FLI-2xETH/sETH2 Liquidity Pool on Uniswap

Ideas
1

Together with Index Coop, StakeWise team brings an idea to launch a $FLI-2xETH/sETH2 liquidity pool, to offer DeFi users a 2x leveraged ETH exposure, staking yield and abundance of trading fees in one place. We call it The Mega Bull Pool, or MBP for short. The DAO’s approval is sought for assigning a portion of $SWISE to the pool to incentivize LPing.

Backstory

For many of us, Ethereum is the core asset in the portfolio. We stake it, lend it, farm with it, and do just about anything to boost the yield. We just can’t get enough of this precious asset - no amount is ever enough. We always look for ways to increase our exposure, and so paycheck after paycheck goes into unbanking ourselves.

Yet what if we could double our exposure without allocating more capital? What if $2,000 worth of ETH bought us $4,000 worth of it? If this were possible, we could earn double without spending double.

Typically, this requires getting into a complicated leveraged position - one must balance factors like collaterization ratio and interest rate in response to changes in the price of a borrowed asset and utilization of a lending pool. These manipulations often require skills beyond those possessed by an average user or are unaffordable due to the gas cost.

Index Coop came up with a great solution to this problem. The creator of the $DPI token recently presented $FLI - a new index that gives users a simple way to get leveraged ETH exposure.

$FLI utilizes Compound Protocol to borrow USDC against ETH as collateral and convert that USDC into more ETH, effectively achieving a 2x leveraged ETH position. To clarify, 2x leverage means that a 10% increase in ETH price results in a 20% gain for the user (same principle applies when the price falls). This is like owning 2x of the ETH you actually hold.

Why would you buy/mint $FLI instead of manually entering into a leveraged position? Easy - holding $FLI only costs 1.95% per year, saves you gas and outsources management of leverage to Index Coop, including during times of market panic. Put simply, it makes boosting your ETH exposure by 2x very accessible.

What’s very important is that the index has an emergency deleveraging mechanism in case of Black Swan events, protecting your capital from liquidation during the downside. The full description of $FLI and its advantages can be found on the Index Coop website.

Before we proceed, here’s an important disclaimer: leveraged products like $FLI always bear a higher risk than vanilla tokens, so you must learn about the risks before using the product.

With that being said, if you understand the risks and are excited about the possibility of higher returns, you will love the ease with which $FLI gives you a bullish exposure to ETH.

Motivation

There are several goals that the StakeWise DAO must achieve to make the protocol successful:

  1. Maintain a strong peg between ETH and sETH2
  2. Offer a variety of profitable and safe integrations for sETH2 in the DeFi ecosystem
  3. Grow the total value locked (TVL) in the StakeWise Pool

We believe that creating a liquidity pool for the $FLI/sETH2 pair will allow the DAO to check all three boxes. Here’s how.

Maintaining a peg

photo_2021-04-18_16-44-59
photo_2021-04-18_16-44-59620×531 22.4 KB

Chart courtesy of Michael from Index Coop

Alongside achieving ample liquidity for the sETH2/ETH pair with farming incentives, a stronger peg between sETH2 and ETH can be achieved by having arbitrage opportunities in times when the peg is lost. Having an ETH2x-FLI/sETH2 pool alongside an ETH/sETH2 stable pool would give rise to precisely such opportunities, via the following mechanisms (note that $FLI price =/ ETH price because $FLI is an index token):

  1. Swap (1-x) ETH into 1 sETH2 (where x is the discount) -> swap 1 sETH2 for $FLI -> swap $FLI into 1 ETH = keep the difference between 1 ETH received and (1-x) ETH spent.

Example: assume ETH price is $2,000. Swap 0.98 ETH into 1 sETH2 -> swap 1 sETH2 into 20 $FLI @ $100 a piece -> swap 20 $FLI into 1 ETH = pocket 1 - 0.98 = 0.02 ETH difference. As more volume goes through this arb trade, it will gradually erode the discount, stabilizing the price of sETH2 between the two pools.

  1. If $FLI/sETH2 is not trading at par, swap (1-x) ETH or $FLI for 1 sETH2 -> swap 1 sETH2 for (1-y) ETH of $FLI (where x and y are the respective discounts in the two liquidity pools), making sure to buy low and sell high to keep the difference between y and x.

Example: assume ETH price is $2,000. Swap 0.97 ETH into 1 sETH2 -> swap 1 sETH2 into 19.6 $FLI @ $100 a piece -> swap 19.6 $FLI into 0.98 ETH = pocket 0.98 - 0.97 = 0.01 ETH difference. As more volume goes through this arb trade, it will gradually erode the discrepancy between the two pools, stabilizing the sETH2 price.

  1. If ETH price rises y%, swap (1-x) ETH into 1 sETH2 -> swap 1 sETH2 into $FLI @ $Z a piece -> swap $FLI @ $Z+y a piece into 1+y/200 ETH = keep the difference between 1+y/200 ETH received and (1-x) ETH spent.

Example: assume ETH price is initially $2,000 and rises to $2,020 (+1%). Swap 0.98 ETH into 1 sETH2 -> swap 1 sETH2 into 20 $FLI @ $100 a piece -> liquidate 20 $FLI @ $102 a piece into 1.02 ETH = pocket 1.02 - 0.98 = 0.04 ETH difference. As more volume goes through this trade, sETH2 in the ETH/sETH2 pool will be bought up, closing some of the discount, and the price of $FLI between the $FLI/ETH and $FLI/sETH2 pools will stabilize.

via GIPHY

In a dynamic market, these arbitrage opportunities will always come up and help sETH2 price discovery, driven by the price fluctuations between ETH, $FLI and sETH2. These opportunities rely on a stable $FLI/ETH peg, which is ensured by the ability to burn and mint $FLI to redeem/spend ETH at par via the Index Coop interface. Also important is that the $FLI holders that are looking to supercharge yields will engage in liquidity provision for the $FLI/sETH2 pool, buying up sETH2 in the process, thus helping to improve the peg.

Offering profitable and safe integrations across DeFi

We expect the ETH2x-FLI/sETH2 liquidity pool to become a high-yielding place to park your assets. There are three sides to this.

  1. Becoming an LP in the $FLI/sETH2 pool allows to continue earning staking rewards whilst also tremendously benefitting from the rise in ETH price. Unlike the staked ETH tokens of competitors, our dual token model allows to preserve staking rewards when sETH2 is in the liquidity pool, enabling an extra bullish ETH exposure together with passive yield from staking. Another good thing for LPs is the absence of impermanent loss possibility in this pool.
  2. Availability of multiple arbitrage strategies shall contribute to a high volume of trades in all the liquidity pools involved. For example, in the $FLI/ETH pool alone, the volume of trading reaches a staggering amount (see below). Hence, providing liquidity for this pool would result not only in a bullish ETH exposure with passive staking income, but some high trading fees as well:

trading_fees
24 hrs trading fees in the $FLI/ETH pool work out to 43% APY from trading activity alone

Once DeFi users start exploring the arbitrage opportunities, it would likely result in higher trading fees for the main sETH2/ETH pool as well.

  1. The pool could be incentivized with both $SWISE and $INDEX tokens to further boost LPs’ yield, pending decisions by the DAOs of respective protocols.

When it comes to safety, there is a strong brand name behind $FLI. Partnering with DeFi Pulse and TokenSets, Index Coop has managed to achieve $136M market cap for its flagship index, $DPI, which offers exposure to a list of the top DeFi projects (DeFi Pulse Index). We have no doubt that $FLI will enjoy a similar success, thanks to its clever mechanisms for automatically keeping leverage between 1.7x-2.3x, frequently re-centering, and utilizing a network of Keeper bots to avoid liquidations in drastic scenarios.

Grow StakeWise TVL

While having a $FLI/sETH2 pool doesn’t directly contribute to a higher TVL, we believe such a pool could boost deposits through the second-order effects like:

  • Increased awareness about StakeWise and the advantages of its tokens via existence of the pool and cross-marketing with Index Coop
  • Wider market participation in the $SWISE farming mechanisms following initial exposure to the token via liquidity provision in $FLI/sETH2 pool
  • Having a stronger peg for the sETH2/ETH pair driven by arbitrage opportunities and deeper liquidity (due to LPs earning more trading fees)

Specification

  • A vanilla liquidity pool on Uniswap where $FLI and sETH2 would be initially provided in 50:50 weights. Uniswap is the top choice among DEXs because liquidity there is expected to be the highest. An alternative DEX could be 1inch, where the ability to take/receive overflowing slippage could boost LPs trading fees.
  • Both Index Coop and StakeWise teams would propose allocation of $INDEX and $SWISE incentives to LPs of the pool.
  • StakeWise and Index Coop would create a separate contract where the rewards from staking (rETH2) and farming (potentially $INDEX, $SWISE) would be collected. LPs would be able to stake LP tokens and collect their fair share of accrued rewards whenever they want.
  • In the future, there remains potential to enable usage of LP tokens as money legos in other DeFi protocols.

Risks

We are dealing with leverage, so obviously this product will not be for everyone. Also we might risk fragmenting liquidity for sETH2, although the flows in and out of the main sETH2/ETH pool could be controlled via incentives.

Closing remarks

So here we are: this is an opportunity for the sETH2 holders and the wider market to gain 2x exposure to ETH while earning staking income, trading commissions and whatever farming rewards the two DAOs will agree on. There are hardly any pools out there that come close to this earnings potential, and hence we call it the Mega Bull Pool (MBP).

Please offer your thoughts on this idea and/or suggest other similar assets we could partner with. Viva la StakeWise!

Index Coop’s proposal to their DAO: https://docs.indexcoop.com/products/flexible-leverage-index-fli

11 Likes
2

Although I am not sure I understood half of it, it sounds mighty cool. I have a couple of questions:

Can you explain how this is achieved? How is IPL prevented?

Which one does the team prefer? I hold 1Inch in high regards and they are very innovative, but if you think Uniswap would still be better (better liquidity?), I’m all for it.

Generally, I have a hard time wrapping my head around the leveraged FLI token. I do know what leverage is and how margin trading works in principle, but how exactly does Index Coop with FLI come into play? What are the downside risks when providing liquidity? An explanation in layman’s terms would be appreciated. :slight_smile:

I love how this will peg sETH2 price to ETH, btw.

5 Likes
3

I like the idea of this. Understand that there is higher risk with this, but I’m sold on the second-order effects, e.g. awareness of the token and a wider market participation in $SWISE farming.

I’m in.

1 Like
4

I don’t fully understand LP and such, as I am fairly new to the crypto space in general. However, I am certainly open to this idea and look forward to the discussion points of those who are more familiar with the risks and rewards.

2 Likes
5

I agree in that I’m fairly lost on a good portion of this. But from what I can garner I like the idea.
Seems like incentivizing the correct things.

There needs to be some ELI5 stuff around this for a all us noobs. :slight_smile:

2 Likes
6

For everybody who has been wondering how leverage tokens such as FLI work exactly, here is a good explanation from the founders of Index Coop (TokenSets):

4 Likes
7

Overall, this seems very creative and I like it and how this could work out for the benefit of Stakewise stakeholders. So I think I somewhat understand the benefits. What are the risks, though, if things go wrong? Things like: ETH loses 60% value, or Stakewise experiences slashing event, or $FLI contracts or bots fail to act as expected.

Is someone positioned to think through/calculate the risks and present those here as well?

2 Likes
8

Really cool!

Thinking about the 1inch vs Uniswap. 1inch liquidity protocol was specifically designed to work more favorably for the liquidity providers where arbitrage bots are concerned. Being that our sETH2 is very specific to our protocol there is little reason beyond our own making(incentives) for it to be integrated into the larger ecosystem. Because of this, I do wonder if having the liquidity on Uniswap would bring any more traffic than any other DEX. Yes its the most widely used DEX, but what reason does a speculator have to hold sETH2 over a leveraged ETH product, or even just ETH itself and forgo smart contract risk all together? What is more, liquidity is fragmenting as is seeks to find the least diluted APYs available and this has seen DEX aggregators getting more use.

Is there a way we can negotiate with 1inch to meet us half way for incentives? Recently they have been allcating 0.01% of their total token supply as liquidity farming incentives for various protocols over the course of about 20 weeks.
Some math:
0.0001 of 1,500,000,000 = 150,000 1inch tokens @ ~$6 each is roughly $900,000.
We have 19,500 ETH locked in stakewise worth about $47,000,000.
1inch has about $295,000,000 TVL in their liquidity protocol.
It stands to reason that capital doesn’t want to sit around while it could be earning yield if offered in relatively safe places.
$47,000,000 / $295,000,000 = 15.93% (this is a reasonable minimum amount of percentage we could increase 1inch TVL by. Offering them higher rankings on Defillama & defipulse ladders, and more importantly bringing them more volume and swap fees to distribute to their supporters.)
Liquidity provision in 1 inch typically involves pooling 2 assets at 50% weight each meaning at the high end $94,000,000 TVL for 1inch.

If a joint liquidity mining incentives program is agreed upon, the amount of ETH staked into stakewise.io is likely to increase. Meaning total sETH2 will be > $47,000,000 meaning in a 2 asset Liquidity pool that could be > $94,000,000, or simply meaning $94,000,000 is more achievable.
$94,000,000 / $295,000,000 = 31.86% additional TVL we can offer 1inch. 1inch offers stakewise marketing and publicity almost guaranteeing more users.

Yes I am pro using 1inch.

6 Likes
9

I really liked the idea and the detailed explanation!

2 Likes
10

This looks very attractive, sounds like a great idea! I don´t understand all the technical parts of it, and that´s ok I guess.

Some things I am curious about:
When I would withdraw from the pool, is it right that I would have a smaller nominal amount of sETH2 than I put in if ETH value goes down. And a larger amount of sETH2 if the value of ETH goes up? Or are the wins/losses settled in some other way?

Is there any more info about how the protection from liquidation would work?

And would this pool be available to everyone or just to people who has staked with Stakewise?

2 Likes
11

I love everything about this. Even when not taking part in this (because of the high risk of holding $FLI), I’ll happily watch from the sidelines and vote a resounding yes to incentivizing this with $SWISE!

I’d always prefer Uniswap personally. I like the values of the Uniswap team as opposed to those of the 1inch team.

I think the values of Uniswap align much better with the core values of ethereum. Hence me questioning in a previous thread the choice of going with forks of uniswap like sushi, which to me go against the values of uniswap and ethereum. Seems unimportant, but it really isn’t.

YES love this project.

Massive benefit!

I like this concept, arbitrage opportunities have proven to be an effective way of keeping market balance.

Given the relationship between tokensets and index coop, there could be an option to perhaps release a set in tokensets that allows exposure to the FLI/sETH2 pool. I’m sure it could become an attractive instrument for the set community.

Wholeheartedly support this proposal!

2 Likes
12

Like many here, this gets by me a bit but I think I get the idea and the pros and cons.

Big fun in a bull market maybe not so much in a bear. I can throw some “internet money” :grin: at that.

:raising_hand_man: got my vote

4 Likes
13

Great idea with a great details of the rationals.
One question that comes to my mind reading the proposal: Does the arbitrage opportunities would not impact in the potential Impermanent losses of the LP?

I’d love also including some examples of risk scenarios, or which are the risk of this pool not only from the point of view of leverage of $FLI, but also what could be the risk if sETH2 or FLI are not pegged with ETH or the risk of Impermanent loss scenarios. My first feeling is that if sETH2/FLI should diverge very little form ETH value, the IL risk should be low, but I wonder if I am right or I am missing something.

Thanks and huge +1 for the proposal.

1 Like
14

okay been directed here for a more in depth response . . .

can you guys give me the breakdown how impermanent loss is less affected in this pair ?

lp
lp933×695 150 KB

3 Likes
15

A great deal of this stuff flies over my head unfortunately, but I like the concept of the idea. Being a trader primarily I’m guessing the timing of the launch would be incredibly important? I’m bullish long term but open to the idea that the crypto markets as a whole could be entering monthly consolidation, meaning a couple of months of sideways/downwards price action, which would be a really bad time to be getting into a leveraged long position on ETH.

3 Likes
16

Yes, you have my vote. This is why stakewise exists and is the leading innovator in Ether staking… for the flexibility and potential. Having this liquidity pool does not require holders to participate and does not preclude us from setting up other creative defi instruments. Those that want to figure it out and profit, you have the option. I say let’s do it!

1 Like
17

Great work and a superb propasal. I share the general sentiment.
That said, thats a lot to unpack. At least for me :smile:

So, i try to get a complete understanding by asking stupid questinons. From bird view down to the worms eye view. Maybe i and others can have a epiphany here and there along the way.

That said, proposal would result in a ecosystem that looks somewhat like this?

Stakewise
Stakewise2500×1667 401 KB

It would be aditional to the Balancer V2 pool and delute the sETH into both pools?

2 Likes
18

On my 3rd read of this, I am getting a better grasp on it!

Can I get some clarification on the 3 legs? Is the FLI-2xETH/sETH2 one pair or does a user have to support all 3 legs separately to take advantage in the arbitrage?

Furthermore, the potential for farming rewards (Swise and Index coins), these will be able to leveraged as well?

I am all for a “safer” leveraged play. Thanks

2 Likes
19

This is too much for me to digest but am sure you have a very solid idea. Am upvoting it. :+1:

1 Like
20

How can there be no IL for LPs when FLI price is increasing 2x more than ETH?