IIP-119: Launch iMATIC, iETH, BTC2X, iBTC FLIs on Polygon

[ChrisG]

IIP: 119
Title: Launching iMATIC, iETH, BTC2X, iBTC FLIs on Polygon (DG1)
Status: Proposed
Author(s): Pulse Inc
Created: 20-Dec-2021
‌

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: A 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	2.1 (-1.1 short)	2.1 (-1.1 short)	2.1 (-1.1 short)	2.2
Minimum Leverage Ratio	1.9 (-0.9 short)	1.9 (-0.9 short)	1.9 (-0.9 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%
Ripcord parameters
Ripcord Leverage Ratio	2.25 (-1.25 short)	2.25 (-1.25 short)	2.25 (-1.25 short)	2.5
Ripcord Slippage Tolerance	5%	5%	5%	5%
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)

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

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

1. Traders who are taking short term bets on up and down price movement.
2. 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.
3. 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:
FLI_t = FLI_t-1 * (1 + (Price_t/Price_t-1–1) * CLR_t-1 – BorrowRate_t * (CLR_t-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:
CLR_t+1 = max(MINLR, min(MAXLR, CLR_t * (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

Copyright

‌Copyright and related rights waived via CC0.

[LemonadeAlpha]

I like it. Coming in hot, LFG

[CryptoIndian]

This is such a great opportunity to target traders. I love this.

[Miza]

Yes great for traders and that LP will be spicy generating fees as folks trade, adding another great option.

[sixtykeys]

Love to see it! My only recommendation would be to make this a more blanket proposal, and add in the ability to launch any future products (that may not be listed above) that use the FLI methodology on Polygon chain, without having to go to IIP.

[ChrisG]

Hey @sixtykeys, this is a good idea. I think @afromac is looking into creating a “batch” IIP framework for such index family launches so that we can quickly launch indices off the same IIP, especially if all very similar iterations of the same index methodology and token implementation.

[Static121]

100% FOR this.

These products were born for L2s. Let’s follow up on the success of ETH2x-FLI-P, generate some velocity, get all of these products into the hands of traders with near zero fees ASAP (then let’s go multi-chain)

Really looking forward to having a readily available suite of automated products for any and all market conditions. lfg

[Matthew_Graham]

I am pumped to see @afromac and @ChrisG bringing opportunities like this to the community. This is exactly the type of collaboration and wealth building positive sum mindset we can all rally behind. The relationship with Defi Pulse is really blossoming and it is fantastic to see the FLI product offering expanding.

This is how we all win. With each new product launch we are becoming more and more dominant. The FLI products are a fantastic revenue generator the coop. By dominating the leverage space, Index Coop wins. We will saturate this segment of the market. I am super excited for what the FLI Defi Pulse and Index Coop team have planned for 2022.

I will be voting FOR.

[Cavalier_Eth]

This is exactly the type of shift we need, towards greater launch velocity for the right products

[overanalyser]

I would love to see these launched as a batch.

From where I sit, I see no technical or financial blockers in launching a group. If anything it simplifies things for the people doing the work as they can cover 4 launches in a single conversation / integration with 3rd parties.

What’s more, we build a product offering that works in both bull and bear markets, so we are offering traders what they need.

[afromac]

Hi @Mringz can you please assign an IIP number and schedule this vote to begin today @ 18:00 UTC

Update: Snapshot vote is now live

[sixtykeys]

Confirming that this IIP has passed with 254.41k INDEX (99.64%) voting FOR.
Snapshot here

[JosephKnecht]

Am I correct in thinking that the iMATIC-MATIC and iETH-ETH LPs will be some of the highest (approximately) stable yield on the market? I’m wondering if that’s worth specifically promoting.

[ChrisG]

I would think that impermanent loss could be high for a negatively correlated pair.

[JosephKnecht]

Definitely. So maybe it would be for short-term holding only and the risk offset by the fact that iETH-ETH is approximately stable.