IIP 13 - Flexible Leverage Index

iip: 13
title: Flexible Leverage Index
status: Proposed
author: Pulse Inc
created: 2020-01-11

Summary :

Pulse Inc would like to propose that the Index Coop manage a series of Sets based on a new Index called Flexible Leverage Index (FLI, pronounced “fly”)

FLI lets you leverage a collateralized debt without having to manage a collateralized debt, by abstracting collateralized debt management into a simple index, reproducible by an ERC20 token built on Set Protocol (https://www.tokensets.com/).

Abstract :

We recently presented [v0.0 of the Flexible Leverage Index].

This current version is preliminary, and we will be doing a round of feedback to make iterative improvements for v0.1.

We would like to see the Index Coop launch a series of Sets based on V0.1 of the FLI starting with the Ethereum Flexible Leverage Index.

Initial parameters for The Ethereum Flexible Leverage Index:

  • Underlying Asset: ETH

  • Target Leverage Ratio: 2

  • DeFi Lending Protocol: Compound

  • Maximum Leverage Ratio: 2.3

  • Minimum Leverage Ratio: 1.7

  • Recentering Speed: 5%

After the successful launch of the initial FLI, other underlying assets can be considered as potential candidates for this series, such as Bitcoin, Chainlink, and YFI.

Motivation :

Flexible Leverage Index makes leverage effortless.

The User would not have to worry about:

  • Monitoring his leveraged loan 24/7, having to always be ready to act.

  • High fees, transactions not being included fast enough or the relative UIs being unresponsive during times of high volatility.

  • Paying for overpriced stablecoins to deleverage on time or panic trading to save his positions.

  • Being liquidated and having to pay the penalty.

FLI has several key advantages over Legacy Leveraged Tokens:

  • Zero slippage via composable entry and exit.

  • Unique Index algorithm reduces rebalancing needs by an order of magnitude.

  • Emergency deleveraging possible during Black Swan events for additional fund safety.

Size of opportunity

Lending protocols are currently leading the Decentralized Finance space by having multiple Billions in Total Value Locked. There is certainly no shortage in interest for collateralized debt positions, one can simply visit [defipulse.com] and look at lending protocols rank and TVL to get a sense of the magnitude of opportunity this new kind of Indexes can potentially present.

Differentiation

FLI being very dissimilar to any existing or proposed Index opens up a new category of leverage based Indexes.

On-chain liquidity analysis

For the initial proposed Ethereum Flexible Leverage Index, which will be using the [Compound] protocol, there are currently almost 1M ETH supplied, by 57K suppliers.

Source https://compound.finance/markets/ETH

Methodology:

Objective

Flexible Leverage Index enables 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)/CLRt-1)))

Calculation of the new Current Lever Ratio for the period:

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

Fee split

UPDATED Feb 2nd 2021
Flexible Leverage Index will have a streaming fee of 1.95% (195 basis points) and a 0.1% minting /redeeming fee. The revenue generated from the streaming fee will be split 40% to DeFi Pulse and 60% to Index Coop.

Previous
The Index Coop growth and treasury teams are working towards more standardized revenue split options for methodologists. Once options are determined Pulse Inc will select a revenue split from the menu of options created by the working group.

Author background and commitment

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. Providing key insights and educational content to help more newcomers go from zero to DeFi.

Decision Gate 1 Vote (Jan 20 11am PST - Jan 23 11am PST)

https://snapshot.page/#/index/proposal/QmehWukEWUEe3NeGKQm5ZnaRsD22k4Yq9Wk6P3b8zv4uJ4

20 Likes

Has anyone done an analysis on what the cost would be historically to hold this index? By cost, I mean the cost/gains associated with interest rates on borrowing/ lending subtracted by the COMP rewards:
totalBorrowBalance * borrowingRate - (totalSupplyBalance * supplyRate + compRewards).

It would be interesting to see if this rate is competitive compared to those of centralized services offering margin positions.

1 Like

Glad you asked! Here’s a comparison between FLI, Binance and FTX. Note: the Binance and FTX interest / funding rates were taken from today so it is higher than usual cause of the ETH rally

Product Annual Streaming fee Creation / redemption fee Trading fee 24 hour volume (1/19/2021) Market cap 24 hr cost of leverage (1/19/2021)
Binance ETH leveraged token 3.65% 0.1% 0.1% $60m $38m 1.2% (0.4% 8 hr funding rate)
FTX ETH leveraged token 10% 0.1% 0.07% $5m $70m 0.18%
ETHFLI 1.95% 0.1% 0% (0.3% on Uniswap) N/A N/A 0.02% (12% borrow APY sub ~3% COMP mining APY / 365)
4 Likes

Thanks for the data. Looks like ETHFLI will have a very competitive rate. I did notice you cited a 0.1% creation/redemption fee which I don’t see mentioned anywhere in the IIP. Care to elaborate about that?

I think above doesn’t reflect it yet, but there’ll be a 0.1% mint / redeem fee as part of this proposal with the appropriate fee split. Tagging @Celey

1 Like

Seems like a great addition to the index products! Would love to see the end result of fee split between the strategist and the coop.