What Are Leveraged Tokens?
Leveraged tokens are ERC20 tokens that have leveraged exposure to crypto.
For example, take ETHBULL, a 3x long ETH token. For every 1% ETH goes up in a day, ETHBULL goes up 3%; for every 1% ETH goes down, ETHBULL goes down 3%.
There are currently two leveraged tokens for every future: BULL (+3x) and BEAR (-3x). If ETH goes up 1% during a day, then ETHBULL goes up 3% and ETHBEAR goes down 3%. If ETH goes down 1% during a day, then ETHBULL goes down 3% and ETHBEAR goes up 3%.
Why Use Leveraged Tokens?
There are three reasons to use leveraged tokens：
Leveraged tokens will automatically reinvest profits into the underlying asset; so if your leveraged token position makes money, the tokens will automatically put on 3x leveraged positions with that.
Conversely, leveraged tokens will automatically reduce risk if they lose money. If you put on a 3x long ETH position and over the course of a month ETH falls 33%, your position will be liquidated and you will have nothing left. But if you instead buy ETHBULL, the leveraged token will automatically sell off some of its ETH as markets go down--likely avoiding liquidation so that it still has assets left even after a 33% down move.
You can buy leveraged tokens just like normal ERC20 tokens on a spot market. No need to manage collateral, margin, liquidation prices, or anything like that; you just spend $10,000 on ETHBULL and have a 3x leveraged long coin.
Leveraged tokens are ERC20 tokens. That means that--unlike margin positions--you can withdraw them from your account! You go to your wallet and send leveraged tokens to any ETH wallet. This means you can custody your own leveraged tokens.
How Do Leveraged Tokens Work?
Each leveraged token gets its price action by trading perpetual futures. For instance, say that you want to create $10,000 of ETHBULL.To do so you send in $10,000, and the ETHBULL account on buys $30,000 worth of ETH perpetual futures. Thus, ETHBULL is now 3x long ETH.
You can also redeem leveraged tokens for their net asset value. To do that, you can send your $10,000 of ETHBULL back to us, and redeem it. This will destroy the token; cause the ETHBULL account to sell back the $30,000 worth of futures; and credit your account with $10,000.
This creation and redemption mechanism is what ultimately enforces that the leveraged tokens are worth what they're supposed to be.
What Are The Fees?
There are two types of fees on leveraged tokens. There is a 0.10% creation and redemption fee; note you only pay this if you create/redeem, not if you buy in a spot market or convert. There is also a 0.03%/day management fee on leveraged tokens. This is just taken out of the net asset value of the leveraged tokens; you won't see an actual token balance decrease or USD charge in your account.