IIP-105: Launch MATIC2X-FLI (Polygon)

[ChrisG]

IIP: 105
Title: Launching MATIC 2x Flexible Leverage Index (MATIC2X-FLI) on Polygon
Status: Proposed
Author(s): Pulse Inc
Created: 11-Oct-2021

Simple Summary

Pulse Inc proposes that the Index Coop manages a new index that provides target 2x leveraged 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 is based on V0.1 of the FLI methodology that is also used for ETH2X-FLI and BTC2X-FLI.
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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:

Asset and strategy parameters
Underlying Asset	MATIC
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%
Ripcord parameters
Ripcord Leverage Ratio	2.3
Ripcord Slippage Tolerance	5%
Initial liquidity
Pair	MATIC2X-FLI / MATIC
DEX	Sushiswap (Polygon)

In accordance with other FLI proposals, a complete list of parameters will be provided before DG 2.

Note: At the time of writing, Aave’s maximum LTV of 50% for MATIC prevents us from launching the product. However, the FLI pod is progressing a proposal through Aave governance to raise the appropriate risk parameters to enable the targeted leverage in a safe fashion.

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 / MATIC 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 value:

FLI_t = FLI_t-1 * (1 + (Price_t / Price_t-1–1) * CLR_t-1 – BorrowRate_t * (CLR_t-1 – 1))

Calculation of the new Current Lever Ratio for the period:

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

Costs

Cost to customer
Implicitly, the customer earns the MATIC 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%.

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 / MATIC 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.
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‌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 provide 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.

Copyright

‌Copyright and related rights waived via CC0.

[allan.g]

Eager to get our first FLI products on Polygon!

[catjam]

Posting the Work Team Analysis results for MATIC2x-FLI. Work team analysis was done by @afromac , @allan.g , @Metfanmike and myself.

Link: FLI_Polygon_Product Scoring Chart - Google Sheets

Overall Score: 2.03.
This is just under LINK-2xFLI (2.08) and just above MVI (1.92). It scored exactly the same as ETH2x-FLI (Polygon edition) – they represent very similar potential for IC products to experiment on Polygon.

Market Opportunity: 3.5
The product did not receive a point for large market as it will be native to Polygon – a smaller (albeit promising) market than our other products on Ethereum. The team was divided on whether it represented a “must-have” and whether the benefits of saving on gas costs negated the necessity of bridging assets over to Polygon and the friction that process creates.

Revenue Structure (5), Methodologist Impact (3), and Financial Costs (1) were unchanged from the last FLI product scoring (LINK-2xFLI).

Operational Costs scored a 3, noting that there is blowup risk of any FLI product, and that the parameter maintenance and additional monitoring deserved an additional point (this effort feels on par with a monthly rebalance.)

Finally, technical costs scored a 2. FLI products are largely 1s at this point due to the work Set has put into the product suite, but launching on Polygon requires the setup of a new multisig, arb bot, and website tooling for token purchases.

re: a MATIC/ETH tie, you may ask one of the following questions:

• “oh no! What do we do if both products score the same?” Luckily, this rubric is no longer used for prioritization and product sequencing. That responsibility lives with PWG & EWG as they have the best context on the product requirements and roadmaps.
• “Um, why did they both score… the same?!” FLI products (as they share a technical framework and a methodologist) generally score very similarly to start with. We also don’t know enough about the Polygon market to differentiate between opportunities there, but think that the ETH / MATIC product pairing makes great sense to start with as a test. ETH2x-FLI represents the possibility of making frequent trades in a low gas environment, which the product was originally designed for but infrequently used for. MATIC2x-FLI represents the opportunity to take a long position in an ecosystem the holder is bought into – something FLI products were not designed for but are frequently used for.

Looking forward to seeing how these products progress & perform!

[afromac]

@Mringz can you please assign IIP number and queue up vote to on begin 18:00 UTC Monday 15th November.

[Matthew_Graham]

Hi @afromac,

Can we confirm that technically this product is very high risk until the LTV parameters for wMATIC on Aave Polygon Markets are changed ?

If we know the product is high risk of liquidation due to low LTV threshold. Is this IIP simply just a sentiment check here.

Also, can we please get a flavour for what operationally is required to support this product. I am aware we need a community multi-sig to receive revenue into.

[allan.g]

Hey @Matthew_Graham - This product would not be implemented until the wMATIC risk parameters are updated by Aave Polygon. At the current configuration, it is not possible to achieve the target leverage ratio or the safe leverage ratio range, so a dependency for this product is raising those risk parameters. The final IIP for DG2 will comment on this as well - this proposal is simply for DG1!

There is some general operational infrastructure required for a Polygon launch - multi-sig operations account, TechOps dashboard, IC website - so that’s something we’re speccing out currently. Thankfully, all other Polygon native products that the Coop launches will benefit from this work, but it is another hurdle to clear for this particular product (and ETH2x on Polygon as well).

[Mringz]

IIP-105 has been queued for snapshot vote for Monday 15th November 18:00 UTC.

https://snapshot.org/#/index-coop.eth/proposal/0x940fea8c7965da18b12fc6a081478204d41cda975ca8acdf220a17b0b99193aa

[Mringz]

IIP-105: Launch MATIC2X-FLI (Polygon) has passed.

Results available here: Snapshot

[Matthew_Graham]

Further to the above, I expect to wMATIC risk parameters on Aave Polygon Market to be updated as per my ARC detailed here in the near future. Through my efforts wMATIC2x-FLI will be technically feasible.

ARC: Polygon Market - wMATIC Risk Parameter Changes

[TheYoungCrews]

fantastic work getting this change thru Aave governance @Matthew_Graham! From a growth perspective, I would like to see us launch both Matic2x-FLI & Eth2x-FLI on Polygon in one shot.