IIP-31 BTC2x-FLI

iip: 31
title: BTC2x-FLI
status: Proposed
author: Pulse Inc.
created: 2021-04-07

Summary

Pulse Inc would like to propose that the Index Coop manages a new set using the FLI strategy proposed in IIP-13.

With the successful launch and proof of concept of ETH2x-FLI, we find that it is due time to give wrapped BTC holders a chance to trustlessly gain leverage!

Abstract

This new set, if launched, would be based on V0.1 of the FLI (same as the ETH2x-FLI) methodology and would bring to life the Bitcoin Flexible Leverage Index.

Initial parameters for The Bitcoin Flexible Leverage Index:

  • Underlying Asset: wBTC
  • Target Leverage Ratio: 2
  • DeFi Lending Protocol: Compound
  • Maximum Leverage Ratio: 2.3
  • Minimum Leverage Ratio: 1.7
  • Recentering Speed: 5%

We are proposing that BTC2x-FLI be composed of Wrapped Bitcoin (wBTC) purely based on the liquidity available on Compound. This may be changed in the future if other alternatives present sufficient adoption and liquidity in Compound or supported lending protocols.

As mentioned in IIP-13 , other underlying assets can be considered as potential candidates for this series, such Chainlink, and YFI and, after major money market integrations and liquidity, DPI!

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.

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, 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.

Bitcoin (WBTC) is the 4th most supplied asset on Compound, with over $1,872.24M in supply in the main pool, in addition to $988.50M in the legacy pool at relatively low usage rates, so low expected interest rates.

Differentiation

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

Launching our second FLI index continues to pave the way to a wide range of leveraged products managed by the Index Coop

On-chain liquidity analysis

For the initial proposed Bitcoin Flexible Leverage Index, which will also be using the [Compound] protocol, there are currently over 29,000 WBTC supplied in the main pool, by 400 suppliers, and nearly 17,000 wBTC in the legacy pool by 2839 suppliers.

Source https://compound.finance/markets/WBTC2 & https://compound.finance/markets/WBTC

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

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.

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.

22 Likes

Hi Jo,

Given the market acceptance of ETH2-FLI to date, I think it is fair to say that there is an appetite for BTC2-FLI.

7 Likes

hey @Jo_K ,

I assume all the technical aspects are exactly the same as ETH2x-FLI? Do you see any differences in the methodology or the execution?

1 Like

Hey @verto0912 , yes technical aspects are identical!
We are working with the set team to potentially improve the leverage ratios in the future, but for now given that ETH2x-FLI is working as expected we are taking the prudent approach :slight_smile:

3 Likes

Would love to hear from Set re implementation. I think we should definitely push forward with this if we can manage the engineering requirements. ETH2x-FLI shows strong demand for such a product.

@Jo_K do you have any sense of demand for leverage BTC product? I would expect there to be a bit less demand for WBTC than ETH. Although I think WBTC pools on Alpha are quite popular, especially the WBTC-WETH Sushi pool. ETH2x-FLI / BTC2x-FLI would be a killer pool to LP imo :rocket:

4 Likes

Hello all.

I don’t often post here, but have been lurking for a few weeks. I think this community is amazing and have learned loads just from reading theses discussions. I just wanted to pipe in and say, as a sample of one, BTC2x-FLI is extremely appealing to me as I see it as a very nice compliment to ETH2x.

I hope this gets the go-ahead.

9 Likes

BTC2x-FLI is the next logical product offering as the ETH2x-FLI has had a successful launch. Fully support. Well done.

1 Like

Seems like a highly logical next step given the demand and great success of ETH2x!

I don’t know if this was ever discussed for the 1st one or if this is possible etc but felt like a small trick was missed with the initial launch price.

If BTC is $60k on the day of launch of BTC2x-FLI can we launch at a price of $120?
$120k BTC = BTC2xFLI @ $240… etc… (I know it won’t track perfectly but that’s almost the beauty it’s a great proxy for just seeing whats going on)

3 Likes

@Jo_K this is an awesome project and I am excited to see it launch.

One small bit of feedback- I suggest we name this index the Leveraged Bitcoin Index ($LBI) - this will maintain our theme of three letter index names and rolls of the tongue a little easier than BTC2x-FLI. This also gives us naming flexibility for future indices - i.e. Leveraged Yearn Index ($LYI), Leveraged AAVE Index ($LAI) etc.

I also strongly suggest that we pair this product with WBTC at launch and work with Badger to co-incentivize. The major selling point for $FLI liquidity is the 1.5x exposure to ETH paired with trading fees. If we pair this index with ETH, we introduce significantly more complexity for LPs and cloud the risk profile. The WBTC pools supported by Badger have massive amounts of liquidity - the appetite for WBTC pools is clearly there.

5 Likes

awesome feedback here, for the naming of the indexes i get the convenience of having more memorable names but this would also diminish the methodology’s brand (FLI) and would also limit the future rollout of more leveraged versions of FLI (ETH5x-FLI anyone?)

will have to get back to you on the launching LP pool

1 Like

I am in full support of this product. This is an amazing opportunity to piggyback off the success of $FLI. It also gives us exposure to bitcoin holders which is great for potentially upselling our other products through supporting this product.

For marketing purposes I strongly agree with this statement. I believe the naming of $FLI really helped market the product much easier to market which ultimately contributed to the success of the product.

From a BD perspective, my suggestion is in regards to liquidity provision. I would like us to experiment with other DEX’s. I believe that we should expose our products to Curve or Sushi natives. I believe this sort of product could be really useful for Curve, if favoured by their community they can incentivise the pool with their native token and it also give us an opportunity to potentially have a yearn vault created for one of our products. We currently do not have a supported product on Curve and Yearn. There is a huge opportunity we are missing here.

1 Like

My understanding is that FLI stands for Flexible Leverage Index and is not particular to any one asset. The actual name of “FLI” is ETH2x-FLI. It got memed into FLI, but the purpose was to create a FLI series (BTC2x-FLI, DPI2x-FLI, etc). I think there are strong benefits to branding and marketing as a series (the FLI meme can still exist with all of them).

4 Likes

In terms of access to market ETH2-FLI:ETH Uniswap pair is probably the easiest for most people to access. Other platforms just don’t have the coverage (yet).

BTC will be interesting as we could go for an ETH pair or a BTC pair. Normally, I would think that ETH would be the obvious pair for a token, but BTC2-FLI:BTC has the advantage that it limits exposure to BTC price

I don’t think curve would work as the AMM logic is designed for tokens that track the same price, FLI products are designed to diverge.

Something for the work team to consider between DG1 and 2.

3 Likes

hey OA, totally agree with the above points made. As stated Curve would not be ideal here since the tokens themselves do differ.
After some internal discussions (and thoughts about the target market of a FLI) we want to give the underlying asset bulls a way to leverage their asset and encourage them to LP so it would make sense to have the each FLI asset have their initial pool with the underlying asset as a base pair as well.

TL;DR the FLI product launch pools will have the same base asset as the underlying asset (ETH2xFLI/ ETH || BTC2xFLI/wBTC etc…)

3 Likes

Seems like an easy, straight-forward way to increase Coop revenue given that FLI is already ~1/3 of Coop daily revenue after only 3 weeks:

Let’s do it!!

3 Likes