The Index Coop, a provider of one-token exposure to popular crypto themes, today announced the launch of its first yield product: Interest Compounding ETH ($icETH).
ICETH provides enhanced return on ETH using a leveraged liquid staking strategy based on Set Protocol. In Aave v2, icETH deposits Lido’s liquid-staking Ethereum token—STETH– as collateral and recursively borrows ETH to procure more stETH. As a result, token holders have spot exposure to ETH and nearly double the yield compared to simply holding stETH.
It should be noted that the actual yield of icETH is variable and subject to staking rates and borrowing costs. icETH is built on the same battle-tested leveraged token infrastructure as the FLI tokens, which encapsulates secured debt management, automates rebalancing and minimizes liquidation risk.
Yet, the risk profile of icETH is significantly lower than that of FLI tokens due to the high correlation between collateral and debt assets.
For example, ETH2x-FLI uses ETH as collateral and USDC as debt, and the inherent price volatility of ETH against USDC requires daily rebalancing to maintain a healthy LTV ratio. Compare that to icETH, which uses stETH as collateral and ETH as debt.
Since the price of both tokens moves in tandem, the LTV ratio is stable and only requires rebalancing every few months. The result is lower liquidation risk and lower volatility for icETH, improving fund security and preserving net asset value.
ETH is the largest and most liquid asset in DeFi. With a market cap of $337 billion and an average annual return of 194% over the past 5 years, many investors are eager to grow their ETH holdings.
Staking is arguably the best way to earn a return on ETH, and tokens like stETH simplify the staking process by offering an interest-bearing liquid token.
However, with stETH enabled as collateral on Aave, icETH holders can easily access the leveraged return on their ETH in an easier and safer way than doing it manually.
There are 4 major advantages to using icETH:
- Risk minimized (but not eliminated)
- Reduced fuel costs
- Ease of use
- Composability with DeFi protocols
While there is inherent risk in using leverage, the high correlation between icETH’s collateral (stETH) and debt (ETH) assets significantly reduces liquidation risk. There are also several safety mechanisms in place to maintain a healthy LTV ratio and mitigate risk.
If the leverage ratio were to go outside the safety range defined for the product (3.0x – 3.3x), it would automatically refocus on the target leverage ratio (3.1x). Allowing the leverage ratio to float within this safe range also minimizes rebalancing, preserving funds and decreasing NAV degradation.
icETH also uses an incentivized emergency deleveraging mechanism – called “ripcord” – as another layer of security in the event of black swan events. If the current leverage ratio for icETH exceeds 3.5x, the publicly callable ripcord function would aggressively refocus the index to avoid liquidation.
Finally, in the event that the costs of borrowing ETH from Aave exceed the staking yield on stETH, the icETH may be delivered so that the effective index yield does not fall below the staking yield for stETH.
Fee Burden Reduction
Compared to manually executing this strategy, icETH holders save significantly on gas fees.
Rather than submitting a dozen different transactions in Aave and different DEXs, users can simply purchase the icETH token and benefit from the socialized gas costs. Additionally, with a streaming fee of 0.75%, icETH is the cheapest option compared to tokens and vaults that use a similar strategy or offer a comparable return.
Ease of use
Best of all, icETH is exceptionally easy to use. Buy and sell simply as you would any other token for leveraged liquid staking summed up in one token! Because icETH rebalances your position for you, constant monitoring or management is not required.
Since icETH is a fully collateralized ERC-20 token, it can be integrated with several different DeFi protocols and platforms to expand its usefulness and use cases.
Under the hood, icETH is built on top of Aave v2, the borrow/lend protocol that enables the creation of the secured debt position.
Understand the methodology
Like all Index Coop products, icETH follows a strict methodology.
Smart contracts supporting icETH are programmed to manage collateral and debt positions in an automated manner by targeting a specific leverage ratio and allowing it to fluctuate within a safe range before returning to the target ratio.
Initial settings for icETH:
- Collateral asset: stETH
- Borrow an asset: ETH
- DeFi Lending Protocol: Aave v2
- Target leverage ratio: 3.1x
- Maximum leverage ratio: 3.3x
- Minimum leverage ratio: 3.0x
- Rebalancing interval: LR 3.3
- Recentering speed: 100%
- Token Supply Cap: 15,000
Since the collateral balance is expected to gradually appreciate against the debt, the index will rebalance when the leverage ratio falls below the minimum threshold and must return to the target leverage ratio.
icETH will have streaming fees of 0.75% (75 bps), no mint fees and redemption fees of 0.25% (25 bps).
How to buy / Mint
To buy: Index Co-op | Uniswap
Mint: Index Co-op | Token sets
The Coop Index sowed a 0.05% iceETH / ETH pool on Uniswap v3, which can currently support a $150,000 iceETH purchase with less than 1% slippage.
Token holders are also able to provide liquidity through this G uni pool powered by Gelato, which manages LP position settings for you. Please note that this is a third party service and Index Coop does not control this g-uni pool.
About Index Cooperative:
the Cooperative Index is a winner of a decentralized finance startup and the Web3 community powering crypto index products that can be purchased on the blockchain.
Index Cooperative products provide unique exposure to popular crypto themes such as Decentralized Finance, Metaverse, and Web3 Data Economy.
As of April 7, 2022, Index Cooperative products have an aggregate Total Value Locked (TVL) of approximately $221 million.3