Compound Bug Affecting NAV Price of ETH2x-FLI
Index Coop became aware of a bug affecting Compound, which resulted in a freeze of their cETH market. cETH is a core component of Index Coop’s mainnet ETH2x-FLI product.
August 31, 2022
On August 30th, Index Coop became aware of a bug affecting Compound, which resulted in a freeze of their cETH market. cETH is a core component of Index Coop’s mainnet ETH2x-FLI product.
ETH2x-FLI is secure & liquidations are effectively disabled for the time being. Compound has put forth a new governance proposal for a fix that will take seven days to go into effect.
Those holding or considering ETH2x-FLI should be mindful that the market price may deviate from NAV while the cETH market remains disabled.
To create a leveraged long position, the ETH2x-FLI token deposits ETH as collateral to Compound and borrows USDC. That USDC is swapped for more ETH, which is then added to the existing collateral balance. This repeats until reaching the target leverage ratio = 2.0x
The Compound bug prevents ETH2x-FLI from reacting when the price of ETH goes down or de-levering because ETH collateral cannot be withdrawn to repay USDC debt.
Redemptions for ETH2x-FLI are also temporarily disabled by this bug. When redeeming ETH2x-FLI, the user effectively closes out their share of the CDP in Compound (which requires selling ETH collateral to repay USDC debt).
Redemptions are critical for arbitrage because, if ETH2x-FLI is trading at a discount to NAV on DEXs, arbs will buy off DEXs and redeem for the underlying (until the discount disappears). Without redemptions, discounts may pop up in secondary markets for ETH2x-FLI.
Before trading ETH2x-FLI, be sure to compare the NAV to the quoted price: https://www.tokensets.com/portfolio/ethfli?origin=leverage
We are in direct communication with the Compound team & will be monitoring the situation as it develops to ensure that ETH2x-FLI and its Compound positions remain sound.
Have questions, just want a better understanding of the FLI products or recent market conditions? Reach out to us in our #fli Discord channel.
Update 9/6/2022: Compound's Proposal 119 has been executed; the v2 of their protocol is now functioning normally. We’re happy to report that user funds in ETH2x-FLI remained secure throughout the outage, and mint/redeem capabilities have been restored.
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