Introducing the Index Coop Arbitrum Leverage Suite

The Index Coop is thrilled to announce the launch of the first Arbitrum-native automated leverage products.

The Index Coop’s 2x mainnet leverage products have long been among the most popular products on offer. Now, in addition to those two mainstays, users can choose from six additional leverage token options on Arbitrum. 

In this article:

• Meet the new leverage tokens on Arbitrum 
• How they work
• Their methodology 
• Fees and costs 
• How to access the new leverage tokens on Arbitrum
• Understanding leverage token risks 

Meet the new leverage tokens on arbitrum

The two previously launched Mainnet leverage tokens are Ethereum 2x Leverage Index (ETH2x) and Bitcoin 2x Leverage Index (BTC2x).

With today’s launch, the Index Coop is adding six new leverage tokens available on Arbitrum.  They are: 

• Inverse Ethereum Index (iETH1x)
• Ethereum 2x Leverage Index (ETH2x)
• Ethereum 3x Leverage Index (ETH3x)
• Inverse Bitcoin Index (iBTC1x)
• Bitcoin 2x Leverage Index (BTC2x)
• Bitcoin 3x Leverage Index (BTC3x)

How do Index Coop leverage tokens work? 

This suite of leverage products consists of fully collateralized tokens enabling amplified exposure to ETH and BTC by tracking key target leverage ratios and automatically rebalancing as prices change. They are built on top of Index Protocol and Aave V3 on Arbitrum and Mainnet.

“Long” products—3x and 2x—use WETH or WBTC as collateral, borrowing USDC which is then swapped for more of the underlying asset and redeposited into Aave until the target leverage is achieved. 

“Short” products use a similar process, using USDC collateral to borrow WETH or WBTC. 

All products adjust real-time leverage ratios through rebalancing within defined bounds to prevent excessive adjustments. This automated rebalancing enables liquidation protection and creates a hands-off experience for users. 

Generally speaking, as the target leverage ratios imply, users can expect tokens to perform proportionally against the underlying asset. For example: If the price of ETH increases by 10%, a 3x Long ETH token would increase in value by 30%, a 2x Long ETH token by 20%, and a -1x Inverse token would fall by 10%. These percentage changes correspond to the leverage factor of each token.

However it is important for users to familiarise themselves with the limitations of leverage products as several factors can lead to varying levels of performance against what might be expected. Volatility drift, or the tendency of leverage products to lose value over time compared to their benchmark, can contribute to leverage tokens underperforming relative to user expectations. 

Generally speaking, leverage tokens are not meant for long-term, passive holding. Increased volatility in the underlying asset negatively impacts performance, such effects compound over time.

The Methodology

The Index Coop Leverage Suite will utilise a range-bound methodology. In a range-bound leverage methodology, rebalancing only occurs when the current leverage ratio is less than the minimum leverage ratio or greater than the maximum leverage ratio.

When a rebalance is triggered leverage ratios are brought back within the min and max params. If the recentering speed is set to 0% then a product set to ~1.74x - 2.3x would re-lever to exactly ~1.74 or de-lever to 2.3x. In order to prevent excessive minor rebalances occurring when the leverage ratios are resting just on the boundaries a recentering speed >0% is applied. This means a product with the above parameters would re-lever to ~1.91x or 2.07x.

More information on the range-bound methodology, including comparisons to the legacy FLI methodology, can be found here.

Fees and Costs

Index Coop charges annual fees that vary based on leverage amount: -1x and 2x products incur a 3.65% fee, while 3x products carry a 5.48% fee. Additionally, all products are subject to issuance and redemption fees of 0.10%.

Costs associated with utilising assets within Aave V3 involve the concept of "Cost of Carry," wherein deposited and borrowed assets accrue interest. This results in a spread between the interest earned from deposits and the interest paid for the debt. For example, if ETH2x deposits $1,000 of WETH and borrows $500 of USDC, where ETH deposits earn 2% APY and borrowing USDC costs 5% APY, the resulting net Cost of Carry is -1% APY, leading to a slight reduction in the token’s value over time. This Cost of Carry may vary, sometimes favourably and sometimes unfavourably, depending on fluctuating borrowing and deposit rates. For this reason, it is recommended that users monitor carrying costs in the Index Coop Leverage interface.

Regarding rebalancing costs, while Index Coop itself doesn't impose charges, swapping assets through DEX pools incurs small fees paid to liquidity providers, such as the 0.05% swap fee in Uniswap v3 WETH/USDC pools. Moreover, swaps also entail "price impact," wherein larger swaps lead to higher overall prices paid for buys or lower overall prices received for sells, thus gradually reducing the net value of the token over time.

Where to access the Index Coop leverage tokens 

The new leverage tokens on Arbitrum are available via the new leverage interface. Leverage tokens on mainnet are available via the main Index Coop app. 

Users of the Leverage Suite and Index Coop website must do so in accordance with Index Coop’s Terms of Service while also noting the list of Tokens Restricted for Restricted Persons. The Index Coop application site at app.indexcoop.com uses a range of technologies to ensure agreement and compliance with the Terms of Service.

What are the risks associated with Index Coop leverage tokens? 

Index Coop is committed to full and fair disclosure and it is important for users to understand that the Leverage Suite - of inverse and leverage tokens on Arbitrum - is a collection of high-risk token products. Crypto assets themselves are risky and volatile compared to traditional assets people are more familiar with and the products in the Leverage Suite add further risk and volatility to the user. Simply put, users of crypto assets should be aware that this volatility means they could lose a lot of their money quickly - and users of the Leverage Suite bear this risk to an even greater degree. Users should be absolutely sure that the Leverage Suite tokens are suitable tools to help them achieve their financial goals and if they are not sure, they should take financial advice to help understand these tokens better.

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