IIP-13 Work Team Analysis

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.

Business Analysis Team

Marketing Benefit

Score: High

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.

Market Size

Score: High

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.

Methodologist Capacity

Score: High

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.

Unique

Score: Medium

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.

Fees Generated

Score: Extreme

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.

Product Development Team

Risk

Score: Medium

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.

Difficulty

Score: Medium

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.

Recommendation

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

9 Likes

I really does seem like an attractive product. I’m pretty risk averse and generally avoid leverage but I’m interested in this.

I’d like to see an example story or two showing the use cases. Just to help confirm I am understanding it correctly.

The cool thing dev-wise is that future products will be easier - that seems like a big benefit for everyone.

2 Likes

Thanks guys, it seems like an interesting opportunity and a useful entry into a new range of products.

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Just as DPI is a great product for brand new entrants to crypto/DeFi, I believe that this is a great product for users that are somewhat crypto native but for any of multiple reasons (risk, management, etc) have not taken on leverage. It allows these users to “level up” in that regard, but in a risk-mitigated fashion. I think this is evidenced by @mrvls_brkfst comment above (which is very similar to my sentiment):

I really does seem like an attractive product. I’m pretty risk averse and generally avoid leverage but I’m interested in this.

But I also agree that this could be an attractive product for users who are already leveraging. I think this is a compelling case:

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.

Everything else (marketing, market, fees, etc) seems to check out - thanks for the great analysis.

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me too! or a “Leverage 101: Guide to FLI”

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@Celey do you have anything somewhat simple and user-friendly that we can turn into an article? happy to work with you on this.

I would love to read something like this. Since I’m a bit confused over FLI :sweat_smile: