IIP-104: Launch ETH2X-FLI-P on Polygon (DG2)

IIP: 104
Title: Launch ETH 2x Flexible Leverage Index (ETH2X-FLI-P) on Polygon (DG2)
Status: Proposed
Author(s): Pulse Inc, @afromac
Created: 23-Nov-2021

Simple Summary

Pulse Inc proposes that the Index Coop manages a new index that provides 2x leverage exposure to the performance of ETH, using the FLI strategy that was proposed in IIP-13.

In contrast to the existing ETH2X-FLI product, this index will be launched on the Polygon network.

Abstract

ETH2X-FLI on Polygon is based on V0.1 of the FLI methodology that is also used for ETH2X-FLI and BTC2X-FLI on the Ethereum network.

Motivation

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.

‌Rationale

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.

Specification

Overview

At inception the following parameters are proposed for ETH2X-FLI-P on Polygon:

Asset and strategy parameters
Underlying Asset WETH
Borrow Asset USDC
DeFi Lending Protocol Aave Polygon
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 parameters
Rebalance Interval 4 hours
Recentering Speed 2.5%
Slippage Tolerance 2%
DEXes for Rebalancing Quickswap, Sushiswap
optimized split
WETH-USDC
Max Trade Size 120 WETH (combined)
Ripcord parameters
Ripcord Leverage Ratio 2.5
Ripcord Slippage Tolerance 5%
Ripcord Max Trade Size 300 WETH (combined)
Liquidity provision
Pair ETH2X-FLI-P / WETH
DEX Sushiswap (Polygon)

USDC is selected as the stable coin for the debt position as it is by a large margin the most liquid stable coin on Polygon. Initial supply cap and token value ensure that the product can safely grow to $20M which is around 17% of available liquidity. Max trade size is set to correspond to total transaction costs (DEX fee and price impact) of 1%.

Size of opportunity

We see a high chance of FLIs and strategies in general that require frequent trading to move to layer 2’s. Currently Polygon is the most advanced alternative to Ethereum with liquid lending protocols and exchanges. While we do anticipate getting new users that don’t use FLI products on Ethereum Mainnet for cost reasons, we also see users of the existing ETH2X-FLI product moving over to the Polygon product – especially more active traders. Hence, availability of this Polygon version is an important mitigation of the risk of losing FLI users for Index Coop and DeFi Pulse.

Market & Customer Research

Target Customer

  1. Traders who are taking short term bets on ETH price movement.
  2. ETH holders who use the minting of a FLI token as a USDC loan while keeping their long ETH exposure and who do not want to actively manage the rebalancing that is needed to maintain a healthy debt position.
  3. ETH holders that act as LPs in a ETH2X-FLI / ETH pool resulting in a 1.5x leveraged ETH position that also earns LP fees with limited impermanent loss.

Methodology

Objective

Flexible Leverage Indices enable market participants to take on leverage while minimizing the transaction costs and risks associated with maintaining collateralized debt.

Definitions

  • 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.

Index Price:

FLIt = FLIt-1 * (1 + (Pricet / Pricet-1 – 1) * CLRt-1 – BorrowRatet * (CLRt-1 – 1))

Calculation of the new Current Lever Ratio for the period:

CLRt+1 = max(MINLR, min(MAXLR, CLRt * (1 – RS) + TLR * RS))

Costs

Cost to customer
Implicitly the customer earns the WETH deposit rate on the collateral while paying the USDC borrow rate on the debt position, the DEX fee, and slippage. In addition a 1.95% streaming fee is extracted from the index’s AUM.

Cost to mint / redeem
There will be mint and redeem fees of 0.10%. Gas price to issue will be negligible on Polygon.

Fee split
Flexible Leverage Index will have a streaming fee of 1.95% (195 basis points) and a 0.10% mint / redeem fee (10 basis points). The revenue generated from the fees and any other rewards, after subtracting gas fees, will be split 40% to DeFi Pulse and 60% to Index Coop on a monthly basis.

Liquidity

Pulse Inc suggests an ETH2X-FLI-P / WETH pool on Sushiswap (Polygon) for initial on-chain liquidity based on observations of the BTC2X-FLI / wBTC pool on Mainnet. We expect self sustaining liquidity driven by FLI traders as well as ETH holders that provide liquidity to achieve a net 1.5 times leveraged position that earns trading fees. Being part of Sushi’s Onsen reward program should further incentivize LPs initially.

‌Author Background

DeFi Pulse and the Pulse Inc brand 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.

Marketing support / distribution / partnerships

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.

Links

Revision history

Copyright

‌Copyright and related rights waived via CC0.

4 Likes

Let’s get ETH2x-FLI-P through DG2! Excited to experiment with the faster rebalance intervals

1 Like

Let’s ship product and get this done. :owl: :owl:

Thank you as always @ChrisG and excited to see Index Coop continue to build out the leverage product offering.

Wen DG2!

1 Like

Hi @Mringz can you please schedule snapshot to begin for this product at 18:00 UTC on Monday 29th of November

2 Likes