Before we get started, this is not a recommendation or endorsement to buy any token(s) mentioned.
This week, we deep dive into automated leverage tokens by IndexCoop for those looking to gain more exposure to ETH or BTC, without having to worry about liquidations or funding rates.
First, leverage products are fully collateralized tokens enabling greater exposure to ETH and BTC by tracking target leverage ratios and automatically rebalancing as the token prices change. All of this is built on the Index Protocol and integrated lending/borrowing markets such as Aave.
The Index Coop offers “long” products such as 3x and 2x leverage tokens using WETH or WBTC as collateral, borrowing USDC which is then swapped for more of the underlying asset, and redeposited into Aave until the target leverage is achieved.
Alternatively, “short” products use a similar looping process, where USDC collateral is used to borrow WETH or WBTC, sell for more USDC, collateralize the USDC, and repeat.
Both these long and short products adjust leverage ratios through rebalancing within defined bounds to prevent excessive adjustments. The automated rebalancing enables liquidation protection and results in a very hands-off experience for users vs opening and managing a perps position.
Leverage token holders can expect tokens to perform proportionally against the underlying asset. For example: If the price of ETH increases by 10%, a 3x Long ETH token would increase in value by 30%, a 2x Long ETH token by 20%, and a -1x Inverse token would fall by 10%. These percentage changes correspond to the leverage factor of each token.
The Index Coop currently offers the following leverage tokens for ETH and BTC exposure across Ethereum Mainnet and Arbitrum.
As of this post, the ETH2x leverage token is the most popular product with just over $30M in liquidity.
One of the major advantages to holding a leverage token over opening a perps position is that perps traders pay a funding rate to keep the price of the contracts close to that of the underlying. When significant trades are made in the same direction, the funding rate increases or decreases to incentivize traders to take the other side and keep the market balanced and hence the prices in-line. Funding rates are paid periodically between longs and shorts (ie 8 hours). However, leverage tokens do not pay funding rates. Instead, they deposit collateral and borrow assets from a lending protocol (ie Aave) where both positions are liable to interest rates. The net of which is referred to as the “cost of carry.”
During periods of elevated demand for leverage, perps traders can suffer from extremely high funding rates, typically much higher than the cost of carry on Aave. This chart above published by the Index Coop shows this, where the estimated net cost of carry of an ETH2x leverage token from the Index Coop (including the 3.65% streaming fee) is much lower than the funding rates paid on an equivalent 2x perp position on some of the most popular perps exchanges.
Furthermore on the subject of fees, it’s important to note that the Index Coop does charge annual fees that vary based on leverage amount: -1x and 2x products incur a 3.65% fee, while 3x products carry a 5.48% fee. Additionally, all products are subject to issuance and redemption fees of 0.10%.
Today, I’ll…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
