FAQ: Index Coop Products and The Merge
With The Merge set to take place in the next few weeks, we're here to answer any questions you may have about Index Coop products and The Merge.
August 29, 2022
In this post, we'll cover frequently asked questions regarding Index Coop ETH products—Interest-compounding ETH Index (icETH), Ethereum Flexible Leverage Index (ETH2x-FLI), and Inverse Ethereum Flexible Leverage Index (iETH-FLI-P). Feel free to reach out to us on Discord with any outstanding questions.
- What if...
- Interest rates spike on the FLIs?
- Borrow rates exceed the staking rate, so the APY on icETH becomes temporarily negative?
- icETH becomes at risk for liquidation, either by the depreciation of collateral assets like stETH or appreciation in the price of debt?
Do I need to do anything with my Index Coop products before The Merge?
No. All Index Coop products held will be reflected on the new PoS chain. If you hold icETH, iETH-FLI-P, or ETH2x-FLI, please be aware of changes in borrowing and lending rates that may affect these products. More details are below.
Will Index Coop support the Ethereum proof-of-work (PoW) chain?
Index Coop will not be supporting the Ethereum PoW chain.
If The Merge is a bullish event for ETH, why is icETH APY so low?
There is a narrative in the market that some ETH holders will borrow ETH ahead of The Merge which will increase their holdings of ETHPoW, which they may or may not be able to sell for a small profit. This is increasing the borrow costs for ETH which pushes down the net APY for icETH.
What are the benefits of holding (icETH/ETH2x-FLI/iETH-FLI-P) before The Merge?
- icETH: The staking rewards on stETH may increase after The Merge. If this continues to exceed the borrow cost of ETH then icETH APY will also increase.
- ETH2x-FLI: If users are bullish on The Merge (they think ETH price will rise), they would benefit by holding ETH2x-FLI, as it will outperform ETH in the short term if the price of ETH rises.
- iETH-FLI-P: If users are bearish on The Merge (they think ETH price will fall) on The Merge, they would benefit by holding iETH-FLI-P, as it will appreciate in value as the price of ETH falls.
What are the risks of holding (icETH/ETH2x-FLI/iETH-FLI-P) before The Merge?
As mentioned above, high ETH borrowing costs may affect icETH and iETH-FLI-P. If the borrow rate on ETH exceeds the APY from stETH, then icETH may have a temporary net negative APY. Note, however, that if this does happen, it is expected to be short and that post-Merge stETH APY is expected to increase.
Users of FLI products should note that volatility affects how the FLI products perform. In the event of extreme volatility, the FLI products will automatically de-lever to protect from liquidations.
What if...
What if Interest rates spike on the FLIs?
Each FLI is subject to two different interest rates: the lending rate associated with the collateral asset, and the borrow rate associated with the debt asset.
2x FLIs earn lending interest on ETH / BTC / MATIC collateral balances and pay interest on USDC debt. The ETH 2x product on Mainnet–which is built on Compound–and the ETH2x product on Polygon–which is built on Aave v2–may earn above average interest on the underlying ETH positions as ETH borrowing is expected to increase ahead of the Merge. The cost of debt (or interest owed on borrowed USDC) may also increase ahead of the Merge if USDC utilization increases in both markets.
Inverse FLIs earn lending interest on USDC collateral balances and pay interest on ETH / BTC / MATIC debt. For iETH-FLI-P specifically, it is likely that costs will increase for maintaining the ETH debt position leading up to the Merge. It is worth noting though that the Inverse FLIs are native to Polygon and plug in to the Aave v2 WETH market, which has seen much less borrowing demand as of late compared to the main net WETH market.
What if icETH becomes at risk for liquidation, either by the depreciation of collateral assets like stETH or appreciation in the price of debt?
In the event that the ETH/stETH price materially deverges, there is a risk of liquidation. However, icETH is designed to automatically de-lever in this situation to protect against liquidation.
What is Index Coop?
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
How to buy Index Coop products with fiat currencies:
- First, you’ll need to create an Ethereum wallet like Argent, Metamask, Gemini, or Rainbow.
- Next, you’ll set up your new wallet and connect your bank account.
- Once you’ve deposited fiat currency in your wallet you can exchange it for Index Coop products like the Interest Compounding ETH Index (icETH).
Or, you can buy Index Coop products directly via your favorite decentralized exchange or on the Index Coop App.
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.
You shall not purchase or otherwise acquire our restricted token products if you are: a citizen, resident (tax or otherwise), and/or green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (defined as a U.S. person), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. persons, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized).
