the price of BTC falls, AUM and the associated leveraged positions must be rebalanced in order to maintain a healthy leverage ratio, and the primary tool for facilitating rebalances is Max Trade Size. Therefore, as the supply of BTC2x-FLI increases, it is critical to adjust Max Trade Size. The Supply Cap was raised with IIP-44, but Max Trade Size has remained static. If token supply and AUM were to increase significantly from here, BTC2x-FLI may deviate from a safe delever speed; this parameter change prevents that from happening.

In this case, the FLI work team would like to propose the following parameter change:

  1. Increase the Max Trade Size for routine rebalance transactions from 10 BTC to 20 BTC
  • Reasoning: it is imperative that we raise the Max Trade Size limit in tandem with Supply Cap increases to achieve acceptable delever speeds for routine rebalance transactions; a Max Trade Size of 20 BTC falls under the acceptable price impact threshold of <0.6%
  • Prior proposals for increasing the Supply Cap can be found here
  1. Increase the Max Trade Size for ripcord transactions from 24 BTC to 50 BTC
  • Background: the ripcord function is called in extreme circumstances when the leverage ratio is dangerously outside the bounds of the safe range and leveraged positions are at risk of liquidation. For this reason, a separate set of emergency parameters apply to ripcord transactions.
  • Reasoning: it is imperative that we raise the Max Trade Size in tandem with Supply Cap increases to achieve acceptable delever speeds for ripcord transactions

Context

As per IIP-45: Delegation of FLI Parameter Changes, management of FLI product parameters has been delegated to a small team of subject matter experts from DeFi Pulse, Set Labs, and the Index Coop community in order to enable more rapid, responsive changes to product parameters.

The FLI work team is comprised of individuals from three sub-groups:

The process for updating FLI parameters is as follows:

  1. The FLI work team discusses and identifies parameter change requirements via discord / calls etc.
  2. Member(s) of the FLI work team will post a short description of the reasoning for the change to the forum and state that the FLI work team is in agreement; no poll is required
  3. The forum post must be active for 24 hours and have no dissent from FLI work team members
  4. The change(s) can then be made once these criteria are met
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