I have queued up IIP-100 Launch LINK2x-FLI for DG1 vote to begin on Monday, 11/8.
PWG in agreement with DeFi Pulse have decided to pause the launch of LINK2x-FLI as gas costs on main net are now prohibitive to launching this product.
Instead focus will now shift to deploying FLI on the Polygon network ASAP. Product proposals for both a MATIC2x-FLI and an ETH2x-FLI will be posted to forum this week.
PWG also recommend continuing to move the LINK2x proposal through DG2 with the amendment that the product will not be launched until economically viable to do so, such as when gas costs are lower or an opportunity to launch on L2 is possible.
Great example of the Automated Indices pod and DFP working closely together to prioritize the FLI product pipeline
IIP-100 Launch LINK 2x Flexible Leverage Index (LINK2X-FLI) has passed DG1!
Results available here: Snapshot
As there are incentives for lending LINK on Aave, 72 basis points, and borrowing USDC, 161 basis points, can we reconsider launching LINK2x-FLI ?
72 basis points, split 60/40 is 43.2 basis points to Index Coop.
161 basis points, split 60/40 is another 96.6 basis points to Index Coop.
If we combine the USDC borrowing incentives, the LINK lending incentives that is 233 basis point of additional revenue. The streaming fee is 195 basis point, so the revenue for this product has gone from 195 basis point streaming fee to 428 basis points. More than doubled.
The 233 basis points of stkAAVE incentives coves the gas costs. The profit margin on this product is healthy in the short term. We have 3 months minimum of incentives on Aave and it is highly probable there is continued Liquidity Incentives on Aave come February next year.
stkAAVE is a productive asset, 5% APR is very plausible and should be considered. Enough stkAAVE and the yield offsets ongoing gas costs. This should give the product the run way it needs before on-chain gas costs are passed to token holders. With this type of modelling/direction, the LINK2x-FLI on mainnet is economical.
Note: This is crude math, as it overlooks the LTV fraction and doesn’t capture the cycling of principal and debt to create the 2x leverage - but should suffice to outline the intent here.
Thanks for surfacing this @Matthew_Graham. I’m in complete agreement with this suggestion. If the increased APY from the incentives offset the costs to the extent that the product become profitable we should bring this to market.
Good way to frame the decision.
Ultimately, this is at the discretion of the methodologist but you have my full support here.
Hi @Matthew_Graham, the revenue side is even better since the LINK reward is effectively leveraged (with $100 NAV, we would earn rewards on $200 LINK and $100 USDC).
The main reason for putting the index on hold was that with the currently high gas prices the AUM necessary for streaming fees to cover rebalancing costs was very high (one $200 swap per day “needs” almost $4M AUM, if we include rewards $1.5M).
In addition, high gas prices will make it more difficult to build up AUM: Less trading will make an LP position less attractive (especially on Uni v3) and the product will generate less revenues from minting.
But I completely agree with you: If we could come up with a mechanism to pass maintenance costs to the user this whole rationale completely changes. Have there been discussion on how to implement this yet (in a permissionless way)?
Coming at this from a slightly different angle. What streaming fee is needed to make this profitable at $4M ?
As revenue is split post on-chain gas cost, we have the option to adjust streaming fees as needed to make this happen. We can taper fees at a later date…
I would really like us to explore what we can do to make this launch feasible.
To some degree this is in our hands: If we allow a very high maximum trade size we can limit the number of trades per day. If we set the max trade size to USDC 500K we should at almost all times not have more than one trade at $4M AUM and 1.95% is then sufficient. Rewards and minting fees would be an additional buffer (but also less predictable). In a sense this turns gas fees into slippage.
Looking at BTC2X the gas fee for a FLI rebalance is actually higher than I expected and currently averaging in the order of $600 as it also includes a repay/borrow transaction in addition to the swap.
For $4M AUM to cover this with streaming fees it has to be 5.5%.
To cover it with 1.95% streaming fee $11M AUM are necessary.
Could we execute this with a different strategy that requires less rebalancing? Using a floating LR that only rebalances when it hits certain bounds can massively reduce gas fees. This strategy is used by Binance and might enable us to continue to launch FLI on L1.
The Pod has looked into this before and found that while this strategy can lag current FLI strategy in a bull, it can provide comparable performance in bear and crab markets due to the increased capital efficiency from reduced transaction costs.