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Bitcoin and Ethereum have fallen sharply in the past few weeks. Nevertheless, some believe that the crypto bullrun is not over yet and therefore rely on so-called Flexible Leverage Indices (FLI) - but what exactly are they?
Trading with leverage is not for the faint of heart. With Bitcoin and Co. in particular, things can go wrong and there are many traders who have already lost a lot with leverage. In addition, every professional leverage trader has to perform a variety of tasks at the same time. He has to monitor the various metrics of his trades, control his emotions, operate risk management and still expect that trades can go wrong at any time. Trading with leverage can be extremely profitable, but it also involves a lot of time and risk.
A new innovation from Decentralized Finance (DeFi) aims to change that and make trading with leverage easier and safer. We are talking about so-called flexible leverage indices.
What is a Flexible Leverage Index?
The technology behind the FLI tokens was designed by Index Coop (INDEX) and the DeFi Pulse team . FLI are structured products in ERC-20 format . They enable traders and investors to hold leveraged positions on Ethereum and theoretically all ERC-20 tokens - in a decentralized and fully automated manner. Since virtually every crypto currency can be mapped as an ERC-20 token, it is also possible with FLI tokens to trade Bitcoin in a decentralized manner on the Ethereum blockchain.
The FLI tokens use a formula and smart contracts that are based on the Set Protocol and the Compound Lending Protocol . This makes it possible to generate an ERC-20 token that automatically opens and manages leveraged positions.
There are currently only two FLI tokens (ETH2X-FLI and BTC2x-FLI), both of which are leveraged by a factor of two and are currently only available on token sets SushiSwap and UniSwap .
For example, the BTC2X-FLI token has the following parameters:
- Underlying asset: wBTC
- Target Leverage Ratio: 2
- DeFi Lending Protocol: Compound
- Maximum leverage ratio: 2.2
- Minimum leverage ratio: 1.8
- Redeployment rate: 10 percent
This allows investors to open a position on Bitcoin that is leveraged by a factor of two by buying BTC2X-FLI tokens. For example, if the Bitcoin price increases by 5.0 percent, the price of BTC2X-FLI will increase by 10.0 percent. Conversely, this also means that BTC2X-FLI falls 10.0 percent if Bitcoin records a price decline of 5.0 percent. The exact methodology of BTC2X-FLI can be viewed on TokenSets .
Advantages of Flexible Leverage Indices
Basically, FLI tokens offer four advantages:
- Lower risk with leverage trading (not eliminated)
- Lower fee burden
- Easier to use
- Compatibility with DeFi protocols
Lower risk
Trading in leverage is risky and even felxible leverage indices cannot change that. But FLI tokens can significantly reduce the risk of leverage trading. This is because they are designed in such a way that they constantly adapt to the given parameters and realign over time. This can cushion even extreme volatility, as smart contracts automatically ensure that the collateral remains above the liquidation thresholds. In addition, every FLI token is actually secured with the underlying token - wBTC and USDC with BTC2X-FLI; ETH and USDC at ETH2X-FLI. During the last Bitcoin crash in mid-May, it was even possible that there were no liquidations .
Lower fees
Another advantage of FLI tokens is that they are cheaper compared to leverage offers on centralized exchanges because their fees are lower and there is no slippage.
Easy to use
One of the greatest advantages of FLI tokens is that they are very easy to use. They are very easy to buy and can be stored in an Ethereum wallet. As a holder of a FLI token, you do not have to monitor whether there is a risk of liquidation, as smart contracts automatically monitor the whole thing for you.
Compatibility with Decentralized Finance
Another great benefit of FLI tokens is that they are fully compatible with DeFi applications. That's because FLI tokens like BTC2X-FLI and ETH2X-FLI are ERC-20 tokens. For this reason, the FLI tokens can also be traded on decentralized exchanges such as UniSwap or SushiSwap. Theoretically, however, it would also be possible in the future to integrate the tokens into a variety of other DeFi protocols.
