IIP: 119
Title: Launching iMATIC, iETH, BTC2X, iBTC FLIs on Polygon (DG2)
Status: Proposed
Author(s): Pulse Inc
Created: 18-Jan-2022
Simple Summary
Pulse Inc proposes that the Index Coop manages new indices that provide 2x leverage and inverse exposure to the performance of MATIC, ETH, and BTC, using the FLI strategy that was proposed in IIP-13.
Following the launch of ETH2X-FLI-P, these indices will also be launched on the Polygon network.
Note: The MATIC2X FLI on Polygon already passed DG2.
Abstract
iMATIC, iETH, BTC2X and iBTC FLIs on Polygon are based on V0.1 of the FLI methodology that is also used for ETH2X-FLI-P on Polygon.
Motivation
Manually maintaining a leverage or inverse 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:
| FLI | iMATIC | iETH | iBTC | BTC2X |
|---|---|---|---|---|
| Asset and strategy parameters | ||||
| Collateral Asset | USDC | USDC | USDC | WBTC |
| Borrow Asset | MATIC | WETH | WBTC | USDC |
| DeFi Lending Protocol | Aave Polygon | Aave Polygon | Aave Polygon | Aave Polygon |
| Target Leverage Ratio | 2 (-1 short) | 2 (-1 short) | 2 (-1 short) | 2 |
| Maximum Leverage Ratio | 2.2 (-1.2 short) | 2.2 (-1.2 short) | 2.2 (-1.2 short) | 2.2 |
| Minimum Leverage Ratio | 1.8 (-0.8 short) | 1.8 (-0.8 short) | 1.8 (-0.8 short) | 1.8 |
| Initial Supply Cap | 250,000 tokens | 250,000 tokens | 250,000 tokens | 250,000 tokens |
| Token value at inception | USDC 100 | USDC 100 | USDC 100 | USDC 100 |
| Rebalance parameters | ||||
| Rebalance Interval | 4 hours | 4 hours | 4 hours | 4 hours |
| Recentering Speed | 2.5% | 2.5% | 2.5% | 2.5% |
| Slippage Tolerance | 2% | 2% | 2% | 2% |
| DEXes for Rebalancing | Quickswap, Sushiswap optimized split Multi hop: WMATIC-ETH-USDC |
Quickswap, Sushiswap optimized split |
Quickswap, Sushiswap optimized split Multi hop: WBTC-ETH-USDC |
Quickswap, Sushiswap optimized split Multi hop: WBTC-ETH-USDC |
| Max Trade Size | 187,000 USDC (combined) | TBD closer to launch | TBD closer to launch | TBD closer to launch |
| Ripcord parameters | ||||
| Ripcord Leverage Ratio | 2.4 (-1.4 short) | 2.4 (-1.4 short) | 2.4 (-1.4 short) | 2.5 |
| Ripcord Slippage Tolerance | 5% | 5% | 5% | 5% |
| Ripcord Max Trade Size | 1,360,000 USDC (combined) | TBD closer to launch | TBD closer to launch | TBD closer to launch |
| Liquidity provision | ||||
| Paired asset | iMATIC-FLI-P / MATIC | iETH-FLI-P / WETH | iBTC-FLI-P / WBTC | BTC2X-FLI-P / WBTC |
| DEX | Sushiswap (Polygon) | Sushiswap (Polygon) | Sushiswap (Polygon) | 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 WETH is used since the MATIC-USDC and WBTC-USDC pool is still significantly smaller than the respective WETH pools. This ensures that large trades that often occur at volatile times can be executed more safely and with less slippage.
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.
The final trade size parameters will be determined closer to the launch date. They are determined to ensure that price impact stays below 0.6% (5% for a ripcord trade), for the limiting swap in case of a multi hop trade.
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 or are only using Polygon, we also see users of the existing ETH2X-FLI products moving over to the Polygon product – especially more active traders. Furthermore, inverse products complete the offering of trading tools. 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
- Traders who are taking short term bets on up and down price movement.
- Token holders who use the minting of a 2X FLI token as a USDC loan while keeping their long exposure and who do not want to actively manage the rebalancing that is needed to maintain a healthy debt position.
- Token holders that act as LPs in a 2X-FLI pool resulting in a 1.5x leveraged 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 net asset value of the index.
- Current Leverage Ratio (CLR) — the value of the asset currently held by the index divided by the current net asset value of 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))
For the inverse indices the CLR in above formula is the value of the debt held by the index dividend by the current net asset value of the index (i.e. -1 if at target leverage).
Calculation of the new Current Leverage Ratio for the period:
CLRt+1 = max(MINLR, min(MAXLR, CLRt * (1 – RS) + TLR * RS))
Costs
Cost to customer
Implicitly the customer earns the lending protocol deposit rate on the collateral while paying the respective borrow rate on the debt position. 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%.
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 pools with the corresponding FLI asset on Sushiswap (Polygon) for initial on-chain liquidity. We expect self sustaining liquidity driven by FLI traders as well as token holders that provide liquidity to achieve a net 1.5 times leveraged position that earns trading fees for the 2X indices. 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.
Revision history
- Update Ripcord leverage to 2.4 (58% LTV). Still far away from liquidation (70% LTV) but reduce likelihood of being called.
Copyright
Copyright and related rights waived via CC0.
