Leveraged tokens and perpetual futures characterize two distinct approaches to reaching leveraged publicity. On the coronary heart of leveraged tokens’ distinctive conduct lies their rebalancing mechanism, designed to take care of leverage inside a focused vary. This contrasts with perpetual futures, the place the leverage issue fluctuates in tandem with the worth actions of the underlying asset.
However past the mechanics, how do these devices fare in the actual world? Which situations favor the efficiency of 1 over the opposite? And importantly, how can one use this data to pick essentially the most acceptable instrument for his or her wants?
This text delves into these questions by analyzing varied historic worth situations and straight evaluating the outcomes. The purpose is to light up the nuances of every choice, serving to customers to make knowledgeable selections within the evolving panorama of leveraged DeFi merchandise.
State of affairs one: Trending markets
Trending markets, characterised by clear and constant upward or downward worth actions, present a superb instance of the distinct conduct between leveraged tokens and perpetual futures. Latest cases of such traits embrace the Solana rally, the place its worth surged from $20 to $200, and the Bitcoin rally, with its worth rising from $27,000 to $73,000, each of which unfolded between October 2023 and March 2024.
In Determine 1, the efficiency comparability between the leveraged token (pink line) and the perpetual future (gray line) demonstrates a transparent benefit for the leveraged token. The underlying mechanism chargeable for this outperformance is the rebalancing course of, marked by blue vertical strains. Rebalancing routinely adjusts the place’s notional worth – basically the whole dimension of the leveraged publicity – every time the leverage issue hits a selected threshold. This adjustment results in elevated publicity, which in flip amplifies returns as the worth continues to rise.
On this explicit instance, the perpetual future’s leverage issue had decreased from 2x to 1.06x with a notional of $18,399 by March 18th. The leveraged token’s leverage issue, then again, remained round 2.02x with a notional of $96,144, showcasing the potential advantages of leveraged tokens underneath these market situations.
State of affairs two: Value actions that set off liquidations
In distinction to the conduct of leveraged tokens in state of affairs one, their efficiency throughout hostile worth actions reveals a unique benefit. In such situations, the rebalancing mechanism decreases the notional worth, resulting in diminished leveraged publicity. This considerably mitigates the danger of liquidation by lowering publicity throughout downturns.
Perpetual futures, nevertheless, don’t share this rebalancing characteristic. They exhibit a fluctuating leverage issue till the market reaches a liquidation worth.
Determine 2 illustrates such a state of affairs. The lower of the $LINK worth throughout the first week of January 2024 led to the liquidation of the perpetual future shortly after the place was opened.
In distinction, the leveraged token, though experiencing a margin lower much like that of the perpetual future, underwent a number of rebalancings all through the downturn. These rebalancing actions successfully diminished the quantity of borrowed funds, thereby lowering leveraged publicity and stopping liquidation. This mechanism allowed the leveraged token to take care of its place all through the interval of declining costs, showcasing the danger administration capabilities inherent within the construction of leveraged tokens.
State of affairs three: Flat and unstable worth actions
The primary two situations offered insights into market situations the place leveraged tokens are inclined to outperform perpetual futures. Nevertheless, rebalancing additionally introduces a possible draw back in sure market environments. Particularly, in markets characterised by flat or unstable worth actions, the place the necessity for frequent rebalancing – each uplevering and downlevering – can lead to what is called volatility decay. The mathematical basis underlying this course of is defined within the official Synthetix Documentation underneath the part “Volatility decay”.
Perpetual futures don’t face this concern and often outperform leveraged tokens underneath these market situations, given they don’t get liquidated.
Determine 3 depicts a state of affairs of steady sideways motion and excessive volatility within the $LINK worth. It clearly demonstrates the depreciating margin of the leveraged token over time, resulting in underperformance in comparison with the perpetual futures contract. The influence of volatility decay on the leveraged token could be additional intensified by greater leverage components, highlighting the challenges leveraged tokens face in unstable, directionless markets.
State of affairs 4: Steady hostile worth improvement
In situations with steady hostile worth motion, rebalancing can mitigate however not stop the influence on the margin. Ought to the worth of an underlying asset persistently transfer in opposition to a place, the margin of a leveraged token will inevitably decay over time. This highlights the limitation of rebalancing in safeguarding a place in opposition to extended unfavorable market traits.
Determine 4 showcases the dynamics of a brief place throughout the worth appreciation of $ETH from February to mid-March 2024. The perpetual future confronted liquidation initially of March. In distinction, by March fifteenth, the leveraged token had nonetheless preserved 30% of its margin. Nevertheless, ought to this upward development proceed, the margin of the leveraged token would decay nearly totally, illustrating the gradual influence of hostile worth actions on leveraged token positions.
Conclusion
Leveraged tokens and perpetual futures every shine underneath completely different market situations. Leveraged tokens outperform in trending markets because of their rebalancing mechanism and supply safety in opposition to liquidation in hostile actions. Nevertheless, this identical characteristic results in volatility decay in flat or unstable markets, the place perpetual futures are inclined to excel, assuming they keep away from liquidation. Whereas leveraged tokens can mitigate losses in downturns, extended hostile traits can nonetheless erode their margin. Customers should think about these dynamics, balancing the potential for amplified returns in opposition to the dangers of volatility decay and market actions, to decide on the best instrument for his or her technique.
Disclaimer
This text is for informational functions solely and isn’t supposed as monetary or funding recommendation. All content material displays the creator’s views and shouldn’t be seen as particular funding suggestions. Buyers ought to do their very own due diligence or seek the advice of knowledgeable advisor earlier than making funding selections. The creator bears no accountability for any monetary losses ensuing from funding decisions primarily based on this text.
The mannequin used for producing the charts excludes funding charges and charges for each leveraged tokens and perpetual futures. This exclusion should not notably have an effect on the efficiency comparability.
