IIP-XX: ETH:BTC2x-FLI & BTC:ETH2x-FLI

Governance Proposal
1

iip: tbd

title: ETH:BTC2x-FLI & BTC:ETH2x-FLI

status: Draft

author: @KeyserSoze, @oneski22, @jierlich, @mringz [Discord: Stopher, TrotNixonLine, Jonah, MRingz]

created: 2021-05-05

Summary

Members of the Index Community would like to propose that the Index Coop manages a new set using the FLI strategy proposed in IIP-13 and IIP-31.

With the successful launch and proof of concept of ETH2x-FLI and the demand for BTC2x-FLI, we find that it is time for the IndexCoop to offer a leveraged product for the crypto native, allowing both Bitcoin and Ethereum maximalists to bet on their beliefs.

Abstract

These new sets, if launched, would be based on V0.1 of the FLI (same as the ETH2x-FLI and BTC2x-FLI) methodology and would bring to life the Ethereum:Bitcoin (FLI-ppining) and Bitcoin:Ethereum (HFSP) Flexible Leverage Indices.

Initial parameters for The Ethereum:Bitcoin Flexible Leverage Index:

  • Underlying Assets: cETH,
  • Target Leverage Ratio: 2
  • DeFi Lending Protocol: Compound
  • Min/Max Ratios and Recentering Speed TBD upon more research

Initial parameters for The Bitcoin:Ethereum Flexible Leverage Index:

  • Underlying Asset: cWBTC2
  • Target Leverage Ratio: 2
  • DeFi Lending Protocol: Compound
  • Min/Max Ratios and Recentering Speed TBD upon more research

We are proposing that BTC:ETH2x-FLI be composed of Compound Wrapped Bitcoin (cWBTC2) 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.

We are also proposing that ETH:BTC2x-FLI be composed of Compound Ethereum (cETH) 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.

Any COMP tokens or other tokens that should be received by the ETH:BTC2x-FLI or BTC:ETH2x-FLI contracts via airdrop or other methods will be farmed into Ethereum (ETH or WETH) or Wrapped Bitcoin (wBTC) respectively and invested per the methodology.

As mentioned in IIP-13 and IIP-31, 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 their 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 their 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 (TVL). 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 these new kind of indices can potentially present.

Wrapped Bitcoin (WBTC) is the 4th most supplied asset on Compound, with nearly $2B in supply in the main pool, in addition to $400M in the legacy pool. Both markets have low utilization with both generally maintaining a bottom 5 lowest interest rate of all of the Compound markets with a range of 0-1% for supply, and 2-5% for borrow.

Ether (ETH) is the 2nd most supplied asset on Compound with over $4B in supply. It generally has the lowest interest rates of all of the Compound pools with a supply rate between 0.1-0.12% and a borrow rate of 2.9-3%.

Differentiation

Launching our first non-USD denominated FLI indices continues to pave the way to a wide range of leveraged products managed by the Index Coop. Additionally launching them together will set a precedent for how the Index Coop should launch FLI products going forward, with both sides of a ratio launching together, and the Bull and Bear of an asset launching together.

This product being non-USD denominated differentiates it even further from most leveraged products available in DeFi (e.g.: options, perpetual futures) which all offer some form of leverage on USD denominated trading pairs.

On-chain liquidity analysis

Both assets used in this proposed product (i.e.: ETH and WBTC) are some of the assets with the most liquidity in DeFi lending platforms. More specifically, 40,251 WBTC are currently being supplied on Compound protocol (7,359 in the legacy pool, 32,892 in the main pool) by 3,259 suppliers (2,585 in the legacy pool, 674 in the main pool). On the ETH side, 1,412,909 ETH is currently being supplied by 62,094 suppliers.

Moreover, both assets have some of the lowest utilization rates amongst all markets (0.27%, 10.95% and 4.77% for WBTC legacy pool [cWBTC], WBTC main pool [cWBTC2] and ETH pool [cETH] respectively). This would suggest that the risk of a liquidity crisis which could dramatically increase the borrowing rate is smaller than for stablecoins, which have, on average, much higher utilization ratios.

Another interesting characteristic of the proposed products is that they are somewhat resistant to large fluctuations in the crypto market since, in the event of a market meltdown, BTC and ETH tend to move in tandem. This would further reduce the risk of both indices becoming insolvent.

Note: All numbers recorded on 2021-04-30 (around Ethereum Block 12342300)

Sources:
ETH pool [cETH] - https://compound.finance/markets/ETH
WBTC main pool [cWBTC2]- https://compound.finance/markets/WBTC2
WBTC legacy pool [cWBTC] - 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 Pulse Inc. and 60% to Index Coop.

Author background

We are members of the Index Coop Community who would like to accelerate the expansion of the FLI product line. Should sufficient technology and market resources be available we would like to advance this pair to DG1, and study the feasibility of a simultaneous launch. If the technology behind ETH2x-FLI and BTC2x-FLI has not been generalized and there are large technical resources required to launch, we would hope that this IIP passes DG1 but does not proceed to a DG2 vote until the resources needed to launch a FLI pair such as the one described in this IIP are minimal. This will ensure that the Index Coop can rapidly launch FLI pairs based on the Pulse Inc methodology when the market demand calls for it.

Methodologist 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.

8 Likes
2

Interesting concept and thanks for putting this together. I have concerns around the long-term potential of this FLI vehicle with the likelihood of it cannibalizing market share from other products (eth maxis in ETH2x moving over to this new product and visa versa if this product is live). I’m a big fan and proponent of the FLI series but I think it would be best served by first building and quickly shipping out additional single asset FLIs (i.e. UNI, AAVE, MKR) or bigger thematic indexes (i.e. L2), which help build the Index Coop brand and recognition and then moving into crypto native leveraged products.

^I really like this idea and hope it’s implemented in future FLI products.

Curious to see the thoughts from the rest of the community.

1 Like
3

I could see the concern about the long term potential but I don’t see it cannibalizing market share from ETH2x en masse. Flippening is a hot topic and getting an easy way of expressing the thesis launched sooner than later seems like the right time to capitalize on the opportunity vs building out additional vanilla single asset FLIs.

I think the product could attract a new segment of people. Maybe you come for the flippening as a trade, stay for the DPI and MVI.

2 Likes
4

I completely agree with your sentiment here. All major ETFs launch bull and bear products and usually 2-3x at the same time. As @prairiefi said bring in the assets with the fun products and keep them with longer term holds.

5

Fully in support of this Index. This creation of this index signifies three major milestones for us as a DAO:

  1. This will be the first index that utilizes DeFi pulses revolutionary methodology but implemented and researched by community members, giving methodologists and ourselves the ability to role out products faster
  2. It also will be the first time we launch an inverse version of an index
  3. Lastly, this is the first time we are developing launching two products in tandem, if this goes well it will enable us to launch FLI products with their inverse versions going forward. Doubling our product output for FLI suite products
6

Hi all,

Thanks for the draft proposal, it’s great to see demand from the community to push forward with an extension for what is obviously a successful series of products.

However, I think that one of the biggest challenges that the coop has at the moment is having experienced Devs to support the launch of products. BTC2-FLI will be launching soon (tm :slight_smile: ) and there will be lots of focus on that once it has launched to see how with behaves once it’s on the market (and I think BTC is less bearish than ETH, so we may learn something).

We are also onboarding a group of community members to become experts in FLI products to help understand how they behave, how we can control them and to help educate the market in their use.

The combination of the PWG FLI team, the Set Engineers and DeFI Pulse we are learning a lot about the FLI product series and we are all keen to capitalise on the opportunity that ETH2-FLI has shown us. However, these are complex products so we will never be able to move as quickly as we might wish.

6 Likes