After three 2x leverage indices, Scalara’s Flexible Leverage Index (FLI) methodology is used for the first time to launch an inverse implementation by the Index Coop on Polygon.
The Index Coop launched the first Polygon-native token that implements the FLI methodology developed by Pulse.inc – now known as Scalara – in December 2021. The index was well accepted by its target audience: traders that bet on short term price movement. The token unit supply grew to nearly 70,000 spread over 1,500 addresses in two short months representing over $3 million TVL. Daily trading volumes on some days reached more than $500,000.
It is worth noting that this happened during a period of time when the underlying, ETH, together with the overall crypto market, had experienced significant drawdowns.
FLI Upside Down
The Flexible Leverage Formula was not developed to only be implemented as an index with positive leverage that amplifies the price movements of the underlying asset. The methodology works just as well for inverse indices. Inverse indices, sometimes called “short” indices, have a payoff structure that causes the index value to increase when the underlying decreases and vice versa. Using a lending protocol, they can be implemented by depositing a stablecoin while borrowing and selling the token for which the inverse exposure is desired.
In order to introduce inverse FLIs, Scalara chooses MATIC as the underlying, the native token of Polygon. The inverse index allows users of the token implementation from Index Coop and Set to benefit from a falling MATIC price or hedge an existing MATIC position.
💡 Polygon, originally known as the “MATIC Network”, is a Layer-2 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.
Below the hypothetical index performance over the last few volatile months is shown:
As expected, the 24 hour returns of the hypothetical index simulation are approximately -1 times the MATIC return over the same time period (R^2 = 0.98) as can be seen when plotting simulated iMATIC index returns over MATIC return. The line is not perfectly straight since the leverage and hence the inverse exposure is not exactly at the target level at the beginning of each 24 hour window.
MATIC2x: Completing The MATIC Index Suite
At the same time, Scalara also launches the corresponding MATIC 2x Flexible Leverage Index on Polygon. This index uses the same methodology as the ETH 2x Flexible Leverage Index launched late last year. Having both an inverse and a leverage index available will give traders a lot more possibilities. It allows them to benefit from up and down movements of the underlying MATIC token.
Everything That Makes FLIs Great
All the index features of the 2x leverage indices are still valid for inverse FLIs:
- No continuous monitoring of the health of the debt position necessary;
- No liquidations, thanks to emergency deleveraging possibility;
- Reduced maintenance costs due to unique index algorithm that limits rebalancing turnover;
- No dependency on availability of user interfaces.
💡 Flexible Leverage Indices implement a collateralized debt position in a safe and efficient way to achieve leveraged or inverse 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.
Furthermore, Flexible Leverage Indices being implemented on Polygon means that entering and exiting a leveraged position is possible for a fraction of the cost that one would normally pay on Ethereum’s Mainnet.
Implementing the FLI methodology natively on Polygon also reduces the cost of the rebalancing transactions by orders of magnitude, therefore allowing Scalara to rebalance the index more frequently.
For example, the index may now be rebalanced every four hours, i.e., every four hours the index will gradually move towards its inverse exposure target of -1. This results in the leverage ratio recentering faster towards the ideal exposure target. Additionally, the improved methodology reduces the timespan of deviations from the ideal leverage ratio (caused by MATIC price movements).
|Target leverage||2 (-1 exposure)||2|
|Maximum leverage ratio||2.2 (-1.2 exposure)||2.2|
|Minimum leverage ratio||1.8 (-0.8 exposure)||1.8|
|Epoch length||4 hours||4 hours|
Scalara is dedicated to creating and maintaining indices for a decentralized world.