In 2020, leveraged tokens will gradually become strategic products of exchanges such as Binance, Huobi, MXC, etc. However, at the same time, more and more complaints about leveraged tokens have appeared. Many investors said that they purchased leveraged tokens. The increase and decrease were inconsistent with the 3 times leverage indicated on the product, and the loss far exceeded expectations.
After investigation and research, Chaincatcher believes that this loss risk is similar to the "impermanence risk" in DeFi lock-up, which is mainly caused by the leveraged token adjustment mechanism, which is equivalent to the side effect of the product's strategic design to avoid the risk of liquidation. After all, there must be losses.
However, among the widespread complaints from investors, the responsibility of the exchanges for negligence cannot be ignored. Inadequate market education and low entry barriers are common. In addition, many investors have strong speculative sentiment and low risk awareness. The "harvest" tragedies in the leveraged token market occurred one after another.
Author/Gong Quanyu, Echo
Leveraged tokens are now gradually occupying a prominent position in major cryptocurrency exchanges, and trading volume continues to rise, but the rules behind them still puzzle many investors.
Recently, many investors in the secondary market have reported to the chain catcher that the rise and fall of the leveraged tokens they purchase is different from the multiple claimed by the product. "When the spot price rose before, the short leveraged tokens I bought fell extremely sharply, but when the spot price plummeted recently, the leveraged tokens did not rise much." An investor named Hehe (a pseudonym) vomited. .
According to Hehe's description, she bought a leveraged token worth about 3,100 U on an exchange at an average price of 4.6 U in early November. The price of LINK was about 10.33 U at the time. The quotation on December 23 was 11.7U, a total increase of about 13.2%, but the price of leveraged tokens held by Hehe fell as much as 81.97%, which made her very unacceptable.
Feedback from investors in a WeChat exchange group on leveraged tokens
According to the usual explanation, leveraged tokens refer to products issued by exchanges that track the rise and fall of a target asset by a specific multiple. In August 2019, FTX took the lead in launching leveraged tokens, allowing investors to use three times leverage to invest in specific currencies without margin or borrowing. This product has attracted a large number of features with its "low cost, high yield" and no liquidation Investors also make major exchanges want to get a share.
In the following months, exchanges such as Binance, Gate.io, Poloniex, and MXC all launched similar products. Leveraged tokens have almost become the standard configuration of first- and second-tier exchanges. It can be seen that leveraged tokens have become an important strategic product for exchanges. . "At present, we see that many users will trade 10%-20% of their assets in leveraged tokens." Binance Contracts Vice President Aaron told Chaincatcher.
"Now our ETF product trading volume has reached 10-20 times that in March, and it can be said to be one of the most important strategic products. Now we are also trying 4/5 times leveraged tokens." MXC related product manager said .
Nowadays, there are many design schemes and names of leveraged tokens on the market. Exchanges such as Bittrex, Bitmax, Gate.io have adopted FTX schemes, and their leveraged token products are supported by tokens issued by FTX, which can be To transfer money between each other, Binance separately issues its leveraged tokens. Similar products of Huobi and MXC are not anchored to the underlying tokens. They are only internal database products, and they are named ETP and ETF products respectively, but the basic operation of the latter three products The principle is the same as the FTX scheme. For convenience, this article refers to such products as leveraged tokens.
In view of the rapid development of the product since its appearance in 19 years, its coverage and industry influence have exceeded many people's expectations. However, the operation mechanism of the product and its weird K-line trend made many investors confused, and even produced huge Loss. To this end, Chain Catcher conducted a detailed investigation of the various design schemes and actual K-line trends of the product, trying to uncover the "harvesting technique" behind the exchanges' efforts to promote leveraged tokens.
01
Find the problem from the data
According to the description of their leveraged token products by Huobi, FTX, MXC and other exchanges, if the price of the tracking underlying asset increases by 1%, the net value of the corresponding triple-long product will increase by 3%. If the price of the underlying asset drops by 1%, the corresponding 3 times the net value of short products will fall -3%.
In order to investigate the accuracy of the foregoing description, Chain Catcher took four tokens of BTC, ETH, LINK, and SUSHI as examples, and conducted statistics and analysis on the K-line data of the four exchanges, Huobi, Binance, MXC, and FTX.
Specifically, the chain catcher intercepted the underlying asset's spot after a sharp rise or fall from a specific price, and then returned to the original specific price (select the date on the K-line chart with a similar single-day price high or single-day price low, and the price difference No more than 1%) time period, and select the initial date, the largest change date and the price return date from the three time points, record the corresponding price of each currency leveraged token product at the corresponding time point of the four major exchanges, and Calculate the performance of the same type of leveraged token products on different exchanges at the same time.
In order to show the above data more intuitively, Chaincatcher made these data into the following four corresponding visualization charts, each of which reflects the performance of the two leveraged tokens of a single currency on the four exchanges. Specifically, it includes the increase/decrease of leveraged tokens when the price of the underlying asset is at the highest/low point during the statistical period, and the increase/decrease when the price of the underlying asset returns to the initial date price.
Due to the share consolidation mechanism of MXC leveraged tokens, the K-line of its XRP short token price is distorted, so no comparison will be made here.
Based on the data information in the above chart, the Chain Catcher reporter found four problems:
First, after almost all leveraged token products experience a period of turbulence, even if the price of the underlying asset returns to the original position, its price will not return to the original position, and even a large loss of more than 70% will occur.
Second, the higher the price of the underlying asset's spot price rises and falls, and the greater the volatility, the greater the depreciation of leveraged token products at the return point. For example, XRP experienced a doubled increase in the statistical range, but as it fell back to its original price thereafter, both short and long leveraged tokens have depreciated significantly, and major exchanges have fallen by more than 60%.
Let's take the 3 times short XRP token of FTX as an example. The price of the token was 1746U when it was issued in August 19, and the XRP spot price was 0.32U. As of December 29 this year, the spot price of XRP had fallen to 0.17U after a sharp shock, but the price of the short-selling token had fallen to 3U.
Third, in a unilateral rise or fall, most leveraged token products that follow the opposite direction can achieve an increase of more than 3 times. For example, Huobi’s 3 times long BTC token has risen by nearly 15 times compared with the beginning of October. BTC The spot price only increased by 2.8 times, but the leveraged token products that followed the wrong direction will also mostly experience declines beyond the theoretical value.
Fourth, the rise and fall of the same type of leveraged token products on different exchanges are also quite different. For example, the decline of MXC leveraged tokens is usually greater than that of other exchanges, while the decline of Binance is relatively smaller.
In addition, according to the aforementioned exchange data, as of December 28, Huobi has issued a total of 26 leveraged token products that track 13 currencies, of which only 7 products are priced higher than the issue price; Binance has issued tracking 18 Of the 36 leveraged token products in three currencies, only 7 of them have a price higher than the issue price. However, according to general cognition, the number of profit and loss products of this type of two-way hedging product should be divided into half.
The reason why the aforementioned rather strange phenomenon occurs in leveraged tokens is mainly due to the leveraged tokens' own adjustment mechanism and differences in the adjustment plans of major exchanges.
02
How the position adjustment mechanism works
According to the chain catcher, the reason why leveraged tokens can achieve leverage is that the exchange uses spot leverage (such as Huobi) or futures contracts (such as Binance, FTX, etc.) to achieve leveraged tokens purchased by users behind the product. Behind it all represents a certain leverage or contract share. However, when it comes to spot leverage or futures contracts, any product will have a risk of liquidation, and exchanges all claim that there is no risk of liquidation in leveraged tokens. This is because the exchange has introduced a so-called adjustment mechanism for leveraged tokens. .
The rebalancing mechanism is a means for the exchange to rebalance the leveraged token positions to ensure that the actual leverage ratio of the product does not deviate too much from the agreed 3 times ratio. Taking a 3x long token product as an example, if the price of the underlying asset drops sharply, the value of the margin will shrink, and the actual leverage will exceed 3 times, which will increase the risk of liquidation.
At this time, the exchange will adjust the contract position of its product and sell a certain share of the contract to maintain the leverage ratio at 3 times. However, once the price of the underlying asset rises sharply thereafter, since the position of the product has been reduced, its actual rate of return Will deviate from the theoretical rate of return.
For example, if a user uses 100U principal to buy 3 times the multi-token product, then in the case of 3 times leverage, it is equivalent to passing 100U of margin, and actually holds a 300U position. If the spot price of the underlying asset drops by 10 %, then the actual position value will fall to 270U, which is equivalent to a user loss of 30U and a principal drop to 70U. At this time, the actual leverage ratio of the position will increase to 3.85 times.
Assuming that this multiple meets the position adjustment conditions set by the exchange, in order to reduce the position risk, the exchange will reduce the user's position to 3 times the user's principal, which is 210U.
If the price of the underlying asset increases by 11.1% after the adjustment and returns to the original price, the user's actual position value will reach 233.3U, which is an increase of 23.3U compared to before the position reduction, and the margin will increase to 93.3U at the same time, which is a loss of the user's original 100U principal. 6.7U. This is the logic behind the previous chart showing that leveraged tokens generally lose money at the spot price return point.
Based on the same analysis logic, if the user uses 100U to purchase a 3x multi-token product, the spot price of the underlying asset has risen by 10% twice (that is, a cumulative increase of 22.1%), and the leverage ratio/increased position is increased once during the period. The user's actual return on assets reached 69.00%, which was 66.3% higher than the theoretical value. This is the logic of the previous chart showing that the actual yield of some leveraged tokens in the unilateral market exceeds the theoretical value.
03
Different exchanges' solutions
Of course, the foregoing analysis is based on a simplified model of market trends. In fact, the profitability of users purchasing leveraged tokens also needs to take into account the exchange’s actual position adjustment mechanism, actual leverage at the time of purchase, charging mechanism, and market depth. And many other factors.
The most important factor is the exchange's position adjustment mechanism, which can generally be divided into two types: fixed position adjustment and irregular position adjustment. The former means that the exchange will rebalance the position at a fixed time every day. Around 0 o’clock on the day, to ensure that the leveraged tokens are at the agreed multiple leverage every day. The latter refers to the temporary adjustment of the exchange when the actual leverage of the leveraged token exceeds a certain level to ensure that the leveraged token is in extreme market There will be no risk of liquidation.
From the previous analysis, it can be seen that when the exchange has a reverse market for the underlying asset of the leveraged token, each time the position adjustment will bring about the net wear of the user's position value, the more frequent the adjustment, the greater the wear , and the extreme market may be unlimited Tend to zero, and user assets will be "harvested" invisibly. It can be considered that the wear and tear of position net value is a side effect of leveraged token products to avoid the risk of liquidation in the strategic design. After all, there are gains and losses.
Although wear and tear cannot be avoided, exchanges can reduce wear and tear as much as possible through the detailed design of position adjustment. Most exchanges adopt two parallel adjustment mechanisms, such as FTX, Huobi, and MXC, but the actual operation is also slightly different. According to more public information, as long as the actual leverage of leveraged tokens is 33% higher than the target leverage of FTX, it will automatically trigger the rebalancing mechanism; MXC stipulates that positions should be rebalanced when the underlying asset price fluctuates by more than 15%; Huobi Regulations generally adjust positions when the actual leverage ratio reaches 4 times (long products) or -5 times (short products).
Binance canceled the timing adjustment mechanism, maintained the target leverage ratio in the range of 1.25x to 4x, and adjusted the position only when the actual leverage ratio was close to exceeding the standard. This means that Binance's leveraged tokens are not like FTX. Waiting for the exchange to fix the leverage ratio to a fixed multiple such as 3 times, which can reduce the frequency of repositioning. This is also the main reason why Binance leveraged tokens have a relatively low increase in the rising market and a relatively small decline in a falling market. Binance also stated that “the outside world cannot predict the target leverage ratio and adjustment time that Binance leveraged tokens want to maintain, so that it can reduce pre-trading and manipulation.”
At the same time, the fee rate mechanism will also bring wear and tear to the value of leveraged token positions. Major exchanges will deduct management fees from the net value of leveraged token positions on a daily basis, usually ranging from 0.01-0.1%, but MXC will be before the end of December last year. A daily funding rate ranging from 0.2-0.4% will be charged for each leverage of this product. Binance also has a fund rate setting, which is charged three times a day, but it claims that the rate is paid by the long and short parties, and not by Binance.
As a result, the exchanges will also get quite generous income. Taking Huobi as an example, as of around 17:00 on December 24, the 24-hour trading volume of all ETP products on the exchange reached 2.78 billion yuan. Calculated based on the two-thousandth of the transaction fee charged by both parties, you can get 556 in a single day. Ten thousand yuan fee income (considering that some users can enjoy a fee discount, the actual income will be slightly less). At the same time, the scale of funds for all ETP products managed by the exchange is 780 million yuan, from which approximately 270,000 yuan of management fees can be deducted daily.
In addition to the above mentioned fees, in fact, leveraged tokens also have some hidden fees, that is, the daily interest rate of the spot leverage behind the product or the daily funding rate of the futures contract, these fees charged by the exchange, and The transaction fee for each position adjustment will also bring wear and tear to the net position of leveraged tokens.
04
Market education has a long way to go
It is precisely because of the above-mentioned reasons, market depth, speculative sentiment and other issues that leveraged tokens have encountered the various problems shown in the aforementioned chart, and most investors are not aware of it, leading to huge losses.
In fact, the aforementioned lever tokens and logic have a lot of information presented in the product page of the major exchanges, but more than investors in the chain catcher asked, most people do not understand its specific mechanism, this On the one hand, it may indicate that many investors are lax and too casual when buying leveraged tokens. On the other hand, it may also indicate that major exchanges have obvious problems in market education and entry barriers, especially the suspicion of avoiding the most important and obscure risks. .
According to the tests conducted by the reporter of Chaincatcher on the APP of major exchanges, when users of MXC and FTX enter the leveraged token page for the first time to trade, there are no pop-up prompts and mandatory test questions, and they can directly trade.
Although Binance and Huobi will pop up the product awareness test page, the system will also prompt the correct answer under certain conditions. At the same time, these product descriptions and tests do not show the principle of position equity wear that may cause huge losses. Users only Relevant information can only be found on the special product description page of the exchange, including not suitable for long-term investment, large net worth wear under volatile market conditions, etc.
First purchase test of leveraged tokens on an exchange
These problems show that the exchange has not fully fulfilled its due responsibilities in terms of market education and entry barriers. Under the temptation of huge profits and the impetuous industry environment, exchanges have long been negligent and slack in this. However, as leveraged tokens are becoming more and more familiar to and purchased by investors, if exchanges do not strengthen this work, In the end, it may be backlashed by these beautiful data.
In the interviews with several exchanges by Chain Catcher, Binance, Huobi and other exchanges all stated that they will strengthen user education. "We have formulated a detailed user education plan, which will be implemented gradually at the beginning of this year. Experience-oriented products are continuously optimized,” said Huobi.
In fact, as a cryptocurrency derivative product, leveraged tokens have their own value like futures contracts, such as intraday arbitrage or intraday hedging, or used to invest in currencies with relatively unilateral market for a long time, but the problem is The fact that most of the cryptocurrency has a large volatility, coupled with the superficial market education of exchanges, has caused a large number of investors to invest in the market without knowing the truth, but in the end they were "harvested" invisible.
Although this "harvest" is mainly caused by the product mechanism, it is hard to say that it is directly promoted by the subjective willingness of the exchanges, but as a product that has been harmed by a large number of investors, it still requires the exchanges to make more powerful innovations And improvement, and it deserves more investors to arouse vigilance.
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