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.
FLI represents our first foray into non-market tracking indices. Such a product clearly distinguishes us from other index providers, and demonstrates Set Protocol’s flexibility to create a wide array of structured products to potential methodologists.
Because FLI uses Compound, the potential to co-market this product alongside a high profile DeFi project is a big advantage.
Pulse Inc’s brand, high-value internet properties, and marketing connections also contribute to the score.
In traditional finance, leveraged indices are prominent. While they do not garner the largest AUM, as they are not meant to be “buy and hold,” they are traded much more frequently.
We believe the market opportunity is even bigger in DeFi where accessing leverage is not only complex using existing protocols, but also incredibly expensive in high gas environments. Because so much of DeFi is currently used for the express purpose of leveraged trading, the confluence of factors make it likely for the FLI to achieve high market penetration.
This is not Pulse Inc.’s first product as they have previously launched the $DPI. We have benefitted from their marketing efforts, business development connections, and investment in improving their products. We are confident that this will continue with the FLI.
While the FLI is unique in its methodology and construction, it should be noted that other leverage tokens have existed on DeFi before (dYdX, Fulcrum), exist currently on CEX, and are continued to be worked on by other protocols(SynLev). We expect our users will find differentiated value in the FLI, but it is not without competition.
Because the FLI is not meant to be a “buy and hold” product, we have the unique opportunity to generate income from the volume of trades. As can be seen from the analysis above, we can undercut pricing from centralized competitors and still generate significant revenue. Potentially much more than traditional streaming fees would enable us to capture.
Naturally, leveraged products present a higher risk and return profile. The FLI has been designed to absorb major volatility spikes, and rebalance more flexibly, but it is still possible for the index to be insolvent in extreme downward price movements. At the end of the day, if you buy a 2x leverage product and the spot price declines by 50%, it should be expected that capital will be lost.
The FLI required new modules and manager contracts to be enabled. This development effort was non-trivial, but was work we would have to do at some point, has been parallelized along with the governance process, and will be useful for future products we create. Launching FLI for another token after ETH will be significantly easier.
Through the reasons outlined above, the Work Teams recommend voting YES. The FLI adds a whole new class of products to the Index Coop’s current offering and enables a new monetization scheme. Such a product will be especially useful during the high-gas environments we see today.
You can look at the rubric and grading here: Product Prioritization Chart - Google Sheets