Leveraged tokens allow leveraged exposure to the price of a cryptocurrency without liquidation risk. This means that you do not have to manage collateral, maintain margin requirements and therefore pay attention to any liquidation threshold. I remind you what the concept of "Margin Trading" is:
Leverage tokens work in a similar way but without margin. Each leveraged token represents a basket of open positions on the futures market (perpetual): they are therefore tokenized versions of leveraged futures. They are bought with USDT (spot) so trading fees apply and there is also a daily interest that is paid as soon as the position is opened. They cannot be withdrawn and are off chain (they exist only on the exchange that hosts them).
For example we have BtcUp and BtcDown, EthUp and EthDown or DotUp and DotDown and so on. BtcUp allows you to generate leverage gains when the price of Bitcoin rises, while BtcDown generates leverage gains when the price of Bitcoin falls.
There are tokens in constant and variable leverage. The variable ones are those of Binance that aim for a variable leverage target range. In the case of Btc it is a range between 1.25x and 4x. The idea behind it is to maximize the potential gains when the price goes up and minimize the risks when the price goes down.
This target leverage is not constant and is not publicly visible because if these tokens rebalance at predefined intervals, there may be ways for other traders to take advantage of this known event. These tokens can be traded on the spot market or redeemed based on the value they represent. In this case, you will have to pay a redemption fee. In most cases, however, it will be better to get out of your spot market position rather than through the redeem process. Exit via redemption will be more expensive than exit on the spot market.
Net Asset Value (NAV) refers to the value of your leveraged tokens in USDT. When you redeem your tokens, the USDT you get will be determined by the NAV. Usually leveraged tokens are generally profitable when there is a strong upward or downward trend but can be detrimental in a side market. Variable leverage partially mitigates this problem. In this case the tokens rebalance only during periods of high volatility. Attention! In no case is it about investment advice. The article is for informational purposes only. You must always do your research (DYOR).
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