3x Leverage Token Using Debt
Fully collateralized using debt on Aave
This method is built on top of the battle-tested TokenSets protocol, and improves upon the well-known IndexCoop FLI 2x series. Using collateralized debt from lending protocol such as Aave and Compound, Zoo innovates to achieve 3x leverage through multiple borrowings. As we know, when the Loan-to-Value (LTV) ratio is at 80%, borrowing once will only yield 1.8x leverage. To get higher leverage, Zoo utilizes recursive borrowing to repeat the cycle of deposit-borrowing-buying-redeposit until targeted 3x leverage is reached. The highest leverage achievable is calculated by 1 / (1-LTV). Hence, with 80% LTV the maximum leverage using our approach is 1 / (1 - 80%) = 5x.
Therefore, targeting a 3x leverage will be a sweet spot for desirable capital efficiency matching CEX leverage products, while preserving sound risk management with on-chain benefits. The products are fully collateralized and supports mint/redeem with underlying assets (e.g. mint 3x ETH Bear with ETH), as well as buy/sell on available DEX pools (e.g. buy 3x wBTC Bull on Sushiswap with DAI).
This is a highly scalable product that can be offered on any blockchain with a lending protocol and swap, which most blockchains have.