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Introducing Inverse FLIs and MATIC2x

Christoph - Feb 9, 2022 | 4 minutes read

Scalara’s Flexible Leverage Index (FLI) methodology for the first time powers an inverse version – implemented by Index Coop on Polygon.

The Index Coop launched the first Polygon-native token that implements the FLI methodology in December 2021. The index was well accepted by its target audience: traders that bet on short term price movement and liquidity providers earning the fees generated from trading. As a result, 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.

Unit supply and asset growth of FLIs
Source: dune.xyz

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 Index formula was not developed to only be implemented as an index with positive leverage. Such FLIs, for example with 2x leverage, amplify the price movements of the underlying asset. The methodology works just as well for inverse indices. Inverse indices, sometimes called “short” indices, have a different payoff structure. It 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.

As its first 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:

Inverse MATIC FLI performance compared to MATIC price
Source: Simulated with Scalara and Coingecko data. Log-scale has been applied to make vertical distance comparable

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). This can be seen when plotting simulated iMATIC index returns over MATIC returns. 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. 

Source: Scalara and Coingecko data

MATIC2x: Completing The MATIC Index Suite

At the same time, Scalara also launches the corresponding MATIC 2x Flexible Leverage Index on Polygon. It uses the same methodology as the ETH 2x Flexible Leverage Index launched late last year. Having both an inverse and a leverage version 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 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. Abstracting away their management into a simple index, allows them to be implemented 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, with Flexible Leverage Indices implemented on Polygon, 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, the index can be rebalanced more frequently.

For example, the index may now be rebalanced every four hours. This means that every four hours the index will gradually move towards its inverse exposure target of -1. Hence, the leverage ratio recenters 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).

Index Parameters

Underlying assetUSDCMATIC
Target leverage2 (-1 exposure)2
Maximum leverage ratio2.2 (-1.2 exposure)2.2
Minimum leverage ratio1.8 (-0.8 exposure)1.8
Epoch length4 hours4 hours
Recentering speed2.5%2.5%

You can read more about Flexible Leverage Indices at scalara.xyz or find out more about the iMATIC-FLI-P and MATIC2X-FLI-P tokens at the Index Coop or Set.

Scalara, a subsidiary of DeFi Pulse, is dedicated to creating and maintaining indices for a decentralized world.

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