Decentralized asset manager Index Coop introduced its first yield product ‘Interest Compounding ETH ($icETH)’, which will provide enhanced yield on ETH by using a liquid staking strategy built on Set Protocol.
As per the blog post published on the Index’s website, the new mechanism deposits Lido’s liquid-staked ETH token stETH as collateral on Aave v2 to borrow ETH. Ultimately, leveraging borrowed ETH the protocol will procure more stETH.
The new yield product claims to have spot exposure to ETH and improves the staking rewards as much as 2x. However, the effective yield for icETH is variable and subject to staking rates and borrowing costs.
icETH uses the same token infrastructure of FLI, but with less risk factors that contains collateralized debt management, automates rebalancing, and minimizes liquidation risks.
icETH notably uses stETH tokens as collateral and ETH tokens as a debt. As the stETH tokens price follows the ETH market value, the LTV ratio stays stable and only needs to rebalance every few months.
Ultimately, the synergy between two different tokens provides less liquidation risk and volatility decay for icETH as well as maintains the Net Asset Value of icETH.
The blog post counts four major benefits of using icETH: minimized risk, lower gas fees, ease of use, and composability with DeFi protocols.
Smart contract deployment for icETH helps the product balance the collateral and debt positions automatically. The product maintains the integrated leverage ratio in the smart contract and as per the requirement, it changes its position according to the target.
The new product leverage ratio is 3.1x with a minimum of 3.0x and a maximum of 3.3x. Also, icETH will charge a streaming fee of 0.75% and redeem fee of 0.25% with no minting fees.
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