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 keep up leverage inside a focused vary. This contrasts with perpetual futures, the place the leverage issue fluctuates in tandem with the value actions of the underlying asset.
However past the mechanics, how do these devices fare in the true world? Which situations favor the efficiency of 1 over the opposite? And importantly, how can one use this data to pick probably the most acceptable instrument for his or her wants?
This text delves into these questions by analyzing varied historic value situations and straight evaluating the outcomes. The objective is to light up the nuances of every possibility, serving to customers to make knowledgeable choices within the evolving panorama of leveraged DeFi merchandise.
State of affairs one: Trending markets
Trending markets, characterised by clear and constant upward or downward value actions, present a superb instance of the distinct conduct between leveraged tokens and perpetual futures. Latest situations of such traits embody the Solana rally, the place its worth surged from $20 to $200, and the Bitcoin rally, with its value 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 liable for this outperformance is the rebalancing course of, marked by blue vertical traces. Rebalancing routinely adjusts the place’s notional worth – basically the entire dimension of the leveraged publicity – at any time when the leverage issue hits a particular threshold. This adjustment results in elevated publicity, which in flip amplifies returns as the value 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, however, remained round 2.02x with a notional of $96,144, showcasing the potential advantages of leveraged tokens beneath these market circumstances.
State of affairs two: Worth actions that set off liquidations
In distinction to the conduct of leveraged tokens in state of affairs one, their efficiency throughout opposed value actions reveals a unique benefit. In such situations, the rebalancing mechanism decreases the notional worth, resulting in lowered leveraged publicity. This considerably mitigates the chance 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 value.
Determine 2 illustrates such a state of affairs. The lower of the $LINK value in the course of 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 just like that of the perpetual future, underwent a number of rebalancings all through the downturn. These rebalancing actions successfully lowered the quantity of borrowed funds, thereby lowering leveraged publicity and stopping liquidation. This mechanism allowed the leveraged token to keep up its place all through the interval of declining costs, showcasing the chance administration capabilities inherent within the construction of leveraged tokens.
State of affairs three: Flat and unstable value actions
The primary two situations offered insights into market circumstances the place leveraged tokens are inclined to outperform perpetual futures. Nonetheless, rebalancing additionally introduces a possible draw back in sure market environments. Particularly, in markets characterised by flat or unstable value actions, the place the necessity for frequent rebalancing – each uplevering and downlevering – may end up in what is called volatility decay. The mathematical basis underlying this course of is defined within the official Synthetix Documentation beneath the part “Volatility decay”.
Perpetual futures don’t face this challenge and normally outperform leveraged tokens beneath these market circumstances, given they don’t get liquidated.
Determine 3 depicts a state of affairs of steady sideways motion and excessive volatility within the $LINK value. It clearly demonstrates the depreciating margin of the leveraged token over time, resulting in underperformance in comparison with the perpetual futures contract. The impression of volatility decay on the leveraged token can be additional intensified by larger leverage elements, highlighting the challenges leveraged tokens face in unstable, directionless markets.
State of affairs 4: Steady opposed value growth
In situations with steady opposed value motion, rebalancing can mitigate however not forestall the impression on the margin. Ought to the value of an underlying asset persistently transfer towards a place, the margin of a leveraged token will inevitably decay over time. This highlights the limitation of rebalancing in safeguarding a place towards extended unfavorable market traits.
Determine 4 showcases the dynamics of a brief place in the course of the value appreciation of $ETH from February to mid-March 2024. The perpetual future confronted liquidation in the beginning of March. In distinction, by March fifteenth, the leveraged token had nonetheless preserved 30% of its margin. Nonetheless, ought to this upward pattern proceed, the margin of the leveraged token would decay nearly completely, illustrating the gradual impression of opposed value actions on leveraged token positions.
Conclusion
Leveraged tokens and perpetual futures every shine beneath completely different market circumstances. Leveraged tokens outperform in trending markets due to their rebalancing mechanism and supply safety towards liquidation in opposed actions. Nonetheless, 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 opposed traits can nonetheless erode their margin. Customers should take into account these dynamics, balancing the potential for amplified returns towards the dangers of volatility decay and market actions, to decide on the suitable instrument for his or her technique.
Disclaimer
This text is for informational functions solely and isn’t meant 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 choices. The creator bears no duty for any monetary losses ensuing from funding selections based mostly on this text.
The mannequin used for producing the charts excludes funding charges and costs for each leveraged tokens and perpetual futures. This exclusion should not notably have an effect on the efficiency comparability.
