After the tremendous success on Ethereum’s Mainnet, Pulse.inc’s Flexible Leverage Index (FLI) methodology was launched for the first time on Polygon by the Index Coop.
Flexible Leverage Indices implement a collateralized debt position in a safe and efficient way to achieve leveraged returns and, by abstracting its management into a simple index, make it investable as a single ERC20 token. Thereby implementation costs are socialized and the continuous effort to maintain a healthy debt position is automated away. In addition, a unique algorithm helps to lower the transaction fees.
Polygon, originally known as the “MATIC Network”, is a scaling solution for Ethereum that maintains and develops a Proof of Stake sidechain that aims to facilitate lower gas costs and faster transaction times compared to the Ethereum Mainnet.
The Index Coop launched the first token that implements the FLI methodology developed by Pulse.inc in March 2021 on Ethereum’s Mainnet and since then total assets tracking FLIs — 2x leverage indices on ETH and BTC respectively — have grown to $200 million, indicating a strong demand by market participants for leveraged market exposure that is easy to access and maintain.
Quickly a robust ecosystem developed around the FLIs with liquid pools on decentralized exchanges allowing users to efficiently trade. This in turn attracted market participants who are willing to act as liquidity providers. Pools consisting of the FLI and its corresponding underlying asset (e.g. ETH2X-FLI / ETH) have proven to be extremely popular on concentrated liquidity pools, offering liquidity providers approximately 1.5x daily leverage, attractive trading fees, and limited impermanent loss.
With gas prices on Ethereum on the rise, using FLIs as a tool for short term bets on the underlying market has been becoming less and less appealing for traders. The Index Coop decided that it was time to create FLIs on Polygon to ensure these popular index strategies remain accessible for everyone.
Flexible Leverage Indices being implemented on Polygon means that entering and exiting a leveraged position is possible for a fraction of the cost on Ethereum’s Mainnet. While this alone could have been achieved by bridging the existing token that is native to the Ethereum Mainnet to the Polygon chain the rebalancing methodology that ensures that the collateralized debt position remains close to its target leverage and that avoids liquidation would still be executed on Ethereum and hence cause high gas fees.
Implementing the FLI methodology natively on Polygon reduces the cost of these rebalancing transactions by orders of magnitude and therefore allows Pulse.inc to select index parameters that are improving the methodology. For example, the index will rebalance every four hours, i.e. every four hours the index will gradually move its leverage ratio back towards its target leverage ratio from the over or under exposure caused by ETH price movements.
In order to avoid increasing the total daily turnover, the recentering speed is lowered accordingly compared to the Ethereum version. As a result, the risk of the index deleveraging quickly is lowered and the FLI methodology becomes suitable for more volatile underlying assets. Similar to the existing indices, this FLI on Polygon also uses a “ripcord” safeguard that can quickly deleverage the collateralized debt position at times of extreme market stress.
Initial index parameters for the ETH 2x Flexible Leverage Index (ETH2X-FLI-P) on Polygon:
- Underlying asset: WETH
- Debt: USDC
- Target leverage: 2
- Maximum leverage ratio: 2.3
- Minimum leverage ratio: 1.7
- Epoch length: 4 hours
- Recentering speed: 2.5%
You can read more about Flexible Leverage Indices at Pulse.inc or find out more about the ETH2X-FLI-P token at the Index Coop.
Pulse.inc, a subsidiary of DeFi Pulse, is dedicated to creating and maintaining indices for a decentralized world.