Background on Leveraged Tokens
What Are Leveraged Tokens?
Leveraged Tokens (LTs) are ERC20 tokens that represent a leveraged crypto position. For instance, ETHBULL is a +3x leveraged ETH token. That means, roughly, that $10 of ETHBULL represents a $30 position in ETH using 3x leverage.
BULL tokens are +3x leveraged; BEAR tokens are -3x leveraged.
For a full explanation of LTs, see here.
What Are Rebalances?
If ETHBULL starts +3x leveraged and then ETH goes down 10%, ETHBULL is no longer +3x leveraged; it’s now about 3.85x leveraged. Instead if ETH goes up 10%, ETHBULL would be about 2.53x leveraged.
This means that in order to maintain 3x leverage, ETHBULL has to rebalance--it has to buy/sell ETH in order to return to the target leverage.
Rebalancing also manages the risk. If ETH goes down 33%, a +3x long position would get liquidated. In order to avoid this, ETHBULL rebalances when ETH goes down, decreasing its risk and returning to +3x leverage.
LTs rebalance each day at 00:02:00 UTC. LTs also rebalance intra-day if they become 4x leveraged, in order to avoid liquidation risk.
How Do LTs Move?
If you start from a rebalance, LTs move 3x as much as the underlying; so if ETH is up 2%, ETHBULL will be up roughly 6%. However, in order to once again have 3x the movement of ETH the next day, ETHBULL has to rebalance at the end of each day--meaning that between two days, LT’s performance can be different than their target leverage times their underlying’s move.
In general, if markets have momentum LTs will outperform. For instance if ETH goes up 5% one day and then 5% again the next day, ETH will be up 10.25% from the start, but ETHBULL--since it reinvests its profits at the end of the first day--will be up 32.25%, which is more than 3x 10.25%.
On the other hand, if markets have mean reversion LTs will underperform. For instance if ETH goes up 5% one day and then down 5% the next, ETH will be down 0.25%, but ETHBULL will be down 2.25%--more than 3x 0.25%.
This means that, in order to line up the movements, you have to measure from the last rebalance time--00:02:00 UTC, unless there was an intraday rebalance.
What Exactly do LTs have?
You can find the holdings of LTs at e.g. ETH/BULL. Each LT has a position in USD, and a position in a perpetual future on FTX; in this case, ETH-PERP.
What Happened on March 12th?
Ultimate Price Action
From the start of the 12th to the end of the 12th, LTs performed as expected.
The BEAR products had -3x the price movement of the PERP products. The BULL products did significantly better than 3x the performance of the PERPs; a +3x ETH position would have gotten liquidated and gone to 0, but instead the BULL tokens still had some value at the end.
Intraday Price Action
However, some of the Binance LT markets lagged the fair value during the day, particularly the BULL tokens. While ETHBULL did end up at the correct price by the end of the day--roughly $80--there was a period where ETH had already fallen and ETHBULL had not yet fallen enough. This period was around 9pm Singapore Time, when ETH had fallen ABOUT 32%. ETHBULL’s net asset value, and its price on FTX’s market, had fallen about 75%--still better than 3x 32%, because an intraday rebalance limited its loss; but it’s price on the Binance ETHBULL vs USDT market had only fallen about 65%.
The reason that it took the Binance markets longer to fall was because of the following reasons:
- Customers were buying ETHBULL
- Liquidity providers ran out of ETHBULL on Binance
Normally this is easily fixed: you can create ETHBULL and send it to Binance, making sure people have inventory (and that they can redeem ETHBULL for its net asset value as well). However, yesterday markets were extremely busy, which resulted in the Ethereum network being congested. The creation facility was still paying the standard amount of gas, and so it took a few hours for the newly created ETHBULL tokens to make it to Binance, meaning that for a while no one had any ETHBULL to sell. This meant that none of the liquidity providers was able to sell ETHBULL down to its fair price. The liquidity providers had started out with some ETHBULL, but they’d already sold it all to a first batch of customers.
All four of the positive tokens--BULL, ETHBULL, EOSBULL, and XRPBULL--experienced the lack of liquidity to some extent around 9pm SGT, because all were falling and there was not enough supply on Binance. The negative tokens--BEAR, ETHBEAR, EOSBEAR, and XRPBEAR--did not have this problem because they were increasing in price.
ETHBULL on Binance--note the delayed drop to $150
Actions Going Forward
In order to maintain more consistent markets on Binance, we’ve made the following changes:
- The Leveraged Token creation portal now pays more gas during heavy network times, making sure that the tokens can still arrive to Binance promptly.
- Liquidity Providers are keeping more inventory of Leveraged Tokens on Binance, meaning that they have more runway to sell while waiting for a refill.
- The Leveraged Token creation portal will keep some inventory on hand for faster creations.
We’re sorry for the lack of liquidity in BULL tokens during part of the market move yesterday. We hope to provide consistent, strong markets, and are striving to show more liquidity next time than we did this time.
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