IIP-105: Launch MATIC2X-FLI-P on Polygon (DG2)

IIP: 105
Title: Launch MATIC 2x Flexible Leverage Index (MATIC2X-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 target 2x leverage exposure to the performance of Polygon’s native MATIC token, using the FLI strategy that was proposed in IIP-13.

In contrast to previous FLI products, MATIC2X-FLI will be launched on the Polygon network.

Abstract

MATIC2X-FLI-P is based on V0.1 of the FLI methodology that is also used for ETH2X-FLI and BTC2X-FLI.

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 MATIC2X-FLI-P:

Asset and strategy parameters
Underlying Asset WMATIC
Borrow Asset USDC
DeFi Lending Protocol Aave Polygon
Target Leverage Ratio 2
Maximum Leverage Ratio 2.2
Minimum Leverage Ratio 1.8
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
Multi hop: WMATIC-ETH-USDC
Max Trade Size 315,000 WMATIC (combined)
Ripcord parameters
Ripcord Leverage Ratio 2.3
Ripcord Slippage Tolerance 5%
Ripcord Max Trade Size 785,000 WMATIC (combined)
Liquidity provision
Pair MATIC2X-FLI-P / WMATIC
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.

The multi hop via ETH is used since the MATIC-USDC pool is still significantly smaller than the respective ETH pools. This ensures that large trades that often occur at volatile times can be executed more safely and with less slippage.

Max trade size values are equivalent to the parameters for ETH2X-FLI-P since the WETH-USDC pool is the limiting factor for the multi hop swap.

Since the DG1 post, the FLI pod’s proposal through Aave governance to raise the appropriate risk parameters to enable the targeted leverage in a safe fashion was approved. The new maximum LTV will be 65%, the new liquidation threshold will be 70%. The index will only be launched once these new risk parameters have been implemented.

In general, liquidity for WMATIC is a lot lower than for the ETH and WBTC products. To alleviate this risk alternative DEXes, specifically Uniswap v3 once available on Polygon, should be added in the near future.

Size of opportunity

Adoption proportional to ETH2X-FLI would imply assets under management in the order of USD 5 million. Given the high trading volumes on Polygon from a more crypto native user base, we expect more trading, minting, and redeeming activity with this MATIC product compared to ETH2X-FLI on Mainnet and subsequently higher assets relative to market cap.

With increasing gas prices on the Ethereum Mainnet - which we perceive to be an irreversible trend - we believe Polygon to be the new home for FLI products. The ability to rebalance more frequently while remaining profitable will benefit the users from risk and return perspective.

Market & Customer Research

Target Customer

  1. Traders who are taking short term bets on MATIC price movement.
  2. MATIC holders who use the minting of a FLI token as a USDC loan while keeping their long MATIC exposure and who do not want to actively manage the rebalancing that is needed to maintain a healthy debt position.
  3. MATIC holders that act as LPs in a MATIC2X-FLI-P / WMATIC pool resulting in a 1.5x leveraged MATIC 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 fees 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. 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 a MATIC2X-FLI-P / WMATIC 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 MATIC 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.

8 Likes

Excited to launch this product and experiment with the faster rebalance intervals!

2 Likes

I am super excited to see this product launch :slight_smile:

2 Likes

Hi @Mringz, similar to IIP-104, can you please schedule snapshot to begin for this product at 18:00 UTC on Monday 29th of November

2 Likes

DG2 for IIP-105: Launch MATIC2xFLI on Polygon has been queued for vote on Monday, 29 November 2021, 18:00 UTC.

https://snapshot.org/#/index-coop.eth/proposal/0xbecffc979a7e3c1d98844a239987ceeeaa8f0c43d49fc8995e7905371636675b

1 Like