Introducing the Flexible Leverage Index (FLI), by Pulse Inc.

Lemonade Alpha
The Index Coop
Published in
5 min readMar 17, 2021

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Translations: 中文, français, deutsch, русский, svenska, Türk

The Index Coop is excited to announce the launch of a new product: The Flexible Leverage Index (FLI, pronounced “fly”) ✈️

FLI is a structured product in ERC20 format that enables traders to automate a target leveraged exposure in a completely decentralized manner.

The FLI is the second collaboration with the team at DeFi Pulse (Pulse, Inc.) — built to minimize the risks and costs typically associated with maintaining collateralized debt. Today, a flagship ETH2x version is available on TokenSets (for non-U.S. users) with an initial supply cap of 50k units.

In this post, you will learn:

  1. The Basics of FLI
  2. What’s under the hood? Methodology 101

FLI Basics

Leverage is one of the killer use-cases for DeFi. However, legacy DeFi leverage workflows are not for the faint of heart. Users have to monitor health ratios, watch out for liquidation risk, and avoid penalties.

The Flexible Leverage Index was created to address those risks and to make the use of leverage safer and easier to maintain.

The FLI uses a novel strategy built on Set Protocol and Compound that abstracts collateralized debt management into a simple index — constructed as an ERC-20 token. Initially available for ETH, FLIs can be created & launched for other assets on lending protocols, such as wBTC, YFI, and LINK.

There are 4 major benefits to using the FLI:

  1. Decreased (not eliminated) risk
  2. Lower gas and fee burden
  3. Ease of use
  4. Composability with DeFi protocols

🦺 Decreased Risk

Leverage is inherently risky. The FLI decreases some of that risk for you.

This is done by automatically maintaining target ratios to recenter over time. FLI is designed to absorb major volatility spikes, and flexibly rebalance to ensure that collateral levels stay above liquidation thresholds. The FLI also utilizes an emergency delevering mechanism to add additional safety for users in the event of a black swan event.

Another benefit of FLI which decreases risk is redeemability. FLI is the first fully-collateralized leverage token which is redeemable into its components (ETH, USDC). Collateralization allows for a better risk profile than relying on synthetic leverage.

⬇️ Lower Fee Burden

FLI also dampens your fee burden by utilizing a unique algorithm that increases rebalancing efficiency by an order of magnitude. Additionally, the token’s 1.95% (annualized) streaming fee is considerably less expensive than alternatives on centralized exchanges, and there is no slippage due to composable entry and exit.

🔰 Ease of Use

Best of all, the Flexible Leverage tokens are exceedingly easy to use. Simply buy and sell on TokenSets or Uniswap for collateralized debt management abstracted into a single token!

FLI rebalances your leverage position for you, so the necessity to constantly monitor the threat of liquidation is eased.

🎼 Composability

One additional differentiator for FLI is composability which is unlocked through the use of a fully collateralized ERC-20 Set token. Because of this, FLI can be integrated into a number of services to broaden its use cases.

What’s Under the Hood? Methodology 101

Index Coop products follow strict methodologies. Pulse, Inc. has published a detailed breakdown for the FLI: Introducing the Flexible Leverage Index and TokenSets has shared technical details here.

Below is a high-level overview.

Initial parameters for The Ethereum Flexible Leverage Index:

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

Fees

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.

Index Formula

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))

Glossary

  • 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.

How to Buy

Availability at wallets and aggregators coming soon!

Please Note: There is a beta supply cap on ETH2x FLI at 50k units. The supply cap may be raised through Index Coop governance.

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