Decision Gate 1: BTC2x-FLI

This is the first of two votes required for a new product to be onboarded to the Index Coop. More details listed under Decision gate 1 here.

Similar to Maker's collateral onboarding process, a passing vote here signals the Index Coop's intent to further research BTC2x-FLI feasibility resulting in a product prioritization score.

• FOR - Pass BTC2x-FLI through Decision Gate 1. Begin work to research & assign BTC2x-FLI a product prioritization score.
• AGAINST - Do not pass BTC2x-FLI through Decision Gate 1.

==========The full text for BTC2x-FLI is below==========

iip: 31 title: BTC2x-FLI status: Proposed author: Pulse Inc. discussions-to: https://gov.indexcoop.com/t/iip-31-btc2x-fli/1163 created: 2021-04-07

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 launch and proof of concept of ETH2x-FLI, we find that it is due time to give wrapped BTC holders a chance to trustlessly gain leverage!

Abstract

This new set, if launched, would be based on V0.1 of the FLI (same as the ETH2x-FLI) methodology and would bring to life the Bitcoin Flexible Leverage Index.

Initial parameters for The Bitcoin Flexible Leverage Index:

• Underlying Asset: wBTC
• Target Leverage Ratio: 2
• DeFi Lending Protocol: Compound
• Maximum Leverage Ratio: 2.3
• Minimum Leverage Ratio: 1.7
• Recentering Speed: 5%

We are proposing that BTC2x-FLI be composed of Wrapped Bitcoin (wBTC) 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.

As mentioned in IIP-13 , 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 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.
• 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 [defipulse.com] and look at lending protocols rank and TVL to get a sense of the magnitude of opportunity this new kind of Indexes can potentially present.

Bitcoin (WBTC) is the 4th most supplied asset on Compound, with over $1,872.24M in supply in the main pool, in addition to $988.50M in the legacy pool at relatively low usage rates, so low expected interest rates.

Differentiation

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

Launching our second FLI index continues to pave the way to a wide range of leveraged products managed by the Index Coop

On-chain liquidity analysis

For the initial proposed Bitcoin Flexible Leverage Index, which will also be using the [Compound] protocol, there are currently over 29,000 WBTC supplied in the main pool, by 400 suppliers, and nearly 17,000 wBTC in the legacy pool by 2839 suppliers.

Source https://compound.finance/markets/WBTC2 & 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 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.