Rebalancing

Continuous rebalancing without hard stops for most accurate leveraged tracking.

Straightforward Rebalancing

The biggest problem with leverage tokens today is that no one understands them. Contrary to other leverage tokens that use a variable target leverage range, the Bear uses fixed leverage mandated by the token. This is achieved through actively and continuously rebalancing throughout the day, as opposed to daily rebalancing at a fixed time, which kills the token’s return in zigzag markets. The whole point of using a leverage token is to get the leverage promised throughout the duration of holding the token. We understand the pain of not getting the leveraged upside when markets go up, but getting the promised leveraged downside when markets go down.

The only time that the Bear deviates from target leverage is when markets move significantly against us, triggering a liquidation protection de-leveraging. However, when the market goes for us, the Bear would re-leverage back to the target ratio.

The Bear also does not seek to reinvest winning and over leverage its exposures, as doing so infers the arbitrary view that trends would continue, and would deviate from the Inverse Token’s objective of accurately tracking the index.

To summarize:

The Bear will always make the mandated leverage when the market goes for it, and will always lose less than the mandated leverage when the market goes against it. This predictable design makes the Bear a near perfect hedging vehicle for market downturns.

The Low-latency Habitat Protocol

Since the Bear is trading layer-2 derivatives, timing is everything. Everything the Bear does is under IndexZoo’s Habitat Protocol, which connects to DEXes via low-latency API, monitors intra-second bid/ask order book feeds (DyDx uses an order book), and always gets the best price when needed. This is of particular value when the market is highly volatile because Habitat Protocol will be able to de-leverage before price gaps away from current level.

An In-depth Example

Initial State

Leverage Target	Number of Token	Token Start Price	Maintenance Margin	Account Leverage
x-2	100	$100	6.25%	10

Indexed Price	Equity	Token Unit Price	Net Exposure	Effective Leverage
100	$ 10,000.00	$100	$ 20,000.00	2

Average Entry Price	Margin Used	Cash Left	Float PL	NAV
$ 100.00	$ 2,000.00	$ 8,000.00	$ -	$ 10,000.00

Liquidation Price	Margin Call Price	Liquidation Safety Margin	Margin Call Safety Margin
$ 177.78	$ 140.00	77.78%	28.57%

Going Live

Indexed Price	Token Unit Price	Effective Leverage	Events	Actions
$100.00	$100.00	2.00	Start with 100 token at $100 each	-
$115.00	$70.00	2.00	Price goes up, result in -$3000 float loss	-
$115.00	$70.00	1.75	New Mint of 20 token at $70	-
$115.00	$70.00	2.00	Rebalance account to meet exposure target	Bought additional $2800 notional value of indexed asset, used $280 margin
$75.00	$145.08	2.00	Price goes down, result in $5000 float win	-
$75.00	$145.08	2.68	20 token redeemed at $136.67 per token	Sending $2733 to the withdrawing user, burnt 20 tokens
$75.00	$145.08	2.00	Need to rebalance to meet exposure target	Sold $5460 notional value of indexed asset, released $546 margin back to cash, realized $1198 profit, also sent to cash
$75.00	$145.08	2.00	Now it looks like this	-
$160.00	$3.22	2.00	Price moves up by a lot, trigger risk management module	-
$160.00	$3.22	2.00	Calculate target exposure after deleveraging	-
$160.00	$3.22	1.76	Deleveraging to reach the risk tolerance price range	Sold $2080 notional value of indexed asset, release $208 margin back to cash, and realized $355.12 loss, also debit to cash
$160.00	$3.22	1.76	Now it looks like this	-
$140.00	$32.59	1.76	Price goes for us, now we are within the safety margin, need to releverage	-
$140.00	$32.59	2.00	Need to add on the same $2080 exposure we exited earlier	-
$50.00	$178.74	2.00	Now price goes down a lot	-

The Bear Accurately Tracks the Leveraged Return of the Indexed Price

A full step by step breakdown of the Bear's margin account state will be linked here too.

Functions

Key Bear Functions

Mint - Cash increased from buy in, add on position to reach target exposure over new equity

Withdraw - Pay withdrawal from cash, exited with position to reach target exposure over new equity

De-leveraging - Liquidation Protection Margin Level reached, deleveraging, exited enough to get to safety margin

Re-leveraging - Liquidation Protection no longer in place but leverage below target - calculate if re-leveraging to target leverage will not break safety margin - if yes, executed buy in trade

Reverse Split - When token prices decrease below $10, Habitat automatically execute a 1/2 reverse token split to increase the price of token by 2 folds, in order to maintain positive token price