Title: Launch LINK 2x Flexible Leverage Index (LINK2X-FLI)
Author(s): Pulse Inc
LINK2X-FLI is based on V0.1 of the FLI methodology that is also used for ETH2X-FLI and BTC2X-FLI.
Manually maintaining a leverage position requires continuous monitoring of the health of the position in order to avoid liquidation and incurs high gas fees when the position is frequently rebalanced.
Flexible Leverage Indices (FLIs) solve this problem by wrapping a collateralized debt position in a single token that can be bought and sold on an exchange and by socializing implementation costs. Furthermore, FLI’s unique index algorithm reduces rebalancing needs by an order of magnitude. Emergency deleveraging is possible during Black Swan events for additional safety.
At inception the following parameters are proposed for LINK2X-FLI:
|Asset and strategy parameters|
|DeFi Lending Protocol||Aave v2|
|Target Leverage Ratio||2|
|Maximum Leverage Ratio||2.3|
|Minimum Leverage Ratio||1.7|
|Initial Supply Cap||250,000 tokens|
|Token value at inception||USDC 100|
|Rebalance Interval||Daily / 24 hours|
|Ripcord Leverage Ratio||2.7|
|Ripcord Slippage Tolerance||5%|
|Pair||LINK2X-FLI / LINK|
More detailed rebalance parameters to be discussed after DG1.
While LINK has a market cap similar to WBTC, it has significantly higher trading volumes and volatility indicating demand and opportunity for a LINK2X-FLI product. Chainlink is one of the most widely used protocols in the Ethereum ecosystem that has gathered a strong community behind it. On Aave v2, LINK is the most supplied non-stable coin after BTC and ETH.
Demand for a 2X-FLI product is therefore expected to be stronger than for WBTC.
- LINK holders who use the minting of a FLI token as a USDC loan while keeping their long LINK exposure and who cannot afford gas fees caused by the frequent rebalancing that is needed to maintain the debt position. In addition, some of these holders may act as LPs in a LINK2X-FLI / LINK pool resulting in a 1.5x leveraged LINK position that also earns LP fees with limited impermanent loss.
- Traders who are taking short term bets on LINK price movement.
Flexible Leverage Indices enable market participants to take on leverage while minimizing the transaction costs and risks associated with maintaining collateralized debt.
- Borrow Rate — the cost to borrow the asset at the DeFi Lending Protocol over the most recent epoch.
- Epoch Length — the time between rebalances.
- Target Leverage Ratio (TLR) — the long term target for the value of the assets held by the index divided by the value of the debt held by the index.
- Current Leverage Ratio (CLR) — the value of the asset currently held by the index divided by the current value of the debt held by the index.
- Maximum Leverage Ratio (MAXLR) — the highest leverage ratio the index will ever have after a rebalance.
- Minimum Leverage Ratio (MINLR) — the lowest leverage ratio the index will ever have after a rebalance.
- Re-centering Speed (RS) — the rate at which the Current Leverage Ratio is adjusted each period to return to the Target Leverage Ratio, when the index is not being adjusted back to the Maximum Leverage Ratio or the Minimum Leverage Ratio.
FLIt = FLIt-1 * (1 + ((Pricet / Pricet-1–1) * CLRt-1 - (BorrowRatet * (CLRt-1 - 1) / CLRt-1)))
Calculation of the new Current Lever Ratio for the period:
CLRt+1 = max(MINLR, min(MAXLR, CLRt * (1 — RS) + TLR * RS))
Cost to customer
Implicitly the customer earns the LINK deposit rate on the collateral while paying the USDC borrow rate on the debt position. In addition a 1.95% streaming fee is deducted from the index performance.
Cost to mint / redeem
There will be mint and redeem fees of 0.10%.
Flexible Leverage Index will have a streaming fee of 1.95% (195 basis points) and a 0.1% mint / redeem fee. The revenue generated from the fees, after subtracting gas fees, will be split 40% to DeFi Pulse and 60% to Index Coop on a monthly basis.
Pulse Inc suggests a LINK2X-FLI / LINK pool on Sushiswap for initial on-chain liquidity based on observing BTC2X-FLI / WBTC as the corresponding most liquid pool for BTC2X-FLI. We expect self sustaining liquidity driven by FLI traders as well as LINK holders that provide liquidity to achieve a net 1.5 times leveraged position that earns trading fees. Being part of Sushi’s reward program should further incentivize LPs initially.
DeFi Pulse and the Pulse Inc are committed to maintaining and creating indices as well as driving the continued growth of the Index Coop.
DeFi Pulse is the leading website for the latest analytics and rankings of DeFi protocols. DeFi Pulse’s rankings track the total value locked into the smart contracts of popular DeFi applications and protocols and provides key insights and educational content to help more newcomers go from zero to DeFi.
DeFi Pulse and Pulse Inc will support the launch of this product through all their channels (websites, blog, twitter) and are open to joint marketing efforts with the Index Coop.
Copyright and related rights waived via CC0.