IIP-XX: Launch a MATIC2x Leveraged Product

title: IIP-XX: Launch a MATIC2x Leveraged Product

status: proposed

author(s): Automated Indices Pod (@allan.g, @afromac, @Mringz, @emault , @tgreco, @sidhemraj)

Summary :

The Automated Indices Pod would like to propose that the Index Coop launch and manage a MATIC2x leveraged product on Polygon.

This product will use a new methodology that features a stable leverage ratio for consistent exposure to MATIC. It will also automate the entire process of creating and managing leveraged positions for token holders. The index will be issued as an ERC-20 token using Set Protocol.

Abstract :

The Index Coop should launch a MATIC2x product with a fixed leverage ratio on Polygon using a new methodology developed by the Automated Indices Pod.

Motivation:

Based on an analysis of trading volumes and pertinent token supplies, MATIC is the most promising ERC-20 token for the first fixed leverage ratio product on Polygon (more details in the Size of the Opportunity section below). A MATIC2x token will enable holders to get twice the exposure to MATIC without having to manually manage or monitor collateral balances and debt positions.

Because the 2x MATIC token uses leverage, it is meant to be a trading asset, not a passive investment product. As a result, it is in the best interest of token holders to minimize entry and exit costs (i.e. gas fees), which is why deploying a product like this on Polygon leads to a better use experience for token holders.

Also, on Ethereum main net, the most significant operational overhead for the Index Coop’s leveraged products is gas costs related to rebalancing. On Polygon, these costs are decimated, leading to better product profitability in the long run.

By holding MATIC2x, token holders would not have to worry about:

  • Monitoring their leveraged loan 24/7 and procuring stablecoins if deleveraging is necessary
  • Coping with costly gas fees, transaction latency, or unresponsive protocol UIs during times of high volatility
  • Being liquidated and having to pay penalties as a result

There are several key advantages over legacy MATIC leveraged products:

  • Fully transferable and tradeable as an ERC-20 token
  • Zero slippage via composable entry and exit.
  • Emergency deleveraging during Black Swan events for additional safety

Size of Opportunity

As the native asset of the Polygon ecosystem, there is sustained demand for MATIC and there are relatively few leveraged investment vehicles on Polygon for users who want additional exposure to MATIC.

The most relevant metric for gauging market demand for a leveraged trading instrument like MATIC2x is 24hr Trading Volume / Market Cap. Plainly stated, this metric allows us to measure the share of total token value that is actively traded within the last 24 hours. The higher the number, the better!

At time of writing, the 24hr Trading Volume for MATIC on Polygon is $56,990,000 and the Market Cap is $414,778,62, yielding an outcome of 13.74% for 24hr Trading Volume / Market Cap; for comparison, the 24hr Trading Volume / Market Cap for WETH and wBTC is 7.52% and 4.41%, respectively. Therefore, we believe that MATIC is the most promising asset currently supported on Aave Polygon for this type of leveraged product.

Differentiation

The MATIC2x token will be the first fixed-leverage product for the Index Coop deployed on Polygon, and it assures consistent exposure to the underlying asset regardless of market conditions.

On-chain Liquidity Analysis

The 2x MATIC token will use AAVE - Polygon as the borrowing / lending protocol

  • MATIC Supply: $175.25 million
  • USDC Supply: $1.16 billion

A combination of different DEXs will be traded against to ensure sufficient liquidity during rebalancing, with preference shown to pools with the lowest slippage and price impact.

  • Quickswap WMATIC/USDC Pool: $30.2 million
  • Sushiswap Polygon WMATIC/USDC Pool: $4.1 million

Methodology:

Objective

Offer a safe, easy-to-use index for users who want leveraged exposure to MATIC on Polygon.

Parameters

  • Underlying Asset: MATIC
  • Borrow Asset: USDC
  • Fixed Leverage Ratio: 2.0
  • Rebalance Interval: 12 hours (currently backtesting 12 hour vs 24 hour intervals, so this parameter may be updated)
  • Recentering Speed: 100%
  • DeFi Lending Protocol: Aave Polygon
    • borrowing / lending rewards (WMATIC) will accrue to the relevant contract that manages the product’s leveraged position; the ultimate destination of these rewards will be determined by the community (see more in FAQs section below)
  • Decentralized Exchange(s): Quickswap, Sushiswap
    • Trade Splitter and Trade Router will be employed to optimize rebalancing outcomes
  • Max Trade Size (targeted price impact <0.6%):
    • Quickswap: 75,000 WMATIC - 0.56%
    • Sushiswap: 7,500 WMATIC - 0.56%
  • Slippage Tolerance: 2%
  • Supply Cap: 100,000 MATIC2x tokens
  • Ripcord Parameters (to be employed during emergency deleveraging):
    • Leverage Ratio Trigger: 2.4
    • Ripcord Max Trade Size:
      • Quickswap:
      • Sushiswap:
    • Ripcord Slippage Tolerance: 5%

Fee split

MATIC2x will have a streaming fee of 1.95% (195 basis points) and a 0.1% mint / redeem fee (10 basis points). The revenue generated from this product will go entirely to Index Coop and the product’s share of the methodologist bounty will also be directed to the community treasury.

Additional Context

Please see the following forum posts for broader context on the Index Coop’s leveraged products:

Author background and commitment

The Automated Indices Pod (formerly known as the Leveraged Indices Pod) is comprised of Index Coop community contributors who are dedicated to the support, maintenance, and growth of automated products since May 2021.

Support:

  • Supported AWG in the design and creation of FLI Dune Dashboards as well as profitability metrics for all Index Coop products
  • Monitored and engaged in #fli-discussion channel, including addressing technical questions about the products
  • Managed the FLI portion of the Community Handbook by creating new pages and refreshing outdated pages
  • Developed a discord bot and a twitter bot for automated parameter reporting
  • Developed a web app for estimating FLI returns, volatility decay included

Maintenance:

Growth:

Dependencies

  1. Completion of the Aave Leverage Module by the Set engineering team, expected end of August 2021; this will allow the relevant contracts to interface with Aave and generate leverage
  2. Migration of Set infrastructure to Polygon
  3. Establishment of Index Coop Treasury addresses and multi-sigs on Polygon

FAQs

  • You’re going to have a snappier name for this product, right?
    • Yes, we are working on better branding for this product and will update this proposal once we’ve got something worth sharing!
  • Why are we using Aave over Compound for the borrowing lending protocol?
    • Compound is not currently on Polygon
  • Why aren’t we sweeping borrowing / lending rewards into the product’s AUM like other leveraged products?
    • The community has expressed alternatives to this approach that ought to be considered before implementing one solution over another
    • The capability to sweep rewards into the product’s collateral position must be developed by Set for Aave Leverage Module
  • When would a fixed leverage ratio work well? When would it work poorly?
    • A fixed leverage ratio will perform more predictably during a strong market move to the upside or downside.
    • It will perform less predictably during choppy and sideways markets.
  • How is this product different from the FLI products?
    • This product is designed to have a fixed leverage ratio of 2x with a hard rebalance every 12 hours so that token holders get consistent exposure to LINK and its price movements. In practice, this means that token holders can expect twice the gains when the market is up and twice the losses when the market is down. The FLI - or Flexible Leverage Index - products use a flexible leverage ratio that can range anywhere from 1.7x - 2.3x depending on market conditions; rebalancing for FLI products is dictated by a unique formula developed by DeFi Pulse. In practice however, when the market is up for the underlying asset, the leverage ratio trends toward the lower end of the range (1.7x), delivering less gains to token holders; when the market is down for the underlying asset, the leverage ratio trends towards the higher end of the range (2.3x), exacerbating losses for token holders. Please see the “How are these products different from the current FLI products?” section of this forum post for more details.
16 Likes

I’m really excited to explore the automated indices, as well as fixed leverage. Really curious about the methodology here and would love to see code on the contracts one day :slight_smile:

6 Likes

@Pepperoni_Joe could you please assign an IIP # to this proposal?

Hi @allan.g

I appreciate the hard work and thought that has gone into these proposals but I would just like to voice some concerns I have over them and at least request more time for community consultation before being put to IIP.

It has been less than a week since the PWG / FLI POD first brought these initiatives to the community and PWG call. 5days Since @afromac 's statement that IC is ready to launch leveraged products. And only 4 days since these IIP’s have been put to the forum. At no point have I seen a sentiment check or significant opportunity for the community to discuss them amongst the many other things currently going on around the coop.

To significantly complicate matters further there is a great deal of uncertainty as to the viability of running these products in parallel to the FLI suit. Whilst I am all for us as a community creating and maintaining our own products and establishing independence and self-sovereignty I remain unconvinced that these products differ significantly enough from the FLI suit. I appreciate the concept is to keep the 2x leverage target tighter but it is my understanding the FLI re-centering speed could be tweaked to achieve a similar outcome. The trade-off of course would be more frequent rebalancing and therefore higher gas costs. Please correct me if I am wrong but these “SLI” products would also need a degree of dynamic rebalancing to protect against liquidation again similar to the FLI suit?

More worryingly to me, however, are the motives behind these proposals… Whilst I don’t doubt the capabilities of the FLI pod and I fully recognise their enthusiasm. On the PWG last Monday the first thing referenced with regards to these products was the 60/40 fee split on the current FLI suit being undesirable and these products being a solution to those ends. So are the motives here to create better products for our users? Something that seems could be achieved by working and collaborating with our current methodologists? To influence the current fee split negotiations? Or even to circumnavigate DFP entirely? Based on discussions so far it is evidently not 100% the first.

Whilst of course we can argue over intentions all day long, what I believe cannot be argued against is that the optics here look far from optimal. It is not a stretch of the imagination that from an outsider’s perspective we have simply backwards engineered and regurgitated DFP’s IP in a move to cut them out/ and or strong arm them at the negotiating table. We are already well aware of their objections. Is this really the way we wish to conduct business? Do we really want to risk antagonising a key strategic partner whose products to date have made up >95% of our revenue? Would it not be better to complete the negotiations with DFP and the numerous proposed improvements to the products first before attempting to table competitive ideas?

There is a lot more I could go into here but the above is the bulk of my feelings towards this process. In summary, this is by far the most contentious, controversial, and potentially most consequential decision put to the community to date. In my humble opinion, it should not be rushed.

10 Likes

Hey @MrMadila - completely agree with you that the community needs more time to discuss both of these products (LINK2x and MATIC2x) and address the outstanding issues concerning FLI products.

We have no intention of pushing this proposal to snapshot until the community has had time and space to digest and discuss each of the items that you have outlined, but I realize that requesting an IIP number may have created some confusion. Thank you though for raising your concerns and rest assured that they will be addressed before any sort of vote is initiated!

3 Likes

Edit*

On the PWG last Monday the first thing referenced with regards to these products was the 60/40 fee split on the current FLI suit being undesirable and these products being a solution to those ends.

Just want to clarify my language and that a more appropriate term would have been unsustainable* rather than undesirable given further context provided to me. Thank you

3 Likes

Thanks Andrew. We could have done a better job communicating our reasoning last week. Appreciate your input and questions on this.

Thanks for putting in this work Allan! I’m a big fan of deploying a product on Polygon for two reasons:

  1. Index should be working towards protocol diversity to both limit exposure to ETH and increase TAM. Polygon is a great start since there is a lot of infrastructure for bridging the protocols already in place. The Ethereum to Polygon bridge is fairly quick (the opposite takes a few hours which is not ideal).

  2. The significantly reduced fees on the Polygon network solves two issues: user adoption and rebalancing costs. Naturally, lower costs to purchase a INDEX product will reduce investor hesitation. Next, rebalancing costs on Ethereum have been an issue of note (at least according to what I have read in the forums). Low Polygon fees means that methodologists can develop rebalancing strategies with less concern about network fees. While the conversation about flipping costs onto the investors is still valid, the issue would be much less severe on Polygon.

I don’t have a developed opinion on whether a leveraged product is the best product to enter a new network with. It should definitely be discussed.

3 Likes

Hey @MrMadila

Thanks again for your questions and concerns about these products and the circumstances surrounding them. Thinking about your questions was invaluable to us, and helped us to understand how our actions were being perceived by the community.

We have tried to address your questions, and questions from other members of the community, in another post: Why is the Index Coop proposing to launch our own suite of leveraged products.

Hopefully this goes some way towards addressing those questions. If we need to provide more clarity on anything else, then please let us know.

4 Likes