ETH2x-FLI Parameter Update #7

title: ETH2x-FLI Parameter Update #7

status: posted

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

created: June 9, 2021

Simple Summary

Raise the Supply Cap of the ETH2x-FLI from 600,000 units to 800,000 units, increase the Max Trade Size for rebalancing from 400 ETH to 600 ETH, and increase the Max Trade Size for ripcord from 1,200 ETH to 1,600 ETH.

Abstract

Adjust the following parameters on the ETH2x-FLI:

  1. Raise the Supply Cap to 800,000 units
  2. Increase the Max Trade Size for routine rebalance transactions from 400 ETH to 600 ETH
  3. Increase the Max Trade Size for ripcord transactions from 1,200 ETH to 1,600 ETH

Motivation

In order to proactively respond to market turbulence, the FLI work team plans to change three parameters related to ETH2x-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.

During normal operation, ETH2x-FLI is constantly rebalancing towards the target leverage ratio by adjusting leverage in the background. However, if the price of ETH drops significantly, the leverage ratio may deviate outside of the safe range of 1.7x - 2.3x. 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 2.4x to 2.3x, 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 ETH FLI product is currently operating within that range, and this update enables us to grow our AUM and 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 ETH2x-FLI increases, so do AUM and the associated leveraged positions. When the price of ETH 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 ETH2x-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 800,000 units from 600,000 units
  • Reasoning: at time of writing, the total unit supply of ETH2x-FLI is ~480,000 or ~80% 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 400 ETH to 600 ETH
  • 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 600 ETH 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 1,200 ETH to 1,600 ETH
  • 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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Looking good guys :pray:

@afromac @allan.g @emault @tgreco

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