The BTC Flexible Leverage Indices (FLIs) launch completes the index suite of leverage indices on Polygon that track the three most liquid tokens on the Polygon blockchain.
The Index Coop launched the first Polygon-native token in December 2021 that implements the FLI methodology developed by Pulse.inc – now known as Scalara. Shortly after, in February 2022, tokens tracking MATIC as well as inverse tokens were added.
Liquid and cheap leverage
The FLI family is the most traded index product on the Polygon blockchain with aggregate FLI daily trading volumes averaging above $300K. A major driver are the low transaction fees that make leverage exposure more economical for smaller trade sizes compared to Ethereum Mainnet or even centralized exchanges. FLIs are available for trading on DEXes like Uniswap, Quickswap and Sushiswap or more easily through aggregators like Slingshot.
Even though FLIs have a flexible leverage, by and large they provide the 2x (or -1x for inverse tokens) exposure to the returns of the underlying token over short and medium horizons.
As a result of the frequent rebalancing, higher volatility may cause the FLI return to be below its target, but in trending markets the return may be higher. Frequent rebalancing is part of the FLI methodology to maintain a target leverage ratio of 2 (or -1 for inverse) for the collateralized debt position that powers the leverage position and to avoid liquidations in the times of market stress.
Two examples of time periods where a trending market caused the FLIs to outperform their target, even over a longer period of time, are shown in the figures below:
During Bitcoin’s rally in the summer and fall of 2021 (as shown in the left image) that catapulted the price of Bitcoin from $30K to $66K (+120%), BTC2X-FLI returned just above 300%.
Similarly, during ETH’s recent recovery (as shown in the right image) from $2400 to $3200 (+33%) ETH-FLI-P returned above 90%.
Over shorter periods of time, though, the return of FLIs will be closer to the target multiple of the underlying return since there are less rebalances taking place that affect the leverage ratio.
Trading and holding at low cost
Several design decisions aim to reduce the costs of trading and holding FLIs compared to alternative leverage products.
- Available on Polygon: Buying/selling/minting/redeeming a FLI costs fractions of a dollar.
- Native on Polygon: The internal rebalancing transactions that maintain the collateralized debt obligation also cost fractions of a dollar.
- Flexible leverage: A smoothing algorithm reduces the rebalancing trade size and therefore, the related DEX fee.
- Low streaming fee: A 1.95% annualized streaming fee is lower than management fees for comparable products on centralized exchanges.
|Target leverage||2||2 (-1 exposure)|
|Maximum leverage ratio||2.2||2.2 (-1.2 exposure)|
|Minimum leverage ratio||1.8||1.8 (-0.8 exposure)|
|Epoch length||4 hours||4 hours|
Scalara is dedicated to creating and maintaining indices for a decentralized world.