What are Flexible Leverage Index (FLI) Tokens?

Flexible Leverage Index (FLI) products are tradable ERC-20 tokens that aim to generate leveraged exposure to the underlying asset. Right now you can use FLI tokens to access double (2x) exposure on a number of popular cryptocurrencies, while greatly reducing the risk and complexity usually associated with leveraged trading.

This makes FLI tokens an easier and safer way to trade with leverage. All of the tasks normally associated with managing a leveraged position are taken care of by the smart contracts that manage FLI tokens behind the scenes. You do not need to deposit collateral and your risk of liquidation is greatly reduced. In this guide we will answer common question about

• How do FLI tokens work?

• Why use a FLI leverage?

• How are Index Coop FLI tokens different?

When using FLI tokens, traders can expect to see double the performance of the underlying asset over a short period of time. For example, if BTC goes up 5% in a day, BTC2x-FLI should go up about 10% in a day. The same concept applies if BTC goes down by 5% in a day — BTC2x-FLI will go down about 10%. The return of a FLI product will not be a perfect 2x multiple of the underlying asset because FLI uses a flexible leverage ratio (more on this later). FLI tokens will also tend to deviate from the 2x multiple over longer time frames because of volatility drift.

A popular strategy with traders is using their FLI tokens to provide liquidity to a decentralized exchange and earn trading fees from other DeFi users’ transactions. This can help to reduce risk even further, as a position as liquidity provider will perform better than a 100% FLI position during a negative or volatile market.

How do FLI tokens work?

FLI tokens use Set Protocol’s asset management platform to create and automate leveraged positions that track ETH and BTC price movements. To create the leveraged position for ETH2x-FLI, the smart contract deposits collateral (cETH) on the lending platform Compound. This collateral enables the FLI protocol to borrow USDC from Compound, which is then reinvested in additional holdings of the collateral asset. In this example, that would mean purchasing further ETH on a decentralized exchange and depositing it back at Compound as cETH. Using this process the FLI token will “lever up” to its target leverage ratio of 2x. In the event that the price of the underlying asset drops, the FLI contracts will repeat the same process in reverse, selling ETH to pay down USDC debt, to delever back to the target of 2x. The process is identical for BTC2x-FLI, except the collateral asset is BTC. For a more detailed description of this process you can refer to the Token Sets website.

To maintain the target leverage ratio (LR) of 2x, FLI products will buy or sell the underlying asset every 24 hours to rebalance towards the target. Unlike traditional leveraged assets, FLI products do not hard rebalance to a perfect 2x leverage ratio, but instead are allowed to float in a safe range of possible values around the target LR. The FLI products will gradually return to the target leverage ratio at a predefined recentering speed (RS) each day.

This flexible leverage approach greatly reduces the cost of rebalancing the product, and also helps it to perform better in volatile or sideways markets.

4 Advantages of Flexible Leverage Index (FLI) Tokens

There are 4 key advantages to using a FLI token:

• Reduced Risk

• Ease of Use

• Retained Ownership

• Lower Fees

1. Reduced Risk

FLI products are designed to automatically manage your risk profile. When your investment makes a profit, the smart contract automatically reinvests those profits back into the underlying asset when it rebalances each day. Similarly, if the value of the asset declines, the smart contract will automatically repay debt to reduce risk. In the event of a major market crash, an emergency ripcord function can be called which will greatly reduce the amount of debt in a fraction of the time compared to regular rebalancing. Taken together, these features offer high levels of protection against any risk of liquidation.

An additional risk which is present in all leveraged assets is volatility drift. This is the phenomenon where leveraged assets tend to deviate from the expected multiple return of the underlying asset over time. The flexible leverage ratio is designed to reduce this risk and help improve the performance of FLI tokens in volatile markets, though it does not entirely eliminate volatility drift.

2. Ease of Use

When you use a FLI token to access leveraged trading, there is no need to post collateral or manage margin requirements. All of those functions are automated by the smart contracts managing each FLI product. This greatly simplifies leveraged trading, and can also save you significant money by minimizing gas fees and spreading costs across all assets under management (AUM). During periods of heightened volatility, it can become extremely expensive to make transactions if the Ethereum network is congested. By using a FLI product you can avoid these extra steps and expenses.

3. Retained Ownership

All FLI tokens are ERC-20 compliant and fully compatible with popular Web 3.0 wallets such as Metamask. From a user perspective, this means FLI tokens are completely decentralized from the point of purchase to sale. You retain complete custody of your FLI tokens at all times, and can transact in FLI tokens on any decentralized exchange where liquidity is available. Likewise, the smart contracts that manage FLI products are built on fully decentralized infrastructure so there is no single point of failure putting the products at risk. Similarly, you can redeem your FLI tokens for the underlying assets at any time on the Token Sets website.

4. Lower Fees

FLI tokens offer the lowest fees compared to other leveraged cryptocurrency indexes. The annual streaming fee is only 1.95%, while creation and redemption of the tokens through Token Sets is 0.1%. Buying or selling a FLI token on a decentralized exchange such as Uniswap will require paying a normal trading fee of 0.3%.

How are Index Coop FLI tokens different from Binance and FTX leveraged tokens?

Both Binance and FTX use perpetual futures markets for the underlying mechanism of their leveraged products. FLI uses the actual underlying asset and creates an over-collateralized leveraged position for you on a DeFi lending platform such as Compound. FLI tokens have several advantages over the competition in terms of custody, transparency and decentralization.

Custody

Binance BLVT tokens are completely centralized and only work on the Binance exchange. You cannot withdraw them from the exchange. Both FLI and FTX leveraged tokens are standard ERC-20 and you can withdraw them to your private wallet.

Transparency

Binance BLVT is a “black box”. Traders are unable to see information about the leverage ratio or rebalancing. Smart contracts for both FLI tokens and FTX leveraged tokens are on-chain and readily accessible.

Decentralization

Both Binance BLVT and FTX leveraged tokens are only tradable on centralized exchanges. In the case of FTX tokens, you can withdraw your tokens to your wallet, but you must return them to a centralized exchange in order to sell or redeem. FLI tokens can be bought or sold on any decentralized exchange where liquidity is available.

Flexibility

FTX uses a fixed leverage ratio on their tokens, which can cause them to perform poorly during volatile markets and consolidation. Both FLI tokens and Binance BLVT use a flexible ratio which can help to improve performance during these periods in the market.

How Do I Buy a FLI Token?

The easiest way to buy and sell FLI tokens is by using popular decentralized exchanges such as Uniswap and Sushiswap. For a full guide on purchasing all Index Coop tokens (including FLI) click here. Once you have purchased your FLI tokens, you retain full custody of your investment. FLI tokens are fully compatible with popular Web 3.0 wallets such as Metamask, Argent and Coinbase Wallet.

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