IIPXX : Launch the ETH:BTC Ratio Index

IIP Number: [to be assigned]
Title: Launch the ETH:BTC Ratio Index
Status: [WIP, Proposed]
Author(s): @sidhemraj, @anthonyb.eth
Reviewed by: @afromac @allan.g @MrMadila
Discussions-to: N/A
Created: Feb 16, 2023

1.0 Simple Summary

Index Coop proposes launching the ETH-BTC trading product, providing exposure to the ETH-BTC ratio. It is not specifically targeting the “flippening” narrative but could benefit those betting on this outcome.

2.0 Abstract

The ETH-BTC ratio is a valuable metric for understanding the relative strength of Ethereum and Bitcoin. This product provides exposure to 2x ETH and -1x wBTC through supplying wETH to Aave’s V3 Market, borrowing wBTC, selling it for wETH, and supplying it as collateral back to Aave V3.

2.1 Motivation

The ETH-BTC ratio is important for traders and investors to track relative value and market sentiment. It is highly likely that this ratio will continue to be important for a long time. Despite its importance, the ratio is relatively difficult and expensive to gain exposure to on-chain.

2.2 Rationale

By introducing a liquid token with automated leverage management on a battle-tested infrastructure, users can get on-chain exposure to the ETH-BTC ratio without needing to create and manage expensive and tedious positions in lending markets.

This higher-risk strategy has historically outperformed both dsETH and icETH strategies over a long-term time horizon. Tokenizing the ETH-BTC ratio allows investors to enjoy exposure to both ETH and the relative performance of ETH and BTC, allowing them to increase their ETH-denominated holdings.

ETH-BTC delivers value to customers by…

  • Offering exposure to the ETH-BTC ratio in a low-risk fashion
  • Abstracting the management of collateral and debt balances
  • Socializing gas costs associated with maintenance

ETH-BTC delivers value to the Index Coop by…

  • Diversifying our product offerings
  • Expanding the ETH-denominated returns category of our portfolio

2.3 Differentiation

Traders can gain exposure to the ETH-BTC ratio by manually taking positions on lending markets such as Aave, Compound, and Euler, as well as on-chain perpetual markets, centralized exchanges, and synthetics; however, there are currently no liquid tokens providing exposure to the ETH-BTC ratio.

3.0 Overview

ETH-BTC will utilize Index Protocol’s battle-tested leverage token infrastructure on Ethereum main net and integrate with Aave V3 for managing collateral and debt positions. wETH will be deposited to Aave V3 and enabled as collateral, allowing wBTC to be borrowed and subsequently swapped for more wETH; this new wETH will be added to the index’s collateral balance in Aave V3, allowing for additional wBTC to be borrowed and swapped for additional wETH. The index will target a leverage ratio of 2.0x and will require minimal rebalancing because of the relatively high correlation between the collateral and debt assets. Emergency deleveraging will be enabled with incentivized ripcord functionality to prevent liquidation during extremely high volatility events.

3.1 Example Composition

At the target leverage ratio of 2.0x, the composition will be ~67% wETH (collateral) and ~33% wBTC (debt). The exact composition may vary due to volatility. Automated rebalancing will recenter the index to the target leverage ratio according to predefined parameters.

3.3 Backtest Results

A backtest of the ETH-BTC was conducted, and the results showed that the product produced high returns over a 3-year period, outperforming both ETH and BTC individually.

Backtest Result 1

The above chart compares ETH vs ETH-BTC ratio returns denominated in ETH over a 3-year period. Over the period, hypothetical ETH-BTC holders who started with 1 ETH ended with 1.97 ETH after the said period.

Backtest Result 2

The above chart compares returns of ETH, ETH2x-FLI, and ETH-BTC in USD terms over a three-year period. ETH-BTC comprehensively outperforms ETH and ETH2x-FLI over 1y/2y/3y periods.

Past returns are not indicative of future performance.

4.0 Size of Opportunity

Our analysis reveals that at least $70 million is invested in this strategy on Aave, Compound, and Euler. We believe the potential market size is much bigger due to the fact that many people prefer not to manage their own leverage and resort to using centralized exchanges.

5.0 Market & Customer Research

A Twitter poll conducted by Index Coop on January 20, 2023, showed that 76.5% of respondents said “Yes” to the question: “Do you want @indexcoop ETH-BTC ratio product?” The poll had 153 respondents.

5.1 Target Customers

The target audience for ETH-BTC includes on-chain Ethereum investors and traders that believe ETH-BTC outperformance is likely to continue. This strategy has been popular with Ethereum-centric podcasts such as Bankless, where host David Hoffman has explicitly spoken of his long-term plan to deploy manual strategies like this one. Additionally, the large DAO, Gnosis, is deploying this strategy on Aave, demonstrating potential effects beyond the target audience.

5.2 User Stories

  • As a retail user, I want to bet on the ETH-BTC ratio, but leverage management is too complex and risky
  • As a retail user, I want to bet on the ETH-BTC ratio, but the gas costs are prohibitive

5.3 Product Economics

We predict monthly revenue of $16,250 and rebalancing costs of ~$2,500 for a gross profit margin of effectively 85%. This is based on a $10m AUM, 1.95% streaming fee, and rebalancing frequency consistent with the 3-yr backtest.

6.0 Methodology

6.1 Initial Composition & Token Inclusion Criteria

The composition would include Aave Supplied ETH and Aave Borrowed BTC.

6.2 Weightings

The weight of the index would be adjusted to have a 2-1 ratio of Aave Supplied ETH to Aave Borrowed wBTC to meet the 2.0 leverage ratio at launch.

6.3 On-Chain Liquidity Analysis of Underlying Tokens

The index will execute rebalance trades primarily on the WBTC/WETH 0.05% Fee pool on Uniswap V3, which has a TVL of $120M, and attracts 80% of the WBTC<->ETH trade volume on Uniswap V3.

6.4 Maintenance / Rebalancing Frequency

Asset and strategy parameters
Collateral Asset : wETH
Debt Asset : wBTC
DeFi Lending Protocol : Aave V3
Target Leverage Ratio : 2.0
Maximum Leverage Ratio : 2.3
Minimum Leverage Ratio : 1.5
Initial Supply Cap 1,000,000 Tokens
Token Value at Inception(TBD) 100 USDC or close to 1WETH in USD value
Rebalance Parameters
Rebalance Interval 3 months or when LR<1.5 or LR>2.3
Recentering Speed 2.5%
Slippage Tolerance 0.2%
Ripcord Parameters
Ripcord Leverage Ratio 2.5
Ripcord Slippage Tolerance 5%
Initial Liquidity
Pair : wETH / wBTC
DEX : Uniswap v3

7.0 Costs

7.1 Costs to Customer

Holders will be charged a 1.95% streaming fee, and 0.15% mint and redeem fee.

7.2 Costs Transparency

There are implicit costs associated with this strategy (though they are excluded from the effective yield communicated in this proposal):

  • Borrow costs from BTC debt balance in Aave v2/v3

  • Slippage incurred during rebalancing

The debt balance the product will carry within Aave v3 is subject to a variable interest rate. While that interest rate is currently and historically very low (0.64% for WBTC), a very large increase in utilization or a very large decrease in supply could drive the variable borrow rate higher and thus reduce the NAV.

NAV decay due to slippage is expected to be negligible due to the very infrequent rebalancing to maintain the target leverage ratio as well as the deep, concentrated WBTC/WETH liquidity on Uniswap 0.05% Fee pool.

7.3 Fee Split

All fees accrued will go 100% to Index Coop treasury.

8.0 Intrinsic Productivity

Token holders stand to benefit from the change in ratio of ETH to BTC price.

There are no metagovernance rights available with this product as it holds supplied ETH and BTC debt.

9.0 Liquidity

This product will require approximately $73,000 in seed liquidity at launch in order to provide a target access cost of 1% based on the assumptions below which are subject to market conditions. It is highly likely that this product will naturally attract LPs, given that ETH-BTC and ETH will not diverge in price quickly.

Target Access Cost 1.00%
ETH/USD Price $1,550
Gas Price 20 gwei
Issuance Cost 526,000 wei
Issuance Cost .011 ETH
Exchange Equilibrium 1.052 ETH
Concentration - Lower Bound -16.7%
Concentration - Upper Bound 20.0%
Total USD Required $73,263

10.0 Author Background and Commitment

Index Coop’s product team is responsible for designing, developing, and deploying index products for the Index Coop, as well as managing and maintaining products post-launch.

Core team members have also been supporting, operating, and refining Set Protocol v2 and Index Protocol’s leverage token infrastructure for over a year.

11.0 Marketing Support / Distribution / Partnerships

As an internally-produced product for the Index Coop, there will be a joint effort amongst Product, Marketing, and Partnerships to market, distribute, and maximize composability for this product.

If you want to work with us to support ETH-BTC on your application or platform, please reach out on our discord.

12.0 Option to Extend

If approved by Index Coop governance, this suite proposal can be extended to other products that adhere to the same methodology (ex. BTCETH).

13.0 Contingency for Depreciation

If this product should be deprecated post-launch, it will be given 60 days notice following an IIP and will be rebalanced entirely into ETH which will make it easy for holders to redeem their assets.


I really like this idea. Let’s make it happen!!
There are plenty of pool/liquidity for ETH
& BTC. Lots of DAO treasuries/Vs has
WBTC & ETH. Also It would make it easier for traders.
Indexcoop should launch when the market is
highly fearful/hopeless, not greedy. The right
time and right place is essential. GMI launched
at the wrong time. GMI wanted the price to go
up while the market was doing the opposite.
Let’s learn from this valuable lesson.


Personally, I think it looks good. Some comments / questions from me:

  • No intention to launch on an L2?
  • Would a simple review of the ETH price in BTC give an indication of historical performance (or is there something more complex happening?)

  • Looking at AAVE v3 on Main net, wBTC has a lower borrow rate than ETH lending, does that mean we may actually benefit from AAVE rates (unlike icETH)?

  • I’m assuming the potential benefit of being long wstETH or rETH :smile: is countered by the lack of liqudiity pair with wBTC.
  • I’m assuming secondary liquidity with be an ETH pair? Sounds attractive to people who are long ETH.

This is correct! Currently, there would be a positive carry as lending ETH currently earns ~3.60% and borrowing wBTC currently costs ~0.75%. Due to the nature of variable rates though, this benefit may not be as pronounced at certain times.

There is also an indirect benefit to icETH in the future if it is built on Aave v3, because the ETH:BTC Ratio product will be supplying ETH to the same market that icETH borrows from!


It is little more complex due to the nature of an auto-rebalancing leveraged product where volatility decay will always have an effect on performance. We are currently running more sophisticated back testing to provide more accurate modelling.



Gud initiative. I used to trade eth-btc ratio strategy manually till last year. Had to abandon since it wasn’t worth my time. Now, that if i can trade through an Index, it unburdens heavy load.

A few questions:-

1.) What’s incentivised Ripcord functionality?

2.) Since I have participated in lending & borrowing markets rarely, i have little knowledge. Why not go ahead with Lido Staked Eth or Rocket Eth instead of plain vanilla Eth.

In this way, atleast 5-7% interest will also accrue to the tune of 2x due to 2 times leverage of Eth.

3.) Eth-Btc ratio index is ideal for long term holding or short term ? Will it lose value just like Eth2FLI whenever the ratio between Eth-Btc deviates beyond normal limits which I suppose happens atleast thrice a year…

4.) Approximately how many sets of lending- borrowing cycles to be done to reach 2 times leverage ?

5.) The proposal is silent regarding deployment on L2.

6.) According to your backtesting, wots the 3 yr low & high of Eth-Btc ratio…

A humble request:- kindly tag me in discord if someone’s replying to these queries since I’m not that active on forums… Thanks in advance.


paging @allan.g :slight_smile:

I think the following are correct:

  1. Ripcord is a function that allows the product to be delivered entirely (or a significant amount), It rewards the person who calls it with a bonus in ETH, This incentives people to write bots /watchers / keepers to keep an eye on the contract. Ripcord can only be called when certainc riteria are emt (i.e. the entire product is close to being liquidated on AAVE). Allt eh leveraged products have a similarcuntion.

I don’t think it’s ever been used.

  1. Purely liquidity: ETH : BTC is a very liquid pair. using stETH : ETH : BTC adds LP fees and slippage. OVer time it has an impact on NAV.

  2. Good question. There will be some NAV decay due to re-balancing periodically.

  3. I don’t know.

  4. Probably not a priority. Less lending market and swap liquidity depth makes it more expensive to manage (although gas is cheaper). FLI products on polygon have been depexciated due to lack of demand.

  5. I don’t know.

1 Like

Hey @Derbygold.eth,

Sorry for the delay, I was at ETH Denver. Anyways, hope this answers your questions:

It’s an extra layer of security to ensure the product doesn’t get too leveraged in extremely volatile periods. The ripcord function can be called by anyone to return leverage ratio back to the max leverage ratio. This function typically would only be called during times of high downside/upside volatility and / or normal keeper malfunctions. The caller of ripcord() will receive a reward in Ether.

Because this product will need to rebalance periodically, it is more important to have sufficient liquidity for the underlying assets rather than try to maximize yield. That said, the product will benefit from positive carry. That is, product holders will earn the supply rate from ETH and pay the borrow cost of wBTC. At the time of writing the aWETH supply rate exceeds the wBTC borrow cost which is typical. It is also expected that supply rates for aWETH will increase post-Shanghai because there will be little incentive to supply aWETH at a lower rate than stETH is paying, for example.

It is expected that ETH-BTC will be much better for holding long-term than ETH2x-FLI due to the fact that ETH and BTC are much less volatile pair than ETH-USDC. That said, the product will still lose some value over time due to volatility, but much less than ETH2x-FLI.

The number of loops is determined by the leverage ratio and max trade size parameters. You can only take out so much debt at a time and swap for the collateral asset as a result of those settings. We won’t use a flash loan to lever the product up initially, so it will like 8-10 transactions to lever up to 2x, as we are restricted by the re-centering speed, but it’s possible to manually lever up with fewer transactions.

This product will be deployed on mainnet, meaning that the smart contracts will live on mainnet, but if there is sufficient demand, we may encourage liquidity on L2s. That is still be determined though.

We are working on a more robust backtest of this strategy. To get a truly accurate backtest we need to use minute price granularity. You can expect that to be posted here in a few days.