Differentiating the ETH2x Products
It important to know the difference between the ETH2x-FLI token on Ethereum Mainnet vs Polygon if you plan on using either token in your trading strategy.
December 10, 2021
Ethereum Mainnet vs Polygon
While both ETH2x products enable traders to achieve leveraged exposure to ETH and abstract collateral and debt management into a single token, let’s start with a valid question: Why a new token on Polygon instead of bridging the existing token from Ethereum?
Cross-Chain Arbitrage
FLI products differ from the Index Coop’s composite indices in that they rebalance on a daily basis, and even multiple times a day on occasion. Because rebalancing occurs frequently, it is not uncommon for a token’s NAV to slightly deviate from the market price, which is when arbitrageurs intervene and synchronize both values. This process is almost instantaneous and token holders benefit from the NAV / price parity brought about by arbitrage; however, high gas fees necessitate a larger spread between NAV and price in order to incentivize arbitrageurs. Bridging ETH2x-FLI tokens to Polygon complicates this process and risks NAV dislocation. Consider a scenario where the market price on Polygon exceeds the NAV on Ethereum main net. Arbitrageurs would have to navigate the bridge between and account for the 7–8 minutes it takes to move assets between the two chains, which is a tremendous risk for operators that are accustomed to settlement times denominated in seconds. Because of this constraint, it is imperative to keep the respective markets and rebalancing on the same layer so that token holders are not negatively affected by NAV and price disparity. Another major benefit of rebalancing natively on Polygon is that gas costs will be trivial compared to rebalancing on mainnet, which greatly improves ETH2x-FLI-P’s economic model.
Issuance & Redemption
Compared to the composite indices, there is a much higher volume of mint and redeem transactions on the FLI tokens. When users go to mint or redeem ETH2x-FLI on the main net, they are indirectly interfacing with Compound, the borrowing/lending protocol built into the product’s back end. Because Compound is only deployed on Ethereum main net, there is no way for users to mint or redeem ETH2x-FLI within the Polygon ecosystem; instead, they would have to bridge their assets back to main net to obtain the token’s underlying assets, which would be cost-prohibitive because of gas fees for many users.
Parameter Differences
In addition to being native to different networks, ETH2x-FLI and ETH2x-FLI-P have several different parameters.
1. Borrowing / Lending Protocol
ETH2x-FLI on main net integrates with Compound for creating and maintaining leverage, while ETH2x-FLI-P uses Aave Polygon for the same function.
2. Rebalance Interval
Because of the high fee environment on main net, ETH2x-FLI is programmed to rebalance every 24 hours; conversely, because of the low fee environment on Polygon, ETH2x-FLI-P is programmed to rebalance every 4 hours, which allows the token to track the 2.0x target leverage ratio more closely and reduce the risk of large de-leveraging trades at times of high volatility.
3. Recentering Speed
Because the Rebalance Interval is much more frequent for ETH2x-FLI-P than its counterpart, the Recentering Speed has been reduced in an effort to minimize implicit costs incurred when trading against DEXs. Visit this resource for more information on FLI parameters.
Conclusion
Although there are differences between the two ETH2x tokens, both products simplify leverage and reduce liquidation risk on behalf of their users, regardless of network preference. Token holders on Ethereum main net can continue using ETH2x-FLI as they always have, and more fee-sensitive users can capture the same benefits with ETH2x-FLI-P on Polygon.
More Resources
- Token Contract: 0x3Ad707dA309f3845cd602059901E39C4dcd66473
- Buy ETH2x-FLI-P
- Mint ETH2x-FLI-P on TokenSets
- Token Contract: 0xAa6E8127831c9DE45ae56bB1b0d4D4Da6e5665BD
- Buy ETH2x-FLI
- Mint ETH2x-FLI on TokenSets
Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
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