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Binance Leveraged Tokens FAQ

Binance
2021-02-02 10:05

Binance Leveraged Tokens FAQ

1. Are leveraged tokens cryptocurrencies?
Leveraged tokens are not cryptocurrencies. Leveraged tokens are a type of financial derivative that is similar in nature to a traditional leveraged ETF. Like traditional leveraged ETFs, leveraged token investments have zero duration, as well as continuous new price quotes. The net value of a leveraged token moves along with that of the underlying asset. Since leveraged tokens tend to be highly pegged to the underlying asset, they trend extremely close to one another. Therefore, the price of the leveraged token moves up or down the same amount as the price of the underlying asset.
Leveraged tokens are not like mutual funds, as the net value of the fund is calculated by adding up the prices of all stocks, bonds, and other assets the fund has invested in when the market closes at the end of the day. This is usually calculated using the closing price, so there is only one net value price each day.
Leveraged tokens are limited to the same trading methods as other tokens and can be bought or sold on the spot market. So keep in mind that since leveraged tokens aren't hosted on-chain and don't have a limited supply, they aren't cryptocurrencies.
2. Do leveraged tokens have a set limited supply? How does Binance ensure that the net value of a leverage token isn't distorted when the supply is increased?
As mentioned above, leveraged tokens are similar in nature to traditional leveraged ETFs. Traditional leveraged ETFs are open-ended funds, so users can buy or sell them on the secondary market, as well as subscribe or redeem whenever they want. Since users are able to subscribe to or redeem leveraged tokens, there isn't a fixed supply. As the issuer of Binance Leveraged Tokens, Binance is able to increase the leveraged token supply based on market liquidity and user demand.
Whenever Binance creates additional leveraged tokens, additional Binance perpetual contract positions are added to the basket of each leveraged token. Information regarding the addition of Binance perpetual contract positions and the creation of additional tokens is public and transparent. How can Binance prove that the net value of leveraged tokens won't be affected by the creation of additional tokens? The net value formula is shown below. If Binance created additional leveraged tokens without adding perpetual contract positions to the basket of each leveraged token, the net value would gradually decrease. However, since Binance adds additional perpetual contract positions to the basket of each leveraged token whenever additional tokens are created, the net value of the leveraged tokens won't be distorted.
Net Value = ((1 / Real leverage) × Basket × Price of the underlying asset) / Issued token supply
Binance makes public the creation of additional leveraged tokens and the increase in perpetual contract positions in the basket of each leveraged token. Users can get this information on the Binance Leveraged Tokens web page and in the Position Adjustment History.
3. Why isn't the performance of leveraged tokens synced with that of the underlying asset? For example, let's say that BTC has had a volatility rate of -10% over the past 24 hours. The net value of the BTCDOWN leveraged token has not increased, but what if it dropped 50% over the past 24 hours? (Suppose the leverage multiplier for BTCDOWN is 3x).
We can't only take into account the change in price (ending - beginning) of a financial product to figure out its rate of return. The price of a leveraged token always follows price movements in the perpetual contracts market, which causes the margin level to fluctuate. Therefore, the net value of a leveraged token is subject to changes in the underlying asset, i.e. changes in the price of the perpetual contract every millisecond and continuous compound interest. The formula is: P(n) = P(0) × (1 + Delta)!, wherein P(n) is the latest price, P(0) is the beginning price, and Delta is the percentage change of the asset in a given period of time.
For example, at T0, the price of underlying asset "X" is 10 USDT, and we assume that the XUP leveraged token has a 3x leverage multiplier, while XDOWN is 3x short X asset. The initial price of both XUP and XDOWN leveraged tokens is 10 USDT.
Suppose that the price of X asset fluctuates within a 5-second window. How will the XUP and XDOWN leveraged tokens perform in that short period of time?
Time
Price of X Underlying Asset
(USDT)
X Underlying Asset
Volatility
XUP Leveraged Token
Volatility
Price of XUP Leveraged Token
(USDT)
XDOWN Leveraged Token
Volatility
Price of XDOWN Leveraged Token
(USDT)
T010.00--10.00-10.00
T19.00-10.0%-30.0%7.00+30.0%13.00
T210.00+11.1%+33.3%9.33-33.3%8.67
T39.00-10.0%-30.0%6.53+30.0%11.27
T411.00+22.2%+66.7%10.89-66.7%3.76
T510.00-9.1%-27.3%7.92+27.3%4.78
∆ (T5 - T0)0%-20.8%-52.2%
If we subtract the beginning rate of volatility from the ending rate of volatility (T5 - T0), we get a rate of 0% for X underlying asset, but rates of -20.8% for XUP and -52.2% for XDOWN. So, if we only use the difference between the beginning and ending values to determine the rate of volatility of a leveraged token, it won't be correct, as it doesn't take into account real-time changes in the price of the underlying asset and the effects of continuous compound interest.
4. Why has the price of X underlying asset already returned to where it started, but the prices of XUP and XDOWN hardly ever return to the original price?
Let's use a super-simplified non-leveraged investment portfolio as an example. If the price of an asset goes down 10% one day and then up 10% the next day, you still won't break even. If the value of a $100 investment goes down 10%, it will be worth $90; if its value goes up 10% the next day, it will only increase by 10% of $90, so the final price will only be $99. This probably isn't what you expected to happen.
Why isn't a 10% gain the break-even point for a 10% loss? Actually, based on the laws of mathematics, we should start with how much you have now and calculate the rate of return you'll need from there.
Suppose your investment portfolio is currently worth $100. If you lose 10%, your portfolio will be worth $90. If you want to make back the $10 that you lost, you'll have to earn 11.1% (10 / 90 × 100%) in order to bring the value of your portfolio back up to its original value of $100.
Therefore, if your investment portfolio takes a loss, you'll need to earn a greater percent profit than what you lost in order to reach the break-even point for your balance/PnL. The following chart shows the rate of return required to reach the break-even point for different amounts of loss.
Portfolio LossReturn Required to Recover Loss
10%11%
20%25%
30%43%
40%67%
50%100%
60%150%
70%233%
80%400%
90%900%
As you can see, the greater the loss, the higher the rate of return required to reach the break-even point. In terms of leveraged tokens, this kind of corrosion happens frequently. Not only that, but if a particular fund uses leverage, this type of corrosion will be multiplied.
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