There are three leveraged tokens for every underlying token or index listed on FTX: BULL, BEAR, and HEDGE.
Each of these has an associated account on FTX that takes leveraged positions on the perpetual futures, and can be created/redeemed for its share of the assets of that account. Those tokens are then withdrawable from FTX as ERC20 tokens.
TAV: the total net asset value of an account on FTX, equal to the sum of all of the positive and negative positions and balances.
Circulation: number of a token in existence.
NAV: the value of an account per token issued, = TAV / Circulation.
Underlying: the coin that a leveraged token has exposure to; one of BTC, ETH, EOS, XRP, or USDT.
Underlying Future: the futures contract that the leveraged token takes is position with; the perpetual future on the Underlying.
Position: the number of Underlying Future contracts a token holds divided by its Circulation.
Position Size: notional value, marked to market (Mark Price), of the Underlying Future that an account holds divided by Circulation.
Current Leverage (CL): Position Size / NAV; this is also the beta from the underlying coin to the leveraged token.
Target Leverage (TL): the beta from the underlying coin that a leveraged token is attempting to achieve.
You can register a creation or redemption at any time by going to the token portal. You specify the number of tokens that you'd like to create or redeem. You must have spot balances of USD equal to the notional value of the creation, or spot balance of the amount of the token you're trying to redeem.
Creations and redemptions are processed shortly after initiating them. The leveraged token will automatically rebalance to add or remove exposure based on the creation/redemption size. The user is charged/credited an amount of USD equal to the number of tokens times the NAV of the token as of the creation/redemption time.
That causes FTX to automatically mint/burn those ERC20 tokens, and credit/debit them from the user's FTX balances. The user is now free to withdraw those tokens (if they were created) or withdraw the USD (if they were redeemed).
Specifically, if a user creates N tokens, then:
a) the leveraged token will buy N * Position contracts of the Underlying Future. (Note that in the case of a HEDGE or BEAR token, Position will be negative and the leveraged token will be selling.)
b) The user will be debited N * NAV (plus creation fees).
c) The user will be credited with N tokens.
If a user redeems N tokens, then:
a) the leveraged token will sell N * Position contracts of the Underlying Future. (Note that in the case of a HEDGE or BEAR token, Position will be negative and the leveraged token will be buying.)
b) The user will be credited with N * NAV (minus redemption fees).
c) The user will be debited N tokens.
Leveraged Tokens are standard ERC20 tokens, and so buyers don't post any collateral or pay any funding costs directly. Thus, a user's PnL from trading leveraged tokens is just the change in the price of the token from when they buy to when they sell.
The price of the token, however, will track the underlying NAV of the token's account, and creations/redemptions will happen directly at that NAV plus fees.
As an example, say that a user creates or buys 10 EOSBULL tokens when the EOSBULL NAV is $5,000, spending $50,000. Then, say that the EOS token goes up 5% that same day, from $4 to $4.20.
EOSBULL's NAV will increase 3 * 5% = 15% from $5,000 to $5,750. If the user then sells their EOSBULL at the new NAV--$5,750--they will make $7,500 on their $50,000 investment.
Because the leveraged tokens rebalance each day, the NAV and PnL will track the sum of the daily percent moves in the underlying tokens, which could diverge from the accumulated move. For instance, say that the user above bought 10 EOSBULL when NAV was $5,000, and then EOS went up 5% that day from $4 to $4.20. The user would be up 15%. Then say that the next day, EOS moved to:
$4.5: EOSBULL NAV would be $6,982. EOS would be up 12.5%, and EOSBULL would be up 39%.
$3.9: EOSBULL NAV would be $4,517. EOS would be down 2.5%, and EOSBULL would be down 8.6%.
As another example, comparing ETHBULL to 3x long ETH:
|ETH daily prices||ETH||3x ETH||ETHBULL|
As markets move and as creations/redemptions are called, a leveraged token's CL might diverge from its TL. In that case, the token will automatically trade futures to rebalance its portfolio at the beginning of the next day, returning its CL to match TL.
The leveraged tokens rebalance each day at 00:02 UTC each day to maintain their target leverage.
In addition, if an underlying coin moves 10% within a day, the leveraged tokens on that coin will automatically execute a midday rebalance to return themselves to their target leverage.
Specifically, whenever a token rebalances, it will buy the following number of Underlying Future contracts: (TL - CL) * NAV / Mark Price of Underlying Future. This will happen every day at 00:02 UTC, and any time the Underlying Future moves at least 10% in a day.
A holder of a leveraged token does not carry any liability for the account it represents, and cannot go below 0. Instead the token's account on FTX is subject to the same margin call and liquidation practices as all other accounts, and in the event of large market moves against the account's positions, the account may have some of its positions closed down by the liquidation engine to assure that it does not end up with a negative NAV.
The token will rebalance if markets move 10% in any given day, and rebalance at the end of each day no matter what, to return it its target leverage and prevent an increased risk of liquidation.
Leveraged tokens charge a 0.10% creation/redemption fee, and a 0.03%/day management fee. The management fee is deducted from the NAV each day.
Leveraged tokens are only over minted as part of a creation. Whenever a user deposits USDC or TUSD as collateral, an equal NAV worth of leveraged tokens are minted and delivered to that user. Similarly, tokens are only ever burned when a user redeems them for collateral.
This means that the number of leveraged tokens outstanding will only ever change in response to creations and redemptions, and that the total NAV of the leveraged tokens will always be equal to the total amount of collateral held by the leveraged tokens.
You can confirm the current holdings of each token, and the number of tokens outstanding, at https://leveragedtokens.com/. You can also find links to the ETHERSCAN pages for each token there.
You can deposit and withdraw leveraged tokens at https://ftexchange.com/wallet. Leveraged tokens are ERC20 tokens and can be sent to ETH addresses.
Note that Leveraged Tokens reserves the right to blacklist or whitelist withdrawal addresses. This is intended to allow us to be responsive to legal inquiries about the holders of leveraged tokens, and is not intended to be used to restrict any user who has undergone legitimate AML/KYC.
As of now there are no restrictions on the addresses, and leveraged tokens can be sent to any ERC20 address.
You can find the API docs for leveraged tokens here.
You can reach out with questions about leveraged tokens on Telegram here.
FTX Crypto Derivatives Exchange: https://ftx.com
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