<aside> ⚠️ Because of the complexity of Leveraged Token, Strike foundation postpones this feature to V2 or even further.

</aside>

Abstract

In addition to offering margin trading directly through Clearing House, Strike provides another set of ERC-20 Leveraged Tokens (LongTokens and ShortTokens) for traders to take long or short positions in Strike. Since Strike's Leveraged Tokens conform with ERC-20 standard, traders can freely transfer LongTokens or ShortTokens to others, use them in other DeFi protocols, or trade them on any ERC-20 compatible exchanges.

Leveraged tokens would automatically reinvest profits into underlying assets when the price of pTokens goes up and also automatically sell off underlying assets when the price of assets drop.

Mechanism

Leveraged Tokens are minted by sending BaseTokens (e.g. DAI) into Leveraged Token Smart Contract, which in turn takes position via Clearing House, and sends the minted Leveraged Tokens back to traders. The Leveraged Token Smart Contract holds the positions and keeps rebalancing positions to maintain its target leveraged. The rebalance function on the Smart Contract would be triggered in the following conditions:

  1. When Leverage Tokens are minted or burned.
  2. When the price of the position moves up or down by over 10%. Keepers can trigger the function and receive rewards.

Below is the formula for how rebalance works:

$$ positionAmountDelta = {leverage \times netAssetValue \over positionPrice} - positionAmount $$

Example

Suppose Alice bought a 5XLONG_ETHDAI Leveraged Token with 100 DAIs when the price of ETHDAI is 500 DAI, the initial balance of Leveraged Token Smart Contract would be:

$$ netAssetValue = 100 $$

$$ positionAmountDelta = {5 \times 100 \over 500} - 0= 1 $$

Suppose the price of ETHDAI goes up to $525 after a day. If any trader triggers another round of rebalance by minting or burning any 5XLONG_ETHDAI, the Leveraged Token Smart Contract will start rebalancing and buys more long positions:

$$ netAssetValue_{new} = newAssetValue_{old} \cdot （{positionPrice_{new} - positionPrice_{old} \over positionPrice_{old}} \times leverage + 1） $$

which in our example results in:

$$ netAssetValue = 100 \times ( {525-500 \over 500} \times 5 + 1) = 125 $$