Pulse Inc would like to propose that the Index Coop manages a new set, the Bitcoin Flexible Leverage Index (BTC2x-FLI) using the FLI strategy proposed in IIP-13. Following the successful launch and proof of concept of ETH2x-FLI, BTC2x-FLI will give wrapped BTC holders a chance to trustlessly gain leverage.
Launching a second FLI product after the recent success of ETH2x-FLI cements the Coop as the leveraged product leader amongst other index providers. The co-marketing benefits are strong with Pulse Inc as a methodologist and Compound as a technological partner. Also, the opportunity to partner with brands like Badger to bring Bitcoin centric products to DeFi is also a differentiator of BTC2x-FLI.
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 have seen this action with ETH2x-FLI.
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 series to achieve high market penetration. BTC2x-FLI is the next step in building out the FLI series.
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.
This is not Pulse Inc.’s first product as they have previously launched DPI and ETH2x-FLI. We have benefitted from their marketing efforts, business development connections, and investment in improving their products. We are confident that this will continue with BTC2x-FLI.
While the FLI series 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. We expect our users will find differentiated value in the FLI series, but it is not without competition.
As an example, on 4/18 ETH2x-FLI produced $2,300 in revenue based on ~$25m AUM, ~$6m in trading volume, and ~14k newly minted units. This daily revenue was only $400 lower than the daily revenue for DPI at ~$135m AUM. FLI products are fee efficient, and BTC2x-FLI presents another strong revenue opportunity. Our FLI products can continue to undercut pricing from centralized competitors and still generate significant revenue.
Naturally, leveraged products present a higher risk and return profile. BTC2x-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. Ultimately, if you buy a 2x leverage product and the spot price declines by 50%, it should be expected that capital will be lost. It should be noted that during the most recent ETH pullback, ETH2x-FLI over-performed due to the rebalancing algorithm and was not in danger of liquidation.
BTC2x-FLI will require the same infrastructure that was built for ETH2x-FLI. Building out a second FLI product for BTC will be significantly easier.
You can look at the rubric and grading here: Product Prioritization Chart - Google Sheets