I think we have covered sufficient basics of the economics of token engineering and the principles involved. Hope you are read to dive into the real fun stuff!This week in on Leveraged Tokens. DeFi is exploding. You know that, we talked about that, you probably are part of that. But this is **only just the beginning**. The power of DeFi is in 2 folds. (1) Decentralised governance and (2) Programmable codes and internal valuation that can be tokenised.Tokens are not just a pump and dump scheme anymore. This is not 2017. Instead, tokens now represent certain economic value generated by the system (e.g. network tokens) or certain internal value (e.g. leveraged tokens).Leveraged token is just an example of the power tokenisation can bring. Internal rules and governance enforced with programmable codes in the tokens. The future is now.
# 1. Leveraged Tokens 101
This is not something everyone knows about. So before I begin, I will caution that this is **A VERY HIGH RISK PRODUCT.** Other than the usual supply and demand, such token has internal valuation and so you have internal risks. Like volatility drag on asset, beta slippage on trade, price movement of underlying assets.
* **Who** issues: derivatives exchange like FTX
* **What** is that: token that gives you leveraged position instead of you manually managing the position
* aka it does all the admin stuff like buying, selling, rebalancing
* **Where** to get access: exchanges. They are ERC20 tokens, so they can be traded on spot market.
* **When** to use: increase exposure to market
* use it with caution!
* **Why** use it: easier to manage risk, manage margin
* **How** to use: purchase on spot market to get leveraged exposure
# 2. So… when do I use it?
Let’s say you want to bet on that Kanye West will be the next US President. And you are very sure of this, because he is so stable, mentally healthy, creative at making music and good at being rich. Ah, the American dream. Now, you want to bet that he wins. But you only have $10. You wish for more, so you can place your bet. When he wins, you get more money. So you go to a friend, and he says “ok tell you what, I will lend you $20, so now you have $30 to bet that Kanye West will be the next president.”In the same way, leveraged position gives you more exposure to your bet. More than the assets you have. Instead of just a position, you can now tokenise it. (With math and programmable codes, which is shown in the YouTube Episode.)So, leveraged tokens give you more exposure to the market. If you are certain of your bet, you use it.In the DeFi space, that means betting if prices go up or down. E.g. I bet that BTC will go up. So I long BTC by buying the Futures contract. (That is me making my bet.) Instead of that, you can get a tokenised leveraged position via leveraged tokens.Or maybe I think ETH will fall. So I bet that. That means shorting ETH. You can do that with leveraged tokens too.Currently, you can get access to leveraged tokens (they are traded via exchanges) on FTX and a few other platforms.
# 3. Internal Valuation of Leveraged Tokens
The fun part of leveraged tokens is that it is has internal value. Its value does not come from supply and demand on the secondary market. If you are an options person, think of it as leveraged tokens having intrinsic value and no extrinsic value. If you are a regular crypto person, leveraged tokens has its value coming from its position, based on the market. It is just something you can “pump and dump” per say.The internal price is dependent on a few things:
* Net asset value
* Price movement of Futures contract
* Revaluation that affect Futures contract
* Slippage fees and other fees
There are other factors affecting the internal value, so it is risky. Also, I still believe that there is a risk of arbitrage and exploitation by high-frequency traders. So if you are a Wall Street folk or dabble in this, please reach out (❤️) and I’d like to discuss it. I’m maxing out my traditional Wall Street friends on this topic.Join our Discord – Link in Bio 🙂