The Flexible Leverage Index (FLI, pronounced “fly”) lets you leverage a collateralized debt without having to manage a collateralized debt. If you’ve ever used legacy leveraged tokens, you can probably answer yes to one or more of the following questions:
- Have you ever worried about getting liquidated overnight?
- Have you ever paid high gas prices to adjust the safety of your debt?
- Have you ever panicked and bought stablecoins to avoid a liquidation?
Or the even more dreaded…
4. Have you ever been liquidated and had to pay a penalty?
It’s never a pleasant experience and in the end you’re left with the thought, “There has to be a better way!” And you aren’t wrong…
Flexible Leverage Index makes leverage effortless
The Flexible Leverage Index abstracts collateralized debt management into a simple index, reproducible by an ERC20 token built on Set Protocol.
Pulse Inc would like to propose that the Index Coop manage a series of Sets based on this new Index:
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
We’d like to present v0.0 of the Flexible Leverage Index
This version is preliminary, and we will be doing a round of feedback to make iterative improvements for v0.1. We would like to see the Index Coop launch a series of Sets based on V0.1 of the FLI starting with the Ethereum Flexible Leverage Index.
Flexible Leverage Index v0.0
Objective
Flexible Leverage Index enables market participants to take on leverage while minimizing the transaction costs and risks associated with maintaining collateralized debt.
Calculation
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))
Series
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%
As previously mentioned, we’re proposing Ethereum Flexible Leverage Index as the first in a envisioned series of Sets based on FLI. Bitcoin, Chainlink, and YFI are other potential candidates which we may consider for this series.
Thank you for reading. We look forward to hearing your feedback and engaging with community to iterate on the design of the Flexible Leverage Index (FLI) series. Learn more about Pulse.inc.
