Leveraged Tokens

Definition & Meaning

Last updated 1 month ago

What Are Leveraged Tokens?

itMyt Explains Leveraged Tokens:

Leveraged Tokens are cryptocurrencies that allow traders to benefit leveraged Publicity to an underlying Cryptocurrency with out placing up any collateral.

Leveraged tokens are utilized by investors with the aim of multiplying profits from token fee movement. These tokens are used to leverage long and quick positions and for hedging towards market volatility.

How do Leveraged Tokens Work?

Leveraged tokens are designed to multiply the proportion rate motion of the underlying cryptocurrency.

For example, a 2X lengthy leveraged token for Ethereum (ETH) will produce two times the percentage trade of ETH’s Charge movement.

If the price of ETH will increase by means of 10%, the 2X long leveraged token for ETH will increase via 20%.

However, if the fee of ETH falls through 10%, the 2X long leveraged token for ETH will decrease by way of 20%.

The danger-praise ratio of leveraged tokens is very high because of its volatility. Traders are recommended to continue cautiously when the use of leveraged tokens, because the risk of heavy losses is tremendous.

Leveraged tokens Explained

Leveraged tokens were popularized with the aid of centralized crypto excHanges which includes Binance and FTX.

There are specifically two kinds of leveraged tokens:

1. Constant leverage

These are conventional leveraged tokens that hold regular leverage to the underlying asset. For Instance, leveraged tokens at a steady leverage of 2X will Constantly multiply the every day percentage alternate via 2.

2. Variable goal leverage

Variable target leveraged tokens are issued with the aid of Binance – the arena’s largest crypto exchange by way of Volume.

These tokens are designed to keep a variable leverage Variety between 1.25X and 4X.

According to Binance, the variable target leverage maximizes profitability on the upswing and minimizes losses on downswings.

Risks Related to Leveraged Tokens

  • High volatility

Leveraged tokens are taken into consideration among the riskiest gadgets within the crypto market because of their high volatility. The amplification of the daily fee movements of the underlying asset is the primary cause for his or her excessive volatility.

  • Volatility Decay

Leveraged tokens are vulnerable to volatility decay, which refers back to the divergence within the returns between the underlying cryptocurrency and the leveraged token.

Here is an instance of volatility decay. Let’s say you have got a 2X long leveraged ETH token that offers two instances the daily return of the ETH token.

Let’s anticipate that each ETH and 2X long leveraged ETH tokens are trading at $1000.

On day one, if the ETH fee rises by way of 10% to $1100, the 2X ETH leveraged token will growth by 20% to $1200.

On day , if the ETH charge drops through 20% to $880. The 2X ETH leveraged token will fall by means of 40% to $720.

In this time period, protecting ETH might bring about a lack of -12%, while keePing 2x leveraged ETH tokens would result in a loss of -28%.

As the volatility trims your investment, leveraged tokens are handiest used for brief-term buying and selling.

  • Extra Charges

Centralized crypto exchanges like Binance rate extra prices to trade leverage tokens.

Binance costs buying and selling, subscription, redemption, control, and investment costs to alternate leveraged tokens.

  • Rebalancing Mechanisms

Leveraged tokens are governed by way of Algorithms that increase or lower their position within the underlying asset to satisfy their target leverage. Leveraged tokens are vulnerable to these rebalancing algorithms which could Fail to paintings effectively in the course of Exceptionally risky markets.

In 2021, a CoinDesk article cited crypto buyers complaining that Binance’s leveraged tokens “didn’t deliver as promised” all through the Terra-prompted market Crash of May 2021.

Advantages of Leveraged Tokens

  • Simplicity

Leveraged tokens are famous as it does no longer require the dealer to pledge collateral and constantly control their margins. The loss of collateral deposit also approach investors do no longer ought to worry approximately liquidation hazard.

When leveraged tokens are used properly, traders can multiply their earnings the usage of leveraged tokens as compared to absolutely holding the underlying asset. Using leverage additionally allows the trader to advantage publicity to a higher price of exchange with their available price Range.

  • Shorting and hedging

Leveraged tokens can be used to benefit from token charge drops and crypto marketplace crashes. These tokens also are used to protect investor portfoliOS towards price drops. Binance Leveraged tokens like BTCDOWN and ETHDOWN generate between 1.25X to 4X leveraged gains when the charge of BTC and ETH declines, respectively.

How Do Leveraged Tokens Work on DeFi?

You also can locate Decentralized Finance (DeFi) leveraged tokens on Web3. Let’s study Index Coop’s ETH 2x FLI leverage token as our example.

Index Coop problems and continues the ETH 2x FLI leverage token by means of leveraging the strength of other DeFi applications along with Uniswap and Compound. To mint the ETH 2x FLI leverage token on Index Coop, you may must deposit ETH.

The ETH is deposited on a DeFi lending Protocol called Compound to borrow USDC. The USDC is then used to shop for more ETH on Uniswap. The newly bought ETH is deposited lower back into Compound to earn interest.

You also can purchase the ETH 2x FLI leverage token at once on Uniswap instead of minting it on Index Coop.

Popular Leveraged Tokens

Here are some famous leveraged tokens issued through centralized exchanges and DeFi protocols


BTCDOWN and ETHDOWN are brief-leveraged tokens issued via Binance that aim to provide leverage up to 4X for Bitcoin and ether.


BTCUP and ETHUP are lengthy-leveraged tokens issued by way of Binance that purpose to offer leverage up to 4X for bitcoin and ether.

  • BTC 2x Flexible Leverage Index and ETH 2x Flexible Leverage Index

These leveraged tokens issued by means of DeFi protocol Index Coop target lengthy 2x publicity to BTC and ETH. The tokens held a mixed marketplace cap of over $14 on the time of writing.

The Bottom Line

Leveraged tokens are crypto innovations that enhance on their conventional opposite numbers, like margin buying and selling, through simplifying the Method.

It need to be noted that leveraged tokens are incredibly risky Devices that are not endorsed for marketplace beginners.

Always do your research earlier than investing, and never change with cash which you cannot find the money for to lose.

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