IIP: 182
Title: Launch ETH2x & BTC2x, Deprecate FLIs
Status: Final
Author(s): @anthonyb.eth
Reviewer(s): @allan.g , @MrMadila , @sidhemraj
Created: 2024-01-17
1.0 Abstract
The Index Coop core team proposes that the DAO launch Ethereum 2x (ETH2x) and Bitcoin 2x (BTC2x) leverage tokens on Ethereum mainnet. These automated leverage tokens will be built on Index Protocol and utilize Aave V3 to achieve 2.0x leverage.
These new leverage tokens are intended to replace ETH2x-FLI and BTC2x-FLI, which were originally launched on Set Protocol and Compound V2. Given that Set Protocol cannot be upgraded and Compound V2 is undergoing deprecation, this proposal also seeks $INDEX holder approval for deprecating the FLIs and migrating any remaining capital to the new Index Coop 2x tokens.
Note to existing FLI holders:
This is a preliminary proposal to deploy new versions of the Index Coop leverage products. You do not need to take any action at this time. If this proposal is approved in its final form, we will proactively inform you of any changes you need to be aware of. FLI tokens will continue functioning as designed.
2.0 Market Information
2.1 User Stories
- As a token holder, I want leveraged exposure to ETH or BTC
- As a token holder, I want automated liquidation protection on my leveraged positions.
- As a token holder, I want access to leverage with lower overall costs compared to perps.
- As a token holder, I want persistent leverage instead of decreasing leverage as prices rise or increasing leverage as prices fall.
2.2 Market research
The primary motivation for launching new 2x tokens on Ethereum mainnet is to enable existing customers to maintain automated leverage exposure using Index Coop products. For context, legacy FLI products are built on Compound V2, which is undergoing deprecation. As liquidity leaves Compound V2, USDC borrowing costs climb, resulting in higher carrying costs for FLI holders. Additionally, if the USDC supply is fully utilized in Compound V2, then issuance for FLIs will be disabled, leading to potential premiums on the secondary market. Levering up when the ETH price increases would also be disabled in this scenario where USDC supply is fully utilized.
USDC supply in Compound V2
Additionally, the FLI tokens are deployed on Set Protocol V2, which is not upgradeable since Set Labs burned the protocol keys that permitted new contracts to be added to the protocol. As a result, it is not possible to “upgrade” the FLI tokens in place or otherwise address the gradual deprecation of Compound V2.
However, Index Coop has developed new smart contract infrastructure for Index Protocol that enables leverage strategies on Aave V3. This new infrastructure enables automated tokens like ETH2x and BTC2x as well as leverage staking strategies. For this reason, the new Index Coop 2x tokens will be built on Index Protocol using Aave V3 for collateralized debt position management. Favourably, new 2x tokens will be less gas-intensive to issue and redeem than the legacy FLIs, and higher loan-to-value parameters in Aave V3 improve efficiency and risk automation.
Over 4,000 unique addresses currently hold ETH2x-FLI, and there have been over 11,131 unique addresses that have held ETH2x-FLI since its launch in March 2021. For BTC2x-FLI, there are currently 800 unique holders with historical address exposure of 2,370. These holders represent a significant share of Index Coop’s user base and contribute meaningfully to TVL and recurring revenue. New and existing user activity has also increased in the past three months, including 201 new users, 238 users active multiple months in a row, and 384 “resurrected” users that were previously dormant. These new leverage tokens will allow Index Coop to serve and sustain these new and existing users.
2.3 Differentiation
The following products or services offer similar value propositions to users:
| Product | Leverage Provider | Chain(s) | TVL | Fees |
|---|---|---|---|---|
| Binance Leverage Tokens | Binance / Perps | CEX | ETHUP: $10m BTCUP: $10m | 0.10% Issuance 0.10% Redemption 3.65% Management + Funding Rates |
| Toros Leverage Tokens | Aave V2 / dHedge | Polygon, Optimism, Arbitrum | ETH 3x: $6m ETH 2x: $620k BTC 3x: $1.5m BTC 2x: $6k | 2.00% Management 0.10% Entry + Carrying Cost |
| SummerFi Multiply | Aave V2, Aave V3 | Ethereum, Arbitrum, Optimism, Base | ETH (AV2): $4m ETH (AV3): $0.6m | 0.20% Swap + Carrying Cost |
| DeFi Saver | Aave V2, Aave V3 | Ethereum, Arbitrum, Optimism, Base | ETH (AV2): $19m ETH (AV3): $7m | 0.25% Swap 0.25% Service 0.25% Automation + Carrying Cost |
| Index Coop FLIs | Compound V2 / Set Protocol | Ethereum | ETH2x: $24m BTC2x: $3.4m | 0.10% Issuance 0.10% Redemption 1.95% Streaming + Carrying Cost |
| Index Coop Leverage Tokens | Aave V3 / Index Protocol | Ethereum | – | 0.10% Issuance 0.10% Redemption 3.65% Streaming + Carrying Cost |
It is worth noting that perpetual platforms across L2s may meet similar needs to Index Coop’s 2x tokens on mainnet. However, the table above focuses on the most immediate competition on Ethereum mainnet. Additional market research comparing leverage tokens to perps is being performed currently and will be published soon by Index Coop.
Feature Comparison:
| Product | Liquidation Protection? | Persistent Leverage? | Rebalance Costs | Notes |
|---|---|---|---|---|
| Binance Leverage Tokens | Yes | No | Paid by Provider | real leverage drifts between 1.25x - 4.00x |
| Toros Leverage Tokens | Yes | Yes | Paid by Provider | not available on Ethereum mainnet |
| SummerFi Multiply | No | No | Paid by User | user must manage position |
| DeFi Saver | No | No | Paid by User | automation requires $30k debt minimum |
| Index Coop FLIs | Yes | Yes | Paid by Provider | subject to Compound V2 carrying costs |
| Index Coop Leverage Tokens | Yes | Yes | Paid by Provider | subject to Aave V3 carrying costs |
Again, this table focuses on the closest competitors on Ethereum mainnet, so perpetual platforms on L2s are not included. Regardless, the largest perpetual platforms do not offer liquidation protection, persistent leverage, or coverage of rebalancing costs.
2.4 Marketing support / distribution / partnerships
At launch, ETH2x and BTC2x will be available to unrestricted persons and not for restricted persons as defined here via:
- Index Coop App for issuing and redeeming
- Decentralized Exchanges (DEXs), subject to independent liquidity providers
- DEX Aggregators (CoW Swap, Matcha, 1inch), subject to independent liquidity providers
Additional partners may be onboarded before and after launch. Self-issuance support will be enabled through the Index Coop App and also made available through the Self-issuance SDK for external integrations.
2.5 Marketing risks and weaknesses
- gas costs on Ethereum mainnet may be prohibitive for many users
- similar leverage solutions are available on L2s
3 Financials
3.1 Revenue
The 2x tokens will have a daily streaming fee of 1bp (0.01%) or an annualized streaming fee of 3.65%.
Additionally, these tokens will have a 10bp (0.10%) issuance and redemption fee.
It is worth noting that the new 2x tokens have a higher annualized streaming fee than the legacy FLI tokens. This is attributed to increasingly expensive gas costs on Ethereum mainnet and to comparative pricing of the closest alternatives. Index Coop will pay for all rebalancing gas costs (not product holders or Set Labs [which was the case when the legacy FLI tokens were first launched]). Index Coop has also made significant investments in its new leverage token infrastructure that must be recouped.
3.2 Fee splits
Index Coop will earn 100% of the revenue from these new leverage tokens, but may enter into revenue-sharing agreements with third parties when appropriate and compliant; Index Coop will also cover 100% of the gas costs associated with rebalancing.
Scalara, the FLI methodologist, may receive a share of the new 2x token revenue based on TVL attributed to the legacy FLI tokens once they are deprecated, pending an agreement.
Update: If passed, IIP-181 will give Index Coop 100% of the revenue without any share of the revenue going to Scalara, in exchange for a one-time payment of $120,000 USDC. Please read the forum post for more details.
3.3 Product Costs
In the long run, the new methodology proves to be more efficient for both users and Index Coop. ETH2x has less trades than ETH2x-FLI in both the backtested actual data (shown below) and simulations based off historical volatility. The primary reason is that the new methodology doesn’t require a rebalance every 24 hours and it only rebalances when it is necessary – that is the leverage ratio is outside on the bounds. This is especially true as the product grows to larger TVLs. It is true, however, that the costs to operate the product can rise during extremely volatile periods, but in the long run this is more than offset by the reduced operational costs during normal periods.
The primary cost of operating the leverage products is the cost of rebalancing transactions. Currently, a rebalance costs approximately 750,000 wei which at $2,500/ETH and 40 gwei gas amounts to $75 per rebalance. We’ve also analyzed the costs using historical gas prices since high volatility periods tend to have higher gas prices. Even with this, the new methodology is more efficient for Index Coop as shown below.
4.0 Specification
4.1 Product design
4.1.1 Range-Bound Methodology vs. Flexible Leverage Methodology
The Index Coop 2x tokens will utilize a range-bound methodology that has several notable differences from the Flexible Leverage Index methodology employed by the FLI tokens. The differences largely have to do with when rebalancing occurs.
In the range-bound leverage methodology, rebalancing occurs when the current leverage ratio is less than the minimum leverage ratio or greater than the maximum leverage ratio (similar to icETH). Compare this to the FLI methodology, where a rebalance occurs every 24 hours regardless of the maximum or minimum leverage ratio; for example, if the minimum leverage ratio was set to 1.7, the maximum leverage ratio to 2.3, and the current leverage ratio was 2.1, the index would still rebalance. Under the range-bound methodology, daily rebalancing is removed.
This has two benefits. First, it reduces the number of rebalances that incur costs for both the user and for Index Coop. Secondly, it allows the leverage ratio to periodically leave the targeted range. To prevent against liquidations, the Ripcord function allowed anyone to rebalance the index, if the current leverage ratio is above the ripcord leverage ratio. This was incentivized with a bounty and will continue to be under the new methodology. The benefit of the rangebound methodology, however, is that the ripcord will only be called in the most extreme cases. Ripcord rebalances are not ideal for users or Index Coop. For users, the rebalances are faster and have more aggressive slippage parameters and trade sizes which is necessary to prevent against liquidation, but causes larger-than-normal losses due to increased rebalancing costs. For Index Coop, ripcord rebalances cost significantly more than normal rebalances.
The second change is changing from an asymmetrical target range to a symmetrical target range. ETH2x-FLI currently has a range of 1.7 - 2.3 while BTC2x-FLI has a range of 1.8 - 2.2. The rangebound methodology will set the minimum leverage ratio to square of the target leverage ratio / maximum leverage ratio. This means that equivalent-sized moves to the upside or downside will result in a rebalance.
4.2 Methodology
4.2.1 ETH2x Parameters
| Detail | Value |
|---|---|
| Token Name: | Index Coop Ethereum 2x Index |
| Token Symbol: | ETH2X |
| Collateral Asset: | wETH |
| Debt Asset: | USDC |
| Leverage Module: | Aave V3 |
| Token Value at Launch: | $100 |
| Streaming Fee: | 3.65% |
| Mint Fee: | 0.10% |
| Redeem Fee: | 0.10% |
| Parameter | Configuration |
|---|---|
| Target Leverage Ratio: | 2.00 |
| Minimum Leverage Ratio: | 1.73913043478 |
| Maximum Leverage Ratio: | 2.30 |
| Rebalance Interval: | Range Bound |
| Recentering Speed: | 0.05 |
| Epoch Length | Infinite |
| Ripcord Leverage Ratio: | 3.00 |
| Ripcord Incentive: | 1 ETH |
| Initial Token Supply Cap: | 1,000,000 units |
| DEX | Pool | TVL | Status | Slippage Tolerance | Max Trade Size (ETH) | Ripcord Slippage Tolerance | Ripcord Max Trade Size (ETH) |
|---|---|---|---|---|---|---|---|
| Uniswap v3 | ETH-USDC 5BPS | $273M | Primary | 0.25% | 400 ETH | 0.50% | 1,250 ETH |
4.2.2 BTC2x Parameters
| Detail | Value |
|---|---|
| Token Name: | Index Coop Bitcoin 2x Index |
| Token Symbol: | BTC2X |
| Collateral Asset: | wBTC |
| Debt Asset: | USDC |
| Leverage Module: | Aave V3 |
| Token Value at Launch: | $100 |
| Streaming Fee: | 3.65% |
| Mint Fee: | 0.10% |
| Redeem Fee: | 0.10% |
| Parameter | Configuration |
|---|---|
| Target Leverage Ratio: | 2.00 |
| Minimum Leverage Ratio: | 1.81818181818 |
| Maximum Leverage Ratio: | 2.20 |
| Rebalance Interval: | Range Bound |
| Recentering Speed: | 0.10 |
| Epoch Length: | Infinite |
| Ripcord Leverage Ratio: | 2.70 |
| Ripcord Incentive: | 1 ETH |
| Initial Token Supply Cap: | 1,000,000 units |
| DEX | Pool | TVL | Status | Slippage Tolerance | Max Trade Size (ETH) | Ripcord Slippage Tolerance | Ripcord Max Trade Size (ETH) |
|---|---|---|---|---|---|---|---|
| Uniswap v3 | wBTC-ETH 5BPS | $64M | Primary | 0.25% | 10.5 BTC / 200 ETH | 0.50% | 1000 ETH |
| Uniswap v3 | ETH-USDC 5BPS | $273M | Primary | 0.25% | 200 ETH | 0.50% | 1000 ETH |
4.2.3 Backtest Results
NAV Comparison
Leverage Ratio Comparison
Please note that past performance is not indicative of future returns, and that this data is for informational purposes only and should not be construed as financial advice.
4.3 Migration of Existing Tokens
The following plan details the steps and timelines for deprecating the FLIs and migrating remaining capital to the new 2x tokens:
- (Ongoing) Communicate deprecation and migration plans to customers and progress through $INDEX governance (underway). Given the nature of the proposal, there will be an extended comment period between initial publication (January 17) and formal snapshot vote (January 31) for the community to review and respond accordingly.
- (February 14) After a successful $INDEX governance vote, de-lever the FLI tokens by gradually lowering the target leverage ratio to 1.0x. This will result in each setToken holding either WETH or WBTC collateral and no USDC debt. Fees on the FLI tokens will also be disabled at this stage.
- (February 14) Rebalance any remaining collateral in the FLI tokens into the new Index Coop 2x tokens. This step ensures that legacy FLI holders continue to have automated leverage exposure to ETH and BTC but on modernized infrastructure with lower carrying costs and improved efficiency. During the migration process the new token will start at 1.0x matching the de-levered FLI tokens and then wound up to 2x once the old FLI tokens hold 100% of the new tokens.
For FLI holders who wish to maintain their leverage exposure, no action is required as the FLI tokens will effectively operate as a “wrapper” around the new 2x tokens. FLI holders will also be able to “unwrap” their FLI tokens for the new 2x tokens in the Index Coop app by February 19, after the migration is completed.
It is also worth noting that issuance will be disabled for FLI tokens after step three, with users directed to the new Index Coop 2x tokens moving forward (which can be issued and redeemed permissionlessly). As always, permissionless redemption of FLI tokens (as well as the new Index Coop 2x tokens) will be possible before, during, and after each of these stages for holders who wish to exit positions entirely.
4.4 Governance
The methodology as detailed above must be voted on and approved by $INDEX token holders before launch. Any material changes to the methodology will be communicated externally and are also subject to an $INDEX token vote.
4.5 On-chain liquidity analysis of underlying tokens
The underlying assets–ETH, WBTC, and USDC–are extremely liquid.
5 .0 Product liquidity
Third-party liquidity providers may provide DEX liquidity for ETH2x and BTC2x as they are permissionless to issue and redeem for non-restricted users.
6.0 Disclaimers
You shall not purchase or otherwise acquire our restricted token products if you are: a citizen, resident (tax or otherwise), and/or green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (defined as a U.S. person), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorised (together with U.S. persons, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorised).
None of our token products have been or will be registered under the U.S. Securities Act of 1933, as amended, or with any securities regulatory authority of any state or other jurisdiction of the U.S. Our restricted tokens may not be offered, sold, or delivered within the U.S. to, or for the account or benefit of, Restricted Persons. Our restricted tokens that may be offered on secondary markets and other platforms are not for distribution to any Restricted Person. No offers, sales, resales, or deliveries of any of our token products may be made in or from any jurisdiction (including the U.S.), except in circumstances that will result in compliance with any applicable laws and regulations and that will not impose any obligations on Index Coop. Persons who obtain our token products are required to inform themselves about and adhere to any such restrictions. Index Coop reserves the right to impose further restrictions at its sole discretion, which will be communicated through its terms of service or on its website. All website users, including U.S. Persons, must read our Terms of Service and List of Restricted Tokens. U.S. person(s) must comply with our Terms of Service and not use restricted Index Coop tokens.
*Index Coop does not provide tax advice. Nothing contained in this document should be construed as tax advice, and you should consult with your own tax advisor before making any financial decisions.
7.0 Copyright
‌Copyright and related rights waived via CC0 2.
