Rebalance is a process where leveraged tokens increase or decrease their futures positions in the underlying asset to achieve the target leverage. As the price of its underlying asset goes up, it will take on more positions. Likewise, if prices go down, it will reduce positions.
Binance Leveraged Tokens rebalancing mechanism
Binance Leveraged Tokens (BLVTs) rebalance on a need basis only. BLVTs are designed to maximize their correlation with the underlying asset and be unpredictable in rebalance to reduce the vulnerability of front-running tactics. Unlike conventional leveraged tokens (not managed by Binance), Binance Leveraged Tokens do not maintain a constant leverage ratio. Instead, Binance Leveraged Tokens maintain variable target leverage and only rebalance during extreme market movements.
The rebalancing of positions of Binance Leveraged Tokens is governed by Binance’s proprietary algorithms. The rebalancing mechanism is designed to protect its users from the long-term detrimental impact of traditional Leveraged Tokens while maintaining the key characteristics of a leveraged product, which allows users to gain leveraged futures positions without worrying about liquidation risk and the nitty-gritty of managing a leveraged position.
How do Binance Leveraged Tokens rebalance?
Binance Leveraged Tokens have a range of target leverage from 1.25x to 4x. The true target leverage level is constantly changing and hidden from outside observation. Both the timing of the rebalance, and the target leverage of the rebalance, are not shown to observers or algorithms, making it much harder to guess future trades and front-running it. At all times, the token info page will always show the “realized” target leverage post rebalancing event.
- Real Leverage Ratio is the actual leverage ratio held by the algorithm. Real leverage ratio changes when the ratio of futures position (notional value) to fund size changes.
- Target Leverage Ratio is decided by the algorithm in case of a rebalancing event. It will aim to achieve a leverage ratio between 1.25-4x, but the exact number will be confidential. The target leverage ratio on the token info page will be the realized target leverage post-rebalancing event. However, do note that the real leverage ratio may fluctuate beyond the target range in extreme market movements.
- Users are not allowed to redeem tokens while the fund is rebalancing.
When the real leverage level is out of the target leverage range (1.25x - 4x), Binance Leveraged Tokens will rebalance to maintain within the target leverage range. The rebalancing information such as a change in basket and leverage level will be displayed in the Binance Leveraged Tokens page after the leveraged tokens rebalance. Users will also see a history of all rebalancing events on the page mentioned earlier.
When the perpetual futures price goes up, the real leverage level will decrease. If the real leverage level drops to 1.25x and below, Binance Leveraged Tokens will rebalance. The algorithm will purchase additional positions to increase the real leverage level so the real leverage level is within the target leverage range. The rebalancing works the other way around when the price goes down.
The example below illustrates how the rebalancing mechanism works when the perpetual futures price goes up:
- Binance Leveraged Tokens have a fund size of $100 million and a total futures position of $180 million in the basket initially. The real leverage ratio is 1.8x.
- When the BTCUSDT perpetual futures price moves up by 5%, the value of the futures positions will increase by $9 million to $189 million. The leveraged tokens will gain $9 million and the fund size will increase to $109 million. The real leverage ratio decreases to 1.73x. However, this does not trigger the rebalancing event as the real leverage ratio is within the target leverage range of 1.25x - 4x.
- When the BTCUSDT perpetual futures price moves up by another 120%, the futures positions will increase by $226.8 million to $415.8 million. As a result, the leveraged tokens will gain $226.8 million and the fund size will increase to $335.8 million. The real leverage ratio decreases to 1.238x.
- Since the real leverage ratio is below 1.25x (out of the target leverage range), a rebalancing event will occur. The algorithm will purchase additional futures positions to increase the real leverage level. This ensures that the leverage level is within the target leverage range. The algorithm will decide the rebalanced leverage level. If the algorithm would like to rebalance from 1.238x to 1.7x, the algorithm will purchase an additional $155.06 million worth of futures positions, increasing the total futures positions to $570.86 million which is 1.7x of fund size.
- Binance Leveraged Tokens rebalance on an as-needed basis only. Especially during extreme market movements.
- Large fluctuations of price cause the real leverage ratio to be out of the target leverage range (1.25x - 4x), which triggers the rebalancing event.
- The algorithm will decide the target leverage to be rebalanced by increasing or decreasing the futures positions subject to the direction of the target leverage.
- Once the rebalancing event is completed, the targeted leverage ratio and rebalance time will be displayed on the Binance Leveraged Tokens page.