BTC2x-FLI Parameter Update #5

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title: BTC2x-FLI Parameter Update #5

status: posted

author: Cormac Daly (@afromac), Eric Mault (@emault)

created: July 1, 2021

Simple Summary

Raise the Supply Cap of the BTC2x-FLI from 400,000 units to 1,000,000 units, and for the deployment of BTC2x-FLI rebalancing mechanism on Uniswap V3: increase the Max Trade Size for rebalancing from 20 BTC to 55 BTC, and increase the Max Trade Size for ripcord from 50 BTC to 100 BTC.

Due to the superior liquidity available on Uniswap V3 we are able to target a vastly greater Max Trade Size while still maintaining an acceptable price impact. For this reason, we define this parameter separately from the SushiSwap Max Trade Size.

Abstract

Adjust the following parameters for BTC2x-FLI:

  1. Raise the Supply Cap to 1,000,000 units
  2. Increase the Max Trade Size for routine rebalance transactions from 20 BTC to 55 BTC
  3. Increase the Max Trade Size for ripcord transactions from 50 BTC to 100 BT.
  4. The changes in points 2 and 3 apply solely to Uniswap V3 and will not apply to any rebalancing transactions that occur on Sushiswap

Motivation

Following the decision to implement IIP-50 Upgrade FLI to Support Multiple Exchanges, the FLI work team plans to change three parameters related to BTC2x-FLI: Supply Cap, Max Trade Size for rebalance transactions, and Max Trade Size for ripcord transactions. These parameters affect the product’s delever speed, which is the most important metric for measuring and responding to risks faced by FLI products. The change to Max Trade Size applies solely to rebalancing transactions on Uniswap V3, and in the event that the product uses Sushiswap to rebalance it will revert to the Max Trade Size parameter defined in BTC2x-FLI Parameter Update #4 for those transactions.

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 was used to optimize for safety and capital efficiency on Sushiswap. Migrating to Uniswap v3 allows us to target a much higher delevering speed of 0.046 and at the same price impact. This makes the product both safer and more capital efficient, due to the superior liquidity conditions available on Uniswap V3

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.

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

  1. Raise the Supply Cap to 1,000,000 units from 400,000 units
  • Reasoning: at time of writing, the total unit supply of BTC2x-FLI is ~220,000 or ~55% of the current Supply Cap. The Supply Cap should be raised to accommodate future market demand and to avoid dislocation from the NAV as we approach the current Supply Cap
  • Prior proposals for increasing the Supply Cap can be found here
  1. Increase the Max Trade Size for routine rebalance transactions from 20 BTC to 55 BTC
  • Reasoning: Migrating rebalancing to Uniswap V3 enables us to target a vastly greater Max Trade Size of 55 BTC and still achieve a price impact of ~0.6%. This has the dual benefit of making the product safer, while also lowering gas requirements by reducing the number of transactions needed to rebalance.
  • Prior proposals for increasing the Supply Cap can be found here
  1. Increase the Max Trade Size for ripcord transactions from 50 BTC to 100 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 1, 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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