IIP-39: BTC2x-FLI Parameter Update #2

Governance Proposal
1

IIP: 39
Title: BTC2x-FLI Parameter Update #2
Status: Proposed
Author: Punia @puniaviision, Richard @richard
Created: April 29, 2021

Simple Summary

In the current implementation, anybody can earn money arb’ing the BTC2x-FLI on the secondary markets. In order to bring that revenue source in house, this IIP proposes that the Coop initializes the Debt Issuance Module on the BTC2x-FLI with an issuance hook that checks:

  1. Only whitelisted smart contract addresses are allowed to mint the BTC2x-FLI. This does not apply if the caller is an externally owned account (EOA). And this does not apply to the redeem flow.
  2. New issuances won’t push the totalSupply over the supply cap (similar to ETH2x-FLI).

Abstract

Adjust the following parameters on theBTC2x-FLI:

  1. Initialize the SupplyCapAllowedCallerIssuanceHook to the DebtIssuanceModule
  2. Whitelist Set’s Arbitrage bot once deployed.

The bot will be created such that:

  1. Anyone can call the arb transaction.
  2. Upon a successful arb, ETH used for gas is returned to the caller.
  3. Excess profits are transferred to the treasury at the end of the transaction.

Motivation

Currently, anybody is able to earn money arb’ing the NAV vs. secondary market spread for the BTC2x-FLI.

Instead of giving that profit opportunity away right at launch, we can internalize it into the Coop by only allowing whitelisted bots (starting with Set Labs). These arbitrage bots will flashloan and source underlying tokens from DEXs, mint the BTC2x-FLI and sell the BTC2x-FLI when price is higher than NAV.

Anyone can call the arb bot to execute an arb, not just Set Labs. At the end of a successful arb, the ETH used for gas in the transaction is returned to the caller, and revenue from arbitrage is automatically deposited into the Index Coop treasury.

Other arbitrage bots run by Coop community members can be added to the whitelist through follow on IIPs. Additionally, if the market reaches maturity, governance can choose to remove the whitelist functionality altogether.

We view this as an experiment to test if we can potentially double or triple the revenue for the Coop per new product. If successful, we can massively increase the profitability of the Coop. If unsuccessful, we can easily remove the whitelist and allow for an open market again.

Copyright

Copyright and related rights waived via CC0.

3 Likes
2

Probably a very noob question but how does whitelisting Set Labs bot internalises the arb profit?

3

I think this covers it.

2 Likes
4

As I understand, it is possible for the token to worth more or less than the underlying tokens. Bots can take advantage of this and pocket the difference by minting or redeeming. Essentially, the coop would be leaving money on the table and this proposal prevents that by allowing only the Coop’s own bot to collect it, while still allowing people (EOAs) to interact freely.

**It is entirely possible that I am wrong in this understanding.

2 Likes
5

Perfect! [Extra characters]

1 Like
6

Doesn’t BTC2x-FLI have mint/redeem fees?
Isn’t the coop already making money off arbitrage from those?
Are we doing this today on ETH2x-FLI?
Just concerned that this is going against the openness of DeFi. Also could be a noob question as well but let’s say the Set bot breaks, are there other market forces that can push BTC2x-FLI back to NAV should a premium/discount manifest?

2 Likes
7

Hey! Made some edits to the proposal regarding some of the centralization concerns. We’re going to make the bot open source and callable by anyone.

Furthermore the community should understand that this will be an experiment to see if we can 2-3x revenue per product. Certainly a lot of things we will learn by trying it out and eliminating the whitelist is pretty easy to do.

6 Likes
8

As long as an EOA can still mint then this will only serve to restrict participants to either whitelisted bots (as described in this IIP) and capital strong players that do not have to rely on flash loans. If a player has enough capital, they can still mint and sell, essentially arbitraging with extra steps, circumventing the entire idea here.

This IIP is then an attempt by the coop to grab extra profits by unleveling the playing field, blocking out smaller and less sophisticated players.