FLI Deep Dive with Allan Gulley

Leveraged Exposure to Crypto

So last week, Index Coop released three new products on Polygon. MATIC 2x, iMATIC, and iETH. These three tokens make up the latest editions to the flexible leverage index series -FLI, and also mark the first inverse product offerings from the Index Coop. FLI is an elegant piece of innovation that simplifies the process of taking out a leveraged position into a fully collateralized ERC 20 token. I had the pleasure of sitting down with Alan Gulley, one of the driving forces behind the FLI series, to learn more about how they're helping traders master the markets.

Q: What is the 32nd to one minute pitch about this product?

A: Yeah, I'd say that the FLI tokens are really effective at creating those short term leverage positions on behalf of users. Like all leverage products, they are subject to volatility drift after volatility decay. And what that means is that the long-term returns are much harder to predict and usually a little bit less appealing than the short-term returns that you can achieve, if you have just smaller time horizons for what you're trying to get out of the tokens.

A good way to think about them is they're like tools in a tactical belt. So, you don't want to treat them like they're set and forget passive products like DPI or NVI or others. They're really good tools and tokens to use when you have your conviction around the price movement of an under underlying asset over shorter term periods. That's definitely the best way to think about it from a trader's perspective.

And then there's also some interesting opportunities to provide liquidity and to actually hedge some of that volatility drift. That's a little more sophisticated than what the average trader may be exposed to, but there are a lot of FLI customers that buy the tokens for the sole purpose of providing liquidity.

Q: I know that other leverage tokens exist now, but was FLI the first one?

A: FLI was the first fully decentralized leverage token. So FTX, the centralized exchange has a pretty robust catalog of leveraged tokens. They are ERC 20 format tokens, but they can only be traded within FTX. In terms of anyone with an Ethereum wallet wanting to get a leveraged token, FLI was the first way for people to do that.

Another big point of comparison between FLI tokens and some of the centralized leveraged tokens, is that the fees that holders pay are significantly lower. You could pay upwards of 10% in management fees annually on some of the centralized exchanges for leveraged tokens. And the streaming fee for FLI tokens is less than 2%.

Q: I just asked if FLI was the first leveraged token, is iMATIC going to be the first fully decentralized inverse leverage token?

A: So we actually will not be the first fully decentralized inverse token. There is one that just came on the market recently, that's kind of a floating leverage ratio token. It is the first FLI token though, that will be inverse. What's really novel and what's really unique about the FLI methodology, is the way that it really minimizes rebalancing.

So, all the tokens will target a specific amount of leverage. Maybe it's 2x for some tokens, maybe it's negative 1x for the inverse tokens. There's a little bit of a buffer of sorts for that ratio can kind of hover between a minimum and a maximum range. It's all centered around that target. So, while there are other decentralized tokens now, the FLI methodology's been battle tested, and it definitely has a lot of benefits compared to some of the other offerings.

Q: Okay. For someone that's never heard of it, inverse leverage, What does this token do?

A: So a good way to think about the inverse tokens is almost like a leverage short position. Just like with the 2x tokens, you're really betting on the price of the underlying asset to go up. These inverse tokens allow you to make the same bet, but in the other direction. So, maybe I have a high conviction that the price of MATIC or the price of ETH or the price of Bitcoin are going to go down over the next several weeks for any given reason. Again, if you wanted to create a short position for yourself, you could go through that same process where you interact directly with compound or AAVE, you manage collateral, you manage borrow, borrow debt and then the liquidation thresholds. So up until now there hasn't been an effective way for people to bet on price movements in the other direction. That's really what the inverse tokens are going to do. They'll target a negative 1X short exposure to either MATIC or Ethereum or BTC.

Q: So what happens if the price goes up instead of down?

A: So just like with the 2x tokens, you will still have that same leverage ratio applied to whatever the price movement may be. If you are holding IETH or iMATIC or iBTC, and the price goes up, then you are going to have, losses or downside exposure that's amplified by the position that you've taken.

The same thing is true for the 2x tokens. You could believe that the price is going to go up. And if the price goes down, you essentially take the price movement and double it for the 2x tokens. So, it can work in your favor when things go your way, but it could also be a lot to stomach when market is moving in the other direction.

If a user doesn't understand how leverage works, some of the phenomenon that come alongside with leverage it, can be a steep and sharp learning curve for them. I do think that users have to be willing to do some of their own research. You have a lot of retail traders, I'm sure. And maybe less experienced traders that want to experiment with these strategies and try and maximize their returns. It's open to everyone, but it's a very different type of product, for a very different persona compared to some of the composite products that we have on the market. Like the DPIs and GMIs, NVIs and all those.

Q: So, I guess this is the second step towards what I understand being FLI's overall goal, which is being a completely market neutral tool for traders to use however they see fit.

A: Yeah, absolutely. And that's really what we're working towards. It's exciting because again, sophisticated traders don't have great options today outside of centralized exchanges. And so, if we are able to offer kind of a portfolio of these trading products with long exposure, short exposure, varied levels of leverage across the biggest assets and defi you really enable people that really want to stay true to the whole decentralized ethos. To have all the same functionality and all the same strategies available to them, but in a decentralized fashion.

So it's a great way to think about it. Just like you said, as a toolkit of sorts, right? If we give them everything, they can need to trade the primary strategies that are popular, then that's a win for everybody. I think the Battle-cry is, master the markets with the FLI products, because we want people to be able to trade whichever way they think the market's going. There's a lot of resources that we've developed over the past year or so about the FLI tokens and how they work and what to expect, and understanding the way the tokens work and the outcomes that you are kind of exposing yourself to. It's really important for those.

So I would definitely encourage anyone that's interested in the FLI tokens to dig through as much documentation as they can find, just to make sure that they have all the knowledge they need to make good decisions. And as always, Discord is wide open and we're there to help. People are always welcome to jump in and ask whatever question they may have.

So there you have it. If you're interested in diving deeper on FLI, we'll provide additional materials in the show notes. If you like the content, please like, and subscribe. And none of this was financial advice. Leverages by nature are volatile. Please do your own research, stay safe, and we'll see you next time.

Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.

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