IIP-57: Launching iETH-FLI - The Ethereum Inverse Flexible Index

This is the first of two votes required for a new product to be onboarded to the Index Coop.

A passing vote here signals the Index Coop's intent to further research iETH-FLI feasibility resulting in a product prioritization score.

• FOR - Pass iETH-FLI through Decision Gate 1. Begin work to research & assign iETH-FLI a product prioritization score.
• AGAINST - Do not pass iETH-FLI through Decision Gate 1.

DG1 is a signalling step to gauge community sentiment. It is NOT subject to quorum requirements.

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Status: Proposed Author: Pulse Inc Created: 30th June 2021 Discussion-to: https://gov.indexcoop.com/t/iip-57-launching-ieth-fli-the-ethereum-inverse-flexible-index/1854

Quorum: 99,742.95 [1,994,859*0.05]

Summary

Pulse Inc would like to propose that the Index Coop manages a new set using the FLI strategy proposed in IIP-13.

With the successful maintenance and stress testing done through the launch of ETH2x-FLI and BTC2x-FLI , we think it is time for the first Inverse FLI to be born!

We propose the launch of iETH-FLI which is a short position on ETH with 1x exposure to the downside

Abstract

This new set, if launched, would be based on V0.1 of the FLI (same as both ETH2x-FLI and BTC2x-FLI) methodology and would be the first Inverse Flexible Leverage Index and would be called the Ethereum Inverse Flexible Index

Initial parameters for The Ethereum Inverse Flexible Leverage Index:

• Underlying Asset: USDC
• Target Leverage Ratio: 1
• DeFi Lending Protocol: Compound
• Maximum Leverage Ratio: 1.15
• Minimum Leverage Ratio: .85
• Recentering Speed: 5%

We are proposing that iETH-FLI utilize Circle’s USDCoin (USDC) based on the liquidity & utilization metrics on Compound. This may be changed in the future if other stablecoins present sufficient liquidity and utilization in Compound or supported lending protocol.

Inverse FLIs function the same way FLIs do in the sense that your deposited asset is locked in a money market and used as collateral to borrow more of the underlying asset.

A key distinction between the two is that Inverse FLIs have much lower volatility decay since the APY on stablecoins is significantly higher than the borrowed asset (being ETH in the case of iETH-FLI)

Motivation

Flexible Leverage Index makes leverage effortless.

The User would not have to worry about:

• Monitoring his 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 his positions.

FLI has several key advantages over Legacy Leveraged Tokens:

• Zero slippage via composable entry and exit.
• The 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. There is certainly no shortage in interest for collateralized debt positions, one can simply visit DeFi Pulse and look at lending protocols rank and TVL to get a sense of the magnitude of opportunity this new kind of index can potentially present.

Differentiation

FLI being very dissimilar to any existing or proposed Index opens up a new category of leverage based Indexes.

With this initial Inverse FLI, we are addressing the second part of the market that would like to speculate on any potential downside on the price of the underlying asset

On-chain liquidity analysis

USDC is the most supplied stablecoin on Compound, with over $3,532,39M in total supply from 218,222 suppliers.

At the time of writing the pool has a utilisation of ~56% meaning $1,555M USDC is left unborrowed.

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 DeFi Pulse and 60% to Index Coop.

Author 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.